Since Economic Profit comes from your Ultimate Paying Clients/Customers and your Providers' (Employees, Suppliers, Community...) ability to delight your Ultimate Paying Clients/Customers , the "important questions" ALWAYS start with:
Starting at the very beginning, asking important questions and carefully listening always leads to creating an actionable plan for achieving an Economic Profit AND maintaining or improving Economic Profit (Economic Profit Trend >= 0) and Growth (focused on the highest value to Clients/Customers and the best Clients/Customers, then developing and executing a plan of transformation that yields the highest Economic Profit and Growth).
Note: If a Business has an Economic Profit, Growth increases Value. However, if an entity has an Economic Loss, Growth decreases Value (increasing volume just increases the Economic Loss).
What is your current Return On Invested Capital (ROIC)? What is your ROIC Trend (has ROIC been increasing or decreasing)? What is your Weighted Average Cost of Capital (WACC) Trend (has WACC been increasing or decreasing)? What is your biggest problem? What is your biggest opportunity?
"Start at the very beginning, ask important questions, then...listen."
We only accept specific projects where all involved believe the Economic Profit Trend (∆EP) can be positive. We actively and constantly redefine our shared understanding of: the Business, the market, the requirements, an in-depth understanding of organizational objectives... then iteratively develop the solution.
Since technology affects all parts of a Business, it is the easier to illustrate and discuss a specific (technology) project.
The unstructured and un-automated. Much of what people work on is on their desk (includes their desk computer) or their phone. And, a large % of the work is done using some office application (BTW Microsoft Office = 95% of all office applications). Generally, this work is unstructured and not automated:
Unfortunately, in most Businesses, the unstructured is many factors bigger than the structured. Now, consider how much of this smaller, structured work is also automated.
Jack of many, master of none. Instead of uniquely handling only the unique circumstances and characteristics of a specific Business, most technology solutions are general, not specific, and have capacity to handle the common parts of many Businesses. The result: the people trying to use general solution don't confidently understand how to "do their specific work". Also, because there are so many choices to handle the common parts of many Businesses, it's too easy to make the wrong one.
We believe our Process of "starting at the very beginning, asking important questions, carefully listening, then working in an Agile / Adaptive / Iterative / Evolutionary way...leads to unique success/solutions. And, unique success/solutions has/have the highest Return On Invested Capital (ROIC).
'Economic Profit Trend' [Economic Profit (current) minus Economic Profit (previous)] is the best performance metric. It is the only metric that can compare and rank (tangible) performance across industries and make direct comparisons between profitable and unprofitable companies.
Note: Assuming Cost of Capital is constant, 'ROIC Trend' (current Return On Invested Capital minus previous ROIC) will provide the same answer as 'Economic Profit Trend'.
Once 'Economic Profit Trend'/'ROIC Trend' shows positive (tangible) performance, Economic Profit can be used to show the scale of the (tangible) Performance.
Other Performance Metrics: (1) total stockholder return; (2) such total stockholder return as compared to total return (on a comparable basis) of a publicly available index such as, but not limited to, a Standard & Poor's stock index; (3) net revenues; (4) net income; (5) earnings per share; (6) income from operations; (7) operating margin; (8) gross profit; (9) gross margin; (10) pretax earnings; (11) earnings before interest expense, taxes, depreciation and amortization; (12) return on equity (associated with the failure of Lehman Brothers); (13) return on capital; (14) return on investment; (15) return on assets; (16) working capital; (17) free cash flow; and (18) ratio of debt to stockholders' equity.
We help find the best way to use Economic Value Theory, which frequently means explaining why 'Economic Profit AND Economic Profit Trend >= 0' can provide more help than any other (tangible) Performance Metric.
Economic Value Theory
Most economists reference Adam Smith (Wealth of Nations 1776) and/or Alfred Marshall (Principle of Economics 1890) to show that Economic Value is derived from Economic Profit (profit after all costs, including the 'cost of capital'). But there is little doubt that this understanding existed from the first recorded history (prior to Greco-Roman writings 400-300 BC).
Owner Earnings (aka Owner Cash Flow) = EBITDA - Capital Expenditures
Invested Capital = Total Assets - Cash & Equivalents
Return On Invested Capital (ROIC) = Owner Earnings (aka Owner Cash Flow) / Invested Capital
Cost of Equity The (Imputed) cost of equity using the Capital Asset Pricing Model (CAPM)
Risk-Free Rate (ShTm or LgTm Treasury Notes/Bonds) + Beta (Systematic Risk) * (Market Rate of Return - Risk-Free Rate)
Weighted Average Cost of Capital (WACC) Cost of Equity * (Equity / Total Capital) + After Tax Cost of Debt * (Debt / Total Capital)
$Economic Profit $Owner Earnings - $Cost of Capital
%Economic Profit %Return On Invested Capital - %Cost of Capital
$Economic Profit Trend (∆$EP) $Economic Profit (current) minus $Economic Profit (previous)
%Economic Profit Trend (∆%EP) Assuming Cost of Capital is constant/stable, then %Return On Invested Capital (current) minus %Return On Invested Capital (previous)