ROE3: A Framework for Smarter Decision-Making

Return on Equity (ROE) traditionally measures how well a company uses its financial resources to generate profits. But in today’s business landscape, effective decision-making requires more than just financial evaluation. Leaders must also account for the Energy spent in the decision-making process and the Effort required to execute their strategies. This is where ROE3 comes into play—a comprehensive framework that balances Equity, Energy, and Effort.

ROE3 encourages leaders to consider all dimensions of resource allocation: financial, mental, and operational. Whether you’re launching a new initiative, responding to a competitor’s move, or planning a project, ROE3 provides a structured approach to making decisions that are not only profitable but also sustainable for your team.

And, before you say -- "this is just a scope and requirements document" -- this is the step before that and absolutely is a great start to building your comprehensive scope and requirements! I will bet money step 2 is not in your S&R doc!

Breaking Down ROE3 with Practical Application

1. Equity

Equity is the financial component of your investment—how much money and capital resources are involved. While this is the most traditional aspect of decision-making, it still requires thoughtful consideration to ensure the financial risk is appropriate.

Steps to Evaluate Equity:

• Set a Clear Financial Goal: Determine your desired outcome—whether it’s increased profitability, market share, or long-term positioning. A defined financial goal will guide how much equity you’re willing to invest.
• Assess Risk vs. Reward: Weigh the potential gains against the risks. Create a simple risk matrix to help visualize high-risk vs. high-reward scenarios, and determine your company’s appetite for risk.
• Use Data for Decision-Making: Leverage market research, sales forecasts, and historical data to set a realistic budget. Ensure that your financial commitment aligns with your organization’s broader strategic goals.
• Break it Down with Milestones: Set smaller financial milestones rather than committing the entire investment upfront. This allows for reassessment and adjustments as you proceed.

2. Energy

Energy represents the mental and emotional effort required for decision-making. It’s about how much time and cognitive power you invest in analyzing data, considering options, and debating outcomes. Too much energy can lead to analysis paralysis, while too little can result in hasty decisions.

Steps to Manage Energy Efficiently:

• Set Time Limits for Analysis: Avoid decision fatigue by setting deadlines for making decisions. This ensures you’re not spending too much mental energy deliberating.
• Focus on Key Factors: Prioritize the top 3-5 factors that will impact the outcome the most. Trying to address every detail will drain your mental resources unnecessarily.
• Delegate Research: Distribute the workload to avoid mental burnout. Assign team members to handle specific parts of the analysis and gather key data points.
• Step Away for Perspective: Schedule short breaks or pauses in the decision-making process to clear your mind and gain fresh perspectives before finalizing any choices.

3. Effort

Effort refers to the work and resources required to implement a decision once it’s made. It’s essential to assess how much effort is realistic and necessary, ensuring that your team doesn’t get overwhelmed by tasks that don’t generate proportional returns.

Steps to Evaluate and Manage Effort:

• Scope the Work: Break down the action plan into clear steps and assess the time, people, and resources needed. Ask yourself: Is this effort sustainable, or will it overburden the team?
• Prioritize Tasks: Start with the most critical tasks that will generate the highest impact. Phase in less urgent work over time.
• Look for Efficiency Gains: Are there tools, processes, or technology that can reduce the manual workload? Always seek to streamline and automate where possible.
• Track and Adjust: Regularly measure how much effort is being expended versus the results you’re seeing. If the returns are diminishing, reassess the level of effort and adjust the workload to prevent burnout.

Business Example: Competitor Launching an AI Product

Imagine your organization has carved out a niche in your industry, providing excellent services and products without a heavy reliance on artificial intelligence (AI). Suddenly, a major competitor announces the launch of an AI-driven product that promises to revolutionize the market. The news creates pressure to respond, but AI hasn’t been part of your company’s strategy, and your leadership team is unsure of the best course of action.

This is where applying the ROE3 framework can help guide a smart and sustainable response.

1. Equity: Is It Worth the Financial Investment?

The first step is to evaluate whether it makes sense for your organization to invest in AI technology to stay competitive.

Steps to Assess Equity:

• Set Financial Goals: What does your company stand to gain financially by investing in AI? For instance, will matching the competitor's product lead to revenue growth, improved customer retention, or market expansion? Defining these goals upfront helps you focus your financial analysis.
• Risk vs. Reward Analysis: How risky is an AI investment for your company, considering it’s not in your core space? Could this investment open new revenue streams, or is it more likely to stretch your financial resources thin? Compare the costs of catching up with AI to the potential rewards, factoring in both short-term gains and long-term sustainability.
• Use Data: Conduct market research to understand customer needs and demand for AI-powered solutions in your industry. Would they expect or even desire AI from your company, or are your core offerings already meeting their needs? Use this data to make an informed decision on the level of financial commitment needed.

By carefully considering these financial aspects, you can decide whether your organization should pivot toward AI or whether the investment isn’t worth it in your case.

2. Energy: How Much Time Should We Spend Deciding?

Next, you’ll need to gauge how much mental energy and analysis should go into this decision. Diving too deep into AI research may consume valuable time, but a quick decision without proper consideration could lead to missteps.

Steps to Manage Energy:

• Set a Deadline for a Decision: Give your team a reasonable time frame—perhaps two weeks—to conduct initial research and decide whether the AI product space is worth entering. This prevents the team from falling into analysis paralysis while giving enough time to weigh the pros and cons.
• Prioritize Key Questions: Focus your analysis on the top factors that will impact your decision. These might include the readiness of your current tech infrastructure, the financial feasibility of an AI project, and the alignment with your overall business strategy.
• Delegate Research Tasks: Avoid draining energy by assigning different team members specific areas to research. Have someone evaluate AI market trends, another assess the technological requirements, and someone else explore potential partnerships for developing AI capabilities.
• Pause for Reflection: Before making the final call, take a step back to review the key findings and ask yourself: Is this direction true to your company’s strengths and values? This ensures you’re not rushing the decision without a holistic view.

By managing the mental energy spent on this decision, your team can avoid being overwhelmed by the complexity of AI while ensuring that enough time is devoted to a thoughtful analysis.

3. Effort: How Much Work Will It Take to Implement?

Once a decision is made—whether to explore AI or double down on your current strengths—it’s important to evaluate the effort required to execute the strategy.

Steps to Evaluate Effort:

• Scope the Work: If you decide to enter the AI space, start by identifying the effort required. What kind of talent will you need to hire or upskill? Will you need new systems or software? If you choose not to enter AI, what effort will go into reinforcing your existing strengths to retain customer loyalty?
• Set Priorities: For those choosing the AI route, begin with a pilot project rather than a full-scale rollout. Focus on a single feature or product enhancement powered by AI that can demonstrate value without overwhelming your resources. If staying out of AI, shift focus to customer engagement and marketing efforts that highlight your company’s unique advantages.
• Leverage Existing Tools: Look for partnerships or third-party providers that can help fast-track your AI development, reducing the internal effort required. If opting to not enter the AI space, explore ways to automate or streamline current operations to free up resources for strategic projects.
• Measure & Adjust: Track the progress and outcomes of your chosen path. Whether it’s the AI pilot project or a renewed focus on core products, regular check-ins ensure that the effort being put in is delivering results. If not, reassess the workload and adjust priorities accordingly.

By balancing effort with the potential payoff, you ensure that your team isn’t overextended, and you make the most efficient use of resources.

The ROE3 framework offers a more comprehensive way to approach decision-making by considering financial equity, mental energy, and physical effort in tandem sooner in the process. By following these practical steps, leaders can ensure that their investments are not only financially sound but also sustainable for the team’s wellbeing and productivity. Balancing these three elements leads to smarter, more efficient decisions that position your organization for long-term success.