While some financial metrics play supporting roles, helping to narrate the broader story of an organization’s performance, others step into the spotlight, independently reflecting a company’s financial productivity and the caliber of its management.
An organization’s return on invested capital, calculated as the net operating profit after taxes divided by invested capital, is one such metric. A gauge of financial productivity, ROIC measures how well an organization can turn financial inputs, such as shareholder investments, debt issued by creditors, and reinvested earnings, into net income, or financial outputs. Finance leaders should therefore manage ROIC thoughtfully and thoroughly, in the same spirit and within the same framework that guides productivity optimization in other areas of the business.
Cross-industry benchmarking data collected by the American Productivity & Quality Center reveals that organizations at the median achieve 15% ROIC. High performers (75th percentile), on average, report 20% ROIC, while bottom-tier performers (25th percentile) average 10% ROIC.
For a better sense of how this translates in financial terms, consider the following example. In 2024, Company “ABC” produced $50 million in net profits. During the same year, the company’s average invested capital balance (a combined value reflecting book values of debt, shareholder equity, and retained earnings) was $450 million. At the end of 2024, Company ABC’s ROIC is 11%.
Strategies for improving ROIC
To improve its ROIC from this baseline, the company must increase productivity — its financial output (profit) must grow faster than its financial input (invested capital). As organizations strive to achieve this, most recognize that greater efficiency is an important piece of the puzzle, but process efficiency alone will not drive productivity gains.
Instead, business leaders should consider the same constellation of factors that influence productivity improvements in other business contexts: people, places, process and technology. To increase productivity, these areas should be thoroughly examined in order, starting with people and concluding with the technology used by the people to produce the desired outcomes.
People. An organization’s greatest asset is its people — the experience, talents and skills of every employee. Every leader should ask themselves: “Is the organization maximizing the talent of its workforce and obtaining the best from each employee?” If the answer is no, dig deeper.
If workers are inefficient, is it because staffing levels are too high? If they are ineffective, is it because workloads are too demanding? Do employees need more training and development to work optimally? Do people have room to grow and innovate in their roles? The profitability, or financial productivity, of an organization is directly linked to the productivity of its people.
Places. In this context, “places” include but also go beyond geography. When deploying invested capital in the organization, leadership must diligently evaluate where the organization operates. Consider these questions:
In which markets are goods or services sold? What are the best locations for the organization’s headquarters, regional offices, distribution centers, and other physical sites? Where should employees work – in the office, remote or hybrid? What financial benefits might be realized from new locations or arrangements?
Process. Efficient and manageable processes are fundamental to productivity improvement. Smart and well-documented processes can mitigate the negative effects of an underperforming workforce or aging physical plants. Good processes can help your organization manage through technology upgrades and guard against threats.
By improving operational efficiency and reducing waste, strong processes directly support higher returns on invested capital and more effective financial management.
Technology. Once organizations optimize their workforces, places, and processes, their leaders are better prepared to select the best technological tools to automate and augment the work. For financial executives, technology investments in software, hardware, training, and security are often significant. Thoughtful and carefully planned investment allocations here can make the difference between a favorable and unfavorable ROIC.
Managing financial productivity
A company with a high-performing workforce, operating in the right places and supported by effective processes and tools, is well positioned to make meaningful progress toward its strategic goals. This alignment, in turn, tends to drive strong financial performance and above-average ROIC.
By supporting senior management in keeping people, places, processes, and technology at the forefront in investment decision making, finance leaders set the stage for a more efficient and productive organization. A more productive company is more capable of converting capital from shareholders and creditors into greater profits, leading to a stronger, more sustainable ROIC.
