What are possible criterias to evaluate investment decisions?

Question

Hi, I'd like to seek your advice on how to come up with suitable evaluation criteria in decision-making cases, if the prompt was blurry and the client does not have a specific objective?

As an example: “Setting up an alternative plant would help us save cost and reduce lead time. Which country should we pick to set up the alternative plant?” Let's say the interviewer did not give me the key objective of the client. What are some possible criteria that I could assume? My thought is:

1.Payback period: quite common in case books, but I found out that in real interviews, it is quite rare that the clients have a targeted payback period.

2.Reduce cost as much as possible: seems more realistic, as clients often focus on “saving cost” as much as possible. However, is it suitable to neglect the “initial investment (setup cost)" and only focus on the cost side?

Thanks for your advice!

Answer 1

Hi!

I believe your ideas make sense. But there is one EXTREMELY important detail:

You should NEVER just “assume” these objectives! You need to suggest them, and align with the interviewer on whether they agree that this makes sense. This is expected of you. Creating alignment with your interviewer (= your client) is much more important than coming up with the “ideal” objective!

So a phrase could be “Well, I could imagine that a sensible measure for Objective X would be KPI Y. Would this be fine for our client if we use this measure to operationalize the objective, or do they have something different in mind?”

Thereby you show that you have a bullet-proof problem-solving process in place, which is no depending on you “knowing” stuff.

Hope this helps!

Cheers, Sidi

___________________

Dr. Sidi S. Koné

Former Senior Engagement Manager & Interviewer at McKinsey | Former Senior Consultant at BCG | Co-Founder of The MBB Offer Machine™

Answer 2

Hi there,

Q: Let's say the interviewer did not give me the key objective of the client. What are some possible criteria that I could assume?

If the interviewer did not provide the key objective as part of the prompt, the first step I would recommend is to clarify with them what it is. If you don’t know the goal, it is not possible to structure an approach to achieve it.

If they are unable to clarify the goal after you've asked, you will have to present to the interviewer your best assumption regarding the goal and explain that you would like to structure your approach based on that, given that there is no other information available. From what you shared, it seems that the goals are cost and lead-time reduction.

In general, it is unusual for an interviewer not to provide a clear goal when asked, as without it you cannot properly structure your approach to achieve it.

Best,

Francesco

Answer 3

Hi there,

Generally, I like Cost, Benefit and Implementation Considerations as buckets.

Emphasis: generally. Always create a tailored approach.

Metrics for measuring: ROI, Breakeven, NPV.

Some more reading:

https://www.preplounge.com/en/consulting-forum/investment-cases-ma-pe-hf-differences-9236

https://www.preplounge.com/en/consulting-forum/investment-decision-case-10258

https://www.preplounge.com/en/consulting-forum/upfrontinvestment-costs-and-fixed-costs-10549

Answer 4

Hey,

Although I agree with the other respondents that generally the key metric is either provided by the interviewer or / and you should clarify it, sometimes, according to the case prompt, there are no defined KPI and you are given a choice to brainstorm them on your own.

I can provide a Tier-2 company's case as an example:
“The partner invites you to his office and shows you a deck of the ongoing project requests of the firm. The firm has limited resources, therefore the partner asks you to suggest a metric, based on which the firm can prioritise the projects to take on. What are your ideas?”

After some discussion, surprisingly, according to the case data, the preferred metric is… IRR :)

Cheers,
Nick

Answer 5

Hi there!

It all comes down to clarity at the end of the day.

Ask them specifically if they have any criteria of their own to evaluate this opportunity.

If they say no, then come up with your own (for instance the ones you suggested are fine).

Then tell the interviewer that for now you would recommend to use these criteria to evaluate the opportunity (treat them as an assumption) and once this preliminary analysis is ready, you can go out and study how other such opportunities have been evaluated in the market.

Best,
Cristian

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Answer 6

Hi,

I think couple of key points already mentioned by other coaches in terms of the thought process you should follow.

I'll add some elaboration and nuance to build on the great point made by Sidi on how you should suggest and align them. When you are suggesting them - this is a chance where you can demonstrate your logical thinking, business judgment as well as creativity.

The point I want to make here is that ‘profit’ related metrics may not always be the sole goal or criteria for evaluation. I'll give you an example from an actual project I worked on in BCG. I was working for a Sovereign Wealth Fund to define potential investment targets - and in addition to ROI, they also cared about contribution to the economy (e.g. contribution to GDP in priority sectors, contribution to employment) etc.

All the best!