Business Case Development        What, Why and How   Dave Angelow – Executive Principal              April 2011
Tonight’s Plan• Discussion of Why a Business Case is Needed• Review of What is contained in a business case• Discuss how t...
Who is Dave Angelow• Expert in value-stream mapping, process improvement and business case  development    – Focus on star...
Why Create a Business Case?•   Executive Management is charged with making decisions on effective use of corporate    reso...
What is a business case?• A business case captures the reasoning for initiating a project or  task.    – The logic of the ...
How is business case information used         in decision-making• Business activities all into two major  categories – Ope...
Companies need to make decisions on how to           allocate limited resources• Many companies set an annual budget and a...
The difference between Projects and               Operations• Projects - “A temporary endeavor to create a unique  product...
Simplified Business Model – Financial       components of a business case                                          Revenue...
Creating a business case requires            critical thinking• Business case development is a value-added  activity and r...
Approach for Business Case                         Development                    Estimate Costs                          ...
Assumptions on the case• Implementation of new internal-use software  capability• Uncertainty on benefits – different peop...
Estimating Costs• Cost estimates are frequently based on quotes or bids, or values from  finance/accounting• Good practice...
Sample Cost Estimating Template          Cost Categories                    One Time Fees                                 ...
Estimating Benefits• Creating an estimate of benefits can be more complex than  estimating costs because…   – Efficiency g...
Sample Benefit Estimating Template    Benefit                                          One Time                           ...
Non-financial factors are also     components of a business case• Non-financial factors     • Organizational Risks, resist...
Assumptions and Rationale• Documenting the assumptions and rationale for  both costs and benefits is critical   – “All est...
Sample Completed Business Case Most likely                                        One Time                                ...
Sample Completed Business Case – Sensitivity 1                              (pessimistic)                                 ...
Sample Completed Business Case – Sensitivity 2                              (optimistic)                                  ...
Tips, Trick and Techniques (pitfalls to avoid)• Ensure data as complete as possible   – Creating estimates requires data, ...
Presenting the Business Case• Pre-sell – meet with finance early and get buy-in  – Ask for templates and formats that are ...
Recap• Business cases help organizations evaluate  project efforts and determine go/no-go and  priority• Sensitivity analy...
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Business Case Development - How and Why

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how to develop a simplified business case

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Business Case Development - How and Why

  1. 1. Business Case Development What, Why and How Dave Angelow – Executive Principal April 2011
  2. 2. Tonight’s Plan• Discussion of Why a Business Case is Needed• Review of What is contained in a business case• Discuss how to create a business case
  3. 3. Who is Dave Angelow• Expert in value-stream mapping, process improvement and business case development – Focus on start-ups and high-growth companies – Primary assistance is driving improvements in revenue or costs• 12 years experience in business operations and program management with high-tech companies – Dell – Applied Materials – Freescale/Motorola• Over 10 years management consulting experience – Deloitte Consulting – Ernst & Young – Kalypso – Business Foundations
  4. 4. Why Create a Business Case?• Executive Management is charged with making decisions on effective use of corporate resources• A business case helps organizations estimate the costs and benefits from project efforts• Comparing the expected outcomes from different efforts, management is able to determine where to allocate resources – Every organization has constraints and needs to determine where to invest resources Facilities and Equipment, Materials and Supplies, Payroll/PersonnelAssumption – materials in this presentation focus on internal improvement, a businesscase for new products/development is differentAssumption #2 – You own building the business case, or have a key role to contributedata for the business case and understanding where the business case fitsorganizationally
  5. 5. What is a business case?• A business case captures the reasoning for initiating a project or task. – The logic of the business case should help evaluate the costs and benefits of resource consumption – Business cases are most often used to evaluate projects to make decisions – they are the initial screen for a project • Should we initiate the project – go/no-go • If a go – what priority should we give the project• A business case is not financial model – Financial modeling tools like NPV, IRR, WACC, etc. can be applied to business case data; however the data from the case are just an input into models – Financial models can be complex and are more often used for accounting or finance applications
  6. 6. How is business case information used in decision-making• Business activities all into two major categories – Operations or Projects – Operations are the core value-adding activities needed to generate profits – Projects are temporary efforts to achieve a specific outcome• The information from the business case enables understanding the costs and expected benefits from a project
  7. 7. Companies need to make decisions on how to allocate limited resources• Many companies set an annual budget and allocate a portion to Projects Annual Expense Budget Selling General and Admin Expense $ 200,000• A majority of the budget is Cost of Goods Sold $ 1,250,000 Labor $ 300,000 consumed by Operations Material $ 800,000 Overhead $ 150,000• Projects are often a Inventory $ 40,000 Facilities/Rent $ 20,000 component of “other” Interest Expense $ 5,000 expenses Other Projects $ $ 325,000 175,000 – The cost estimates for a Internal Labor $ 50,000 Consulting/3rd Party Services project(s) are compared to and Labor $ 20,000 budget for decision-making Equipment $ 30,000 Software $ 75,000 – Benefits are often not Travel $ 50,000 budgeted, yet a critical part Emergency Funds $ 100,000 of the business case Total Budget $ 2,165,000
  8. 8. The difference between Projects and Operations• Projects - “A temporary endeavor to create a unique product, service or result” – 4th Edition of PMBOK – The temporary nature of a project indicates a defined beginning and end; the end is reached when the project’s objectives are achieved or it’s determined they cannot be achieved (note, temporary does not necessarily mean short in duration)• Operations – Recurring work effort that follows generally defined processes, procedures and existing organizational capabilities.As organizations mature, there is often a greater focus on “improvementprojects” with a goal of increasing profitability
  9. 9. Simplified Business Model – Financial components of a business case Revenue Organization Asset Utilization ProfitabilityThree levers impact profitability Costs • Increase Revenue • Increase utilization of Assets • Reduce Costs
  10. 10. Creating a business case requires critical thinking• Business case development is a value-added activity and requires four major components – Understand costs/resources that a project will require – Define the benefits that will be derived upon completion – Identify risks that may occur during the course of the effort – Capture the assumptions behind the estimates
  11. 11. Approach for Business Case Development Estimate Costs Use/Develop Perform PrepareIdentify Project Project Benefits Business Case Sensitivity Management Needs Template (reuse) Analysis Presentation Document Document Non- Assumptions financial factors and Rationale
  12. 12. Assumptions on the case• Implementation of new internal-use software capability• Uncertainty on benefits – different people on the team have different opinions on magnitude of impact• Cost estimates are from quotes and have higher degree of accuracy than benefit estimates
  13. 13. Estimating Costs• Cost estimates are frequently based on quotes or bids, or values from finance/accounting• Good practice is to outline broad cost categories and decompose to ensure all elements are included – Categories could include areas like: • Hardware Costs • Development/Test Tools Software Costs • Internal Staffing Costs • External Staffing Costs • Etc• Categorize costs as One-time, or Recurring – Challenge with one-time costs is to be sure they don’t recur or have some portion that recurs (maintenance fees, etc.) – Recurring costs should be estimated to have periodic increases – Cost of Living Adjustments, increases in rates, etc.
  14. 14. Sample Cost Estimating Template Cost Categories One Time Fees Recurring FeesSoftware Costs Yr1 Yr2 Yr3 Yr4 Application $ 100,000 $ 17,000 $ 17,000 $ 20,000 $ 25,000 Software Database Software $ 25,000 $ 4,250 $ 4,250 $ 5,000 $ 6,250 Additional 3rd $ 5,000 $ 850 $ 850 $ 1,000 $ 1,250 Party Software Subtotal $ 130,000 $ 22,100 $ 22,100 $ 26,000 $ 32,500Hardware Costs Application Server $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Other Subtotal $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500Infrastructure Costs Network $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000 Other $ - Subtotal $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000Implementation Costs Internal IT Staff $ 150,000 $ 50,000 $ 52,500 $ 55,125 $ 57,881 Internal Business $ 250,000 $ 60,000 $ 63,000 $ 66,150 $ 69,458 Staff Software Services $ 25,000 3rd Party Systems $ 500,000 Integrator Subtotal $ 925,000 $ 110,000 $ 115,500 $ 121,275 $ 127,339Grand Total $ 1,105,000 $ 139,600 $ 147,600 $ 162,775 $ 180,339
  15. 15. Estimating Benefits• Creating an estimate of benefits can be more complex than estimating costs because… – Efficiency gains may not translate into financial benefits • “Step-function” – within a range costs are the same (450 min phone plan, no benefit if you use 200 or 449 min) • Saving hours may not reduce costs, people have more free time but payroll is flat unless someone leaves – Confirmation Bias – tendency for people to favor information that confirms their preconceptions regardless of whether the information is true • “We need this project and we’ll make it so”• Like estimating costs, the best approach is to outline benefit categories, determine if one-time or recurring, and be sure to include changes over time
  16. 16. Sample Benefit Estimating Template Benefit One Time Recurring Fees Categories Benefits Yr1 Yr2 Yr3 Yr4Increased Efficiency Manual Process Elimination $ - $ 20,000 $ 100,000 $ 300,000 $ 500,000 Cycle-time reduction $ - Other (describe below) $ - Subtotal $ - $ 20,000 $ 100,000 $ 300,000 $ 500,000Headcount Reduction Austin $ - $ 100,000 Design Centers $ - $ 250,000 $ 500,000 Subtotal $ - $ 100,000 $ 250,000 $ 500,000 $ -Infrastructure Benefits Eliminate CSS Support $ 10,000 Consolidate Number of Tools $ 500,000 Other $ - Subtotal $ 510,000 $ - $ - $ - $ - Grand Total $ 510,000 $ 120,000 $ 350,000 $ 800,000 $ 500,000
  17. 17. Non-financial factors are also components of a business case• Non-financial factors • Organizational Risks, resistance to change • Employee Satisfaction, potential turn-over • Other Risks (governmental, environmental, competitor response, etc.)
  18. 18. Assumptions and Rationale• Documenting the assumptions and rationale for both costs and benefits is critical – “All estimates are wrong, some are useful” • Estimates are imperfect, providing details as to behind the numbers are relevant to help with understanding – Discussions around the relevant range is critical• Business cases are essentially sales tools – selling finance, product management or others on an idea and direction, and getting $$$ – Assumptions and rationale bring the numbers to life and create the entire picture
  19. 19. Sample Completed Business Case Most likely One Time Benefit One Time Benefits Recurring Fees Cost Categories Recurring Fees Fees Yr1 Yr2 Yr3 Yr4Software Costs Yr1 Yr2 Yr3 Yr4 Increased Efficiency Manual Process Application Software $ 100,000 $ 17,000 $ 17,000 $ 20,000 $ 25,000 Elimination $ - $ 20,000 $ 100,000 $ 300,000 $ 500,000 Cycle-time reduction $ - Database Software $ 25,000 $ 4,250 $ 4,250 $ 5,000 $ 6,250 Other (decribe below) $ - Additional 3rd Party $ 5,000 $ 850 $ 850 $ 1,000 $ 1,250 Subtotal $ - $ 20,000 $ 100,000 $ 300,000 $ 500,000 Software Subtotal $ 130,000 $ 22,100 $ 22,100 $ 26,000 $ 32,500 Headcount ReductionHardware Costs Austin $ - $ 100,000 Application Server $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Design Centers $ - $ 250,000 $ 500,000 Other Subtotal $ - $ 100,000 $ 250,000 $ 500,000 $ - Subtotal $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Infrastructure BenefitsInfrastructure Costs Network $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000 Eliminate CSS Support $ 10,000 Other $ - Consolidate Number of Subtotal $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000 Tools $ 500,000 Other $ -Implementation Costs Subtotal $ 510,000 $ - $ - $ - $ - Internal IT Staff $ 150,000 $ 50,000 $ 52,500 $ 55,125 $ 57,881 Grand Total $ 510,000 $ 120,000 $ 350,000 $ 800,000 $ 500,000 Internal Business Staff $ 250,000 Software Services $ 25,000 4 Yr Total $ 2,280,000 3rd Party Systems $ 500,000 $ 50,000 $ 50,000 Integrator Subtotal $ 925,000 $ 50,000 $102,500 $ 55,125 $ 107,881 ProjectedGrand Total $1,105,000 $ 79,600 $134,600 $ 96,625 $ 160,881 1.45 Return4 Yr Total $ 1,576,706
  20. 20. Sample Completed Business Case – Sensitivity 1 (pessimistic) Benefit Recurring Fees Categories One Time Benefits One Time Cost Categories Recurring Fees Yr1 Yr2 Yr3 Yr4 FeesSoftware Costs Yr1 Yr2 Yr3 Yr4 Increased Efficiency Manual Process Elimination $ - $ 20,000 $ 250,000 $ - $ - Application Software $ 100,000 $ 17,000 $ 17,000 $ 20,000 $ 25,000 Cycle-time reduction $ - Database Software $ 25,000 $ 4,250 $ 4,250 $ 5,000 $ 6,250 Other (decribe below) $ - Additional 3rd Party $ 5,000 $ 850 $ 850 $ 1,000 $ 1,250 Software Subtotal $ - $ 20,000 $ 250,000 $ - $ - Subtotal $ 130,000 $ 22,100 $ 22,100 $ 26,000 $ 32,500 Headcount ReductionHardware Costs Austin $ - $ 100,000 Application Server $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Design Centers $ - $ 100,000 $ 100,000 $ 100,000 Other Subtotal $ - $ 100,000 $ 100,000 $ 100,000 $ 100,000 Subtotal $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Infrastructure BenefitsInfrastructure Costs Eliminate CSS Support $ 100,000 Consolidate Number of Network $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000 Tools $ 250,000 Other $ - Other $ - Subtotal $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000 Subtotal $ 350,000 $ - $ - $ - $ - Grand Total $ 350,000 $ 120,000 $ 350,000 $ 100,000 $ 100,000Implementation Costs Internal IT Staff $ 150,000 $ 50,000 $ 52,500 $ 55,125 $ 57,881 4 Yr Total $ 1,020,000 Internal Business Staff $ 250,000 Software Services $ 25,000 3rd Party Systems $ 500,000 $ 50,000 $ 50,000 Integrator Subtotal $ 925,000 $ 50,000 $102,500 $ 55,125 $ 107,881Grand Total $1,105,000 $ 79,600 $134,600 $ 96,625 $ 160,881 Projected .654 Yr Total $ 1,576,706 Return Projected Return 0.65
  21. 21. Sample Completed Business Case – Sensitivity 2 (optimistic) Benefit Recurring Fees Categories One Time Benefits One Time Cost Categories Recurring Fees Yr1 Yr2 Yr3 Yr4 FeesSoftware Costs Yr1 Yr2 Yr3 Yr4 Increased Efficiency Manual Process Elimination $ - $ 20,000 $ 700,000 $ 900,000 $ 700,000 Application Software $ 100,000 $ 17,000 $ 17,000 $ 20,000 $ 25,000 Cycle-time reduction $ - Database Software $ 25,000 $ 4,250 $ 4,250 $ 5,000 $ 6,250 Other (decribe below) $ - Additional 3rd Party $ 5,000 $ 850 $ 850 $ 1,000 $ 1,250 Software Subtotal $ - $ 20,000 $ 700,000 $ 900,000 $ 700,000 Subtotal $ 130,000 $ 22,100 $ 22,100 $ 26,000 $ 32,500 Headcount ReductionHardware Costs Austin $ - $ 100,000 Application Server $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Design Centers $ - $ 500,000 $ 500,000 $ 500,000 Other Subtotal $ - $ 100,000 $ 500,000 $ 500,000 $ 500,000 Subtotal $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Infrastructure BenefitsInfrastructure Costs Eliminate CSS Support $ 700,000 Consolidate Number of Network $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000 Tools $ 500,000 Other $ - Other $ - Subtotal $ - $ 5,000 $ 5,000 $ 8,000 $ 8,000 Subtotal $ 1,200,000 $ - $ - $ - $ - Grand Total $ 1,200,000 $ 120,000 $ 1,200,000 $ 1,400,000 $ 1,200,000Implementation Costs Internal IT Staff $ 150,000 $ 50,000 $ 52,500 $ 55,125 $ 57,881 4 Yr Total $ 5,120,000 Internal Business Staff $ 250,000 Software Services $ 25,000 3rd Party Systems $ 500,000 $ 50,000 $ 50,000 Integrator Subtotal $ 925,000 $ 50,000 $102,500 $ 55,125 $ 107,881Grand Total $1,105,000 $ 79,600 $134,600 $ 96,625 $ 160,881 Projected 3.254 Yr Total $ 1,576,706 Return Projected Return 3.25
  22. 22. Tips, Trick and Techniques (pitfalls to avoid)• Ensure data as complete as possible – Creating estimates requires data, be sure data is as complete as possible – (IE, multi-year project will likely have increased labor costs)• Document Assumptions – Developing business cases requires making projections into the future; document all assumptions• Build models using variables not fixed values – Assume you’ll have to explain the impact of a change in value for any financial factor – construct models to make changing any value easy• Don’t Sandbag – “All estimates are wrong, some are useful”; use sensitivity analysis/scenario analysis to box upper and lower expectations
  23. 23. Presenting the Business Case• Pre-sell – meet with finance early and get buy-in – Ask for templates and formats that are preferred – Seek a review to gain feedback/agreement with cost and benefit estimates• Make Recommendation – Say why the project matters and what will happen if you don’t do it – Support the position with assumptions and rationale – Have different models with various assumptions
  24. 24. Recap• Business cases help organizations evaluate project efforts and determine go/no-go and priority• Sensitivity analysis should be included – test the upper and lower ranges to understand impact of assumptions and risks• The business case is the foundation for investment decision-making – Complexity of the business case is often a factor of investment size

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