Business Case Development Framework

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The Business Case is an instrumental tool in both justifying a project (requiring a capital budgeting decision), as well as measuring the project's success. The Business Case model typically takes the form of an Excel spreadsheet and quantifies the financial components of the project, projecting key metrics for making any important business decision: Net Present Value (NPV), Return on Investment (ROI), Payback Period, Cost of Investment.

If a project has been justified by the Business Case (both financially and non-financially) and receives the go-ahead from executives, the Business Case model is then continuously maintained and adjusted to track the project?s progress against the initial financial projections and assumptions. This model then becomes a working document used during the project management process.

This toolkit will detail the process of creating a robust Business Case. It also includes a working sample Business Case model (in Microsoft Excel).

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Business Case Development Framework

  1. 1. Business Framework Business Case Development Framework Any project requiring a non-trivial investment must be supported by a robust business case to justify the economics of this pursuit. This toolkit outlines the objectives, components, and processes involved with business case development. Furthermore, it includes a working, consulting quality capital budgeting business case model (Excel financial model). Bottoms- up Benefits Case Business Modeling Top-down Business Case Financial Analysis BUSINESS CASE ELEMENTS Find our other documents at http://flevy.com/seller/learnppt
  2. 2. 3 Contents • Overview - Executive Summary - Objectives - Business Case Stream Charter • Quantitative Analysis Elements • Business Case Modeling • Sample Business Case Model (Excel document) • Final Words - Dos and Don’ts - Common Pitfalls - Rules of Thumb
  3. 3. 5 You will find that all business cases have the same core objectives Objectives – Core Objectives of Business Case  Quantify major improvement opportunities  Ensure project resources are allocated to the areas of highest leverage  Establish the range of benefits to be achieved through implementation activities  Provide the basis for assessing the return on investment and tracking benefits to the bottom line during the implementation phase  Develop the rational basis for making change necessary
  4. 4. 7 Identify major areas of revenue and cost assets and their key drivers Identify true value (i.e. revenue and costs): By function/activity By process By product/client type Quantify the financial impact of improvement opportunities from streams Validate business case and gain sign-off The business case stream identifies areas of opportunity and quantifies the improvement potential OBJECTIVES CRITICAL SUCCESS FACTORS Understanding of the business case within the project Access to key data and knowledge holders within client Availability of key resources to validate findings Timely input from streams SCOPE Summary analysis of costs and revenues Detailed analysis of operating costs DELIVERABLES Detailed breakdown of current costs and revenues Quantification of financial impact of early wins Benefits case estimate for improvement potential in costs and revenues: Including payback periods Input to design of benefits-tracking mechanism ACTIVITIES Conduct focus interview Analyze financials Build business model Build top-down business case Analyze benefits from team Build bottoms-up benefits case Prepare business case for benefits-tracking Business Case Stream Charter
  5. 5. 9 The structure of a business case is built on a combination of four separate, yet interlinked, quantitative analysis elements The extent of each element varies from case to case—but, they are always there. Bottoms-up Benefits Case Business Modeling Top-down Business Case Financial Analysis BUSINESS CASE ELEMENTS Enabling Element Core Deliverables Quantitative Analysis Elements
  6. 6. 11 Top-down Business Case Bottoms-up Benefits Case • Builds common understanding of the basics • Enables us to define framework for business case • Indicates levers that can deliver benefits • Is about “what if” not “how” • Mainly financial • Is about “how” not “what if” • Quantifies identified opportunities • Strong operational focus • Defines critical success factors and key performance indicators for implementation • Fully validated Business Modeling (Enabling element) Financial Analysis (Enabling element) Regardless of its focus, all business cases encapsulate both a top-down and bottoms-up approach Quantitative Analysis Elements – Top-down & Bottoms-up Approaches (1 of 3)
  7. 7. 13 The combined top-down and bottoms-up approaches triangulate to form the final business case Final Top-down Business case Final Bottoms-up Benefits Case Aspiration Hypotheses Benchmarks Baseline Implementation Prioritization Leveraging the Opportunities Analysis Preliminary Top-down Benefit Evaluation Benefit Scope by Area Final Business Case Realized Benefits Focus on Major Benefit Levers $$$ Bottoms-up Approach Top-down Approach Proposed Issues Quantitative Analysis Elements – Top-down & Bottoms-up Approaches (3 of 3)
  8. 8. 15 Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization 1 2 3 4 5  Decompose the organization’s financial situation by understanding economic drivers of the business  Understand the financial projections and historical trends  Based on the financial analyses in the first phase, conduct studies around the key levers identified  Develop a financial baseline  Quantify the opportunities identified and develop benefit logic  Create opportunity charts for each opportunity  Define financial and operational assumptions  Validate the benefit logic with key process owners in the business  Obtain sign-off from key stakeholders in the organization  Design a cohesive project with clear linkages to the benefits identified  Define payback assumptions Business Case Development Approach The business case development process begins with a financial decomposition of the organization to search for opportunities
  9. 9. 17 Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization Those benefits identified as both financial and quantifiable may eventually be captured in the business case financial model Financial Non-financial Examples  Increased sales  Increased delivery time  Reduced operating costs Examples  Customer satisfaction  Service quality  More stable field force team  Increased employee morale Examples  Customer retention  Retail alignment with strategy  Effective work processes Examples  Improved communication  Increased teamwork  Enhanced reputation with suppliers QuantifiableNon-quantifiable Financial Non-financial These benefits can be captured quantitatively in a financial model Capture qualitatively Capture qualitatively Capture qualitatively QuantifiableNon-quantifiable Only those benefits that are both Financial and Quantifiable can be modeled into the final financial model. Phase 1, 2 – Financial Decomposition & Opportunity Identification
  10. 10. 19 Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization Phase 3 – Opportunity Quantification These benefits must then be quantified and translating into specific financial impacts Categorize the financial, quantifiable benefits into the 5 benefit categories for structure in the financial model. PROFIT & LOSS IMPACTS BALANCE SHEET IMPACTS CASHFLOW IMPLICATIONS Gross benefit Investments Net benefit Financial Non-financial Capture qualitatively Capture qualitatively Capture qualitatively QuantifiableNon-quantifiable Revenue Enhancement Cost Reduction Cost Avoidance Capital Reduction Capital Avoidance • Ultimately, benefits must be quantified and translated into impact on the company’s financials • P&L impacts • Balance Sheet impacts • Cash Flow implications • Analyses should be presented within the context of investment required and timeframe for benefits realization (e.g. payback period)
  11. 11. 21 Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization Phase 5 – Business Case Finalization The financial modeling process involves calculating key financial metrics, such as ROI and Payback Period Define key assumptions and financial metrics to drive financial modeling COMMONLY USED FINANCIAL BUSINESS CASE METRICS Timeframe Most business case for capital budgeting models have a 5-year timeframe. Discount / Hurdle Rate By definition, this is the minimum acceptable rate of report for any internal project that the company takes on. This is defined by Corporate Finance and for most companies, it is 10% (annually). This value is crucial, as it drives all the key financial calculations (e.g. NPV, ROI). Net Present Value (NPV) NPV is a concept used to measure present value of future cash flow. This is done by discounting the cash flow by the discount rate. E.g. with a discount rate of 10%, the NPV of $5MM in year 2 is $5MM/(1 + 10%)2 Return on Investment (ROI) ROI is a performance measurement of how profitable the project or investment was. It is a percentage symbolizing the profit as a percentage of total investment. Usually, we calculate the ROI for the snapshot at the end of the 5-year timeframe. Payback Period This is the time it takes for a project to recover its initial costs and start generating a positive return for the company. Since most models are set at a 5-year horizon, the payback period should occur within 5 years. Source: Investopedia (for more information) If these concepts are new to you and unclear, examine the calculations used in the embedded Excel model (on slide 25).
  12. 12. 23 Contents • Overview - Executive Summary - Objectives - Business Case Stream Charter • Quantitative Analysis Elements • Business Case Modeling • Sample Business Case Model (Excel document) • Final Words - Dos and Don’ts - Common Pitfalls - Rules of Thumb
  13. 13. 25 Sample Business Case Model – Documentation (1 of 4) The included Capital Budgeting Business Case model contains 5 tabs Overview Tab The ―Overview‖ tab, in orange, provides a 5-year financial summary of both the benefit case, cost of investment, resulting cash flow analysis, and key financial metrics to drive business decisions. It contains very few inputs, as values are pulled from the next 4 tabs. Benefits Tabs The next 3 tabs, in green, comprise the identified financial, quantifiable benefits, divided into the sections of ―Revenue Enhancements, ―Costs Benefits,‖ and Capital Benefits.‖ The benefits and associated assumptions are clearly defined and calculated in these tabs. For each benefit, values are calculated over the 5- year time frame and are pulled into the ―Overview‖ tab. Cost of Investment Tab The ―Cost of Investment‖ tab, in red, delineates the identified costs associated with undertaking this project/initiative. In the example model, it has been structured similar to the benefit tabs, though this does not need to be the case. The structure is dependent entirely and how the cost structure of this investment. Costs are also calculated over 5 years and summarized in the ―Overview‖ tab.
  14. 14. 27 Sample Business Case Model – Documentation (3 of 4) Your benefits should be clearly defined—both in terms of definitions and calculations—remember, these need to be validated BENEFIT TABS • There are 3 Benefit Tabs: • Revenue Enhancements – includes all identified revenue enhancements • Cost Benefits – includes both Cost Reductions and Cost Avoidances • Capital Benefits – includes both Capital Reductions and Capital Avoidances • Each of these 3 tabs is structure the same • At the top, tabulate all your assumptions • Your assumption values are indicated by yellow cells and should be clearly defined • Below the assumptions are your actual benefits • Each benefit has its own section in blue, which contains 4 sub-sections: the name of the benefit (darker blue), benefit description (light blue), calculation details (gray), calculated values over 5 years (white) • The Excel formulas for the calculations should not contain any numbers—only references to assumption values identified in the top section
  15. 15. 29 Contents • Overview - Executive Summary - Objectives - Business Case Stream Charter • Quantitative Analysis Elements • Business Case Modeling • Sample Business Case Model (Excel document) • Final Words - Dos and Don’ts - Common Pitfalls - Rules of Thumb
  16. 16. 31 … and avoid the common pitfalls!  “Oh data, you wanted me to get data!” – Lots of war stories but no data  “There is no data” – Sadly, too often this means the speaker is too lazy to plug through reams of paper to get at the data  Staying in data gathering and analysis mode  Stating the obvious – ―Increasing margins will improve profits.‖ – We are looking for the ―So-Whats‖—keep on digging until you find them.  Finding a gold mine and quantifying the value of the shack built on it – Too often we get bogged down in the detail and forget the bigger picture  “Validate, validate, validate—oh, does that mean I should have validated my analysis?” – People are validation—averse because they do not understand the process or are afraid it will be abused  Letting the team dictate where the benefits will end up  Not plugging in to the authorisation network and selling strategy discussions  Staying holed up and not understanding each study’s findings and opportunities COMMON PITFALLS Common Pitfalls

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