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Savi chapter9

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  • 1. CHOICE ANDPRESENTING THE BUSINESS CASEA conclusion is sometimes the place where you got tired of thinking 1
  • 2. Figure 9.1, the problem-solving model PROBLEM STATEMENT PROBLEM STATEMENT CRITERIA CRITERIA ALTERNATIVES ALTERNATIVES NON-FINANCIAL ANALYSIS NON-FINANCIAL ANALYSIS FINANCIAL ANALYSIS FINANCIAL ANALYSIS MAKE A CHOICE MAKE A CHOICE IMPLEMENTATION PLAN & IMPLEMENTATION PLAN & FOLLOW UP FOLLOW UP 2
  • 3. MAKE A CHOICE Other things being equal, the best alternative to choose will be the one having these characteristics:  an acceptable level of risk,  the largest benefits (financial and/or non-financial),  the lowest costs,  the best benefit/cost ratio. The choice of best alternative should be immediate and unanimous. If not, go back to the beginning of the model. 3
  • 4. Figure 9.2, Make a choice checklist Yes/NoDo we share an understanding of the strategic plan?Do we mutually understand the problem we are facing?Do we agree on the type and relevance of decision criteria?Are we all satisfied that the range of alternatives was broadenough?Do we agree that the qualitative data was relevant and accurate?Do we agree that the quantitative data was relevant andaccurate?Do we agree that the evaluation system effectively dealt with theinformation?Are we free from issues involving something other than thisproblem situation? (Hidden agendas?) 4
  • 5. The Evaluation Process The evaluation of alternative courses of action is a three‑stage process: 1. Data Collection 2. Analysis 3. Evaluation 5
  • 6. The Evaluation Process1.DATA COLLECTION There are three types of data:  Quantitative data based on observations.  Qualitative data based on observations.  Data based on the opinions, intuition and personal judgment of experts. 6
  • 7. The Evaluation Process2.ANALYSIS Before ranking begins, the quality of the information to be used in the evaluation needs to be tested. Good information should be used in the analysis, bad information should be discarded.. 7
  • 8. The Evaluation Process3. Evaluation1. Identify all major assumptions used in the collection of data.  Time frame:  Physical life (Projected operating life).  Technological life (equipment obsolescence).  Product useful life (economic obsolescence). 8
  • 9. The Evaluation Process Cost data:  Sum of dollars associated with the total project cycle, from the business case preparation to post implementation evaluation. Benefits/savings data:  Increase in revenues and/or decrease in costs over the life of the project. Increase in efficiency/productivity. 9
  • 10. The Evaluation Process2.Identify operating and non-financial impacts:  employees with appropriate skill sets may be unavailable when required  availability of technology and support systems  environmental impact  compliance with legislated/regulatory requirements. 3.Risks:  Identify any risks that could affect the expenditure initiative. 10
  • 11. The Evaluation Process The evaluation system used for non- financial impacts will be different for each situation. (There is no standard practice for evaluating the impact of a suggested solution on customer perception or employee perception for example. ) In the case of financial evaluation, there is a standard procedure.. 11
  • 12. Financial Evaluation  Chapter 8 dealt with the mechanics of the financial evaluation … NPV. B/C Ratio, Payback period and IRR. Financial analysis is quite narrow. There is more to the health of people, the reduction of crime, and the safety of fish than can be measured with money. 12
  • 13. Non-Financial Evaluation Some business cases need to be advanced even though they do not have benefits that can be measured in financial terms. Their true impact could only be measured using some other measurement scale. 13
  • 14. Non-Financial Evaluation Even when alternatives have no financial benefits of any form, they all have a financial cost. One method to help rank non-financial alternatives in order of preference is to use financial costs to drive the rankings. This is called “Critical Values” analysis. 14
  • 15. Non-Financial Evaluation Imagine that park in the neighbourhood has a present value of financial costs of negative $712,800 which comes from the financial spreadsheet assuming a $500,000 construction cost and $25,000 per year in maintenance for an estimated 20 year life of the project. As there are no financial benefits, the present value of the costs of the park must be matched to the users of the park. 15
  • 16. Figure 9.3, Non-financial analysis input screen 16
  • 17. Figure 9.4, Critical Values 17
  • 18. Figure 9.5, The Value Of A Park Visit This is to say that we are investing $27.91 in each park visit per person. The financial value would then be matched against some qualitative judgement. Does it make sense to pay that much per park visit? 18
  • 19. Non-Financial Evaluation Sometimes a business case has more than one social impact. For example, if our project will also create five new jobs in the region we split the investment between the two “Social” accounts. The investment made per job is $8,366.20 and the investment per park visit is $13.95. 19
  • 20. Figure 9.6, Shared benefits 20
  • 21. THE “EVALUATION MATRIX” SPREADSHEET The third tab on the spreadsheet presents a tool that might be useful in the ranking and selection of alternative solutions to a problem. The tool enables the decision-maker to rank alternatives against the criteria that meet the requirements of the strategic plan. 21
  • 22. THE “EVALUATION MATRIX” SPREADSHEET  Step 1, Establish Decision Criteria  Step 2, Apply Weighting Factors.  Step 3, Rank the Alternatives Against Each Criteria.  Step 4, Calculate the Weighted Scores. The result of this analysis is that the alternative that best meets the most important criteria will be given the highest numerical value. 22
  • 23. Figure 9.7, evaluation matrix 23
  • 24. INTEGRATING THE EVALUATION WITH YOUR BUSINESS CASE The spreadsheets are only tools to support the business case. The case itself will be a combination of quantitative analysis provided by the spreadsheets, and qualitative analysis provided by the text of the case. 24
  • 25. Implementation plan and Control Systems Controlling projects and initiatives is an absolutely critical element of being effective in a management situation. There are two focus areas in developing control systems to manage expenditures. 25
  • 26. Implementation plan and Control Systems The first is to control the scope, time and money spent while a project is being constructed, and the second is to control the operation of the project while costs are incurred and benefits are earned. 26
  • 27. IMPLEMENTATION PLAN A project can only be called a success when the implementation has proceeded, the project has created the anticipated benefits, and there is a measure of the benefits received.  The implementation plan deals with two elements:  What has to happen to be successful?  How will you know if you have achieved the benefits? 27
  • 28. IMPLEMENTATION PLAN Step 1, Build the project  The construction phase should identify project management responsibilities  Assign individual(s) to:  be in charge of the overall project  plan the project schedule  determine resource requirements  ensure that the project is completed on time/within budget 28
  • 29. IMPLEMENTATION PLAN Timetable  Develop a timetable to cover all phases of the project that includes:  project duration  area of responsibilities  key project events  deliverables and due dates 29
  • 30. IMPLEMENTATION PLAN Resource impacts 1) CAPITAL BUDGETS 2) OPERATING BUDGETS 3) NON-FINANCIAL BUDGET 30
  • 31. IMPLEMENTATION PLAN Step 2, Control the Results  The difference between a budgeted amount and an actual amount is called a variance. It is the variance that causes a management reaction. Variances are a powerful management tool to use to control a process. 31
  • 32. VARIANCES AS A MANAGEMENT TOOL To be useful as a tool, we must consider the following:  The variance fairly reflects a managers control area.  The variance isolates relevant deviations from the plan.  Management reaction is appropriate to the magnitude and severity of the variance.  The act of isolating variances and taking corrective action causes desired changes in behavior. 32
  • 33. VARIANCE ANALYSES, MANAGEMENT BY EXCEPTION When performance is evaluated, two factors are considered:  Has there been a deviation from the plan? If so how large?  Was the deviation controllable, and by whom? 33
  • 34. VARIANCE THEORY A variance analysis will generate observations like.  Spending on materials and labour is $50,000 higher than expected.  Customer demand is 15% less than expected  Customer satisfaction is 15% greater than expected  The emission if solid particulates into the airborne environment is 5% more than expected  The impact on the economic system in terms of job creation is 7% more than expected 34
  • 35. Variances: Variances  identify the presence of a deviation from the plan  attach a value to the deviation from the plan  identify possible cause areas. Variances do not  Fix blame  Suggest remedies 35
  • 36. Remedial action may involve the following activities:  Directing the process into an "in control state", by forcing the process to meet the budget.  Changing the budget if the variance was caused by a permanent change in operating conditions which causes the budget to be wrong  Ignoring the variance and taking no corrective action on the assumption that the variance was a temporary aberration that will not repeat itself 36
  • 37. WHEN TO INVESTIGATE VARIANCES Variances should be investigated when the cost of investigating and correcting the process is less than the cost of allowing the process to continue in its out of control state.  A process appears to be heading for an out of control state.  The variance is minimal but repeats itself constantly.  The investigation may have a desired behavioral side effect. 37
  • 38. Making Effective Presentations  Effective business communication uses objective language. We must persuade the reader that the information we are providing is accurate, deserving of consideration, relevant and important.  What we say and how we say it should be driven by the needs of our reader.  It is important to align your written and oral submissions with the information needs of the reader in a convincing manner. 38
  • 39. Effective business presentations  Planning  Clearly establish the objectives and style of the report to meet the readers needs.  Using a Logic Model  Overcome resistance to change by presenting a conclusion that is supported by objective facts and sound business rationale.  Proving the Conclusions  Provide evidence as to the source of information used in the analysis and evidence of the costs and benefits associated with the solution to a problem. 39
  • 40. PLANNING YOUR CASE PRESENTATION Set your objective.  What do you wish to accomplish as a result of your submission?  What must you convince the audience of to achieve your objective?  What conclusions will you guide your audience to reach? 40
  • 41. PLANNING YOUR CASE PRESENTATION Identify the concerns you have of the audience and their:  Perspective, (Financial? Performance? Image?)  Prior knowledge  - What do they know of your submission?  - What do they not know?  Attitude  - Indifference?  - Acceptance?  - Objection? 41
  • 42. PLANNING YOUR CASE PRESENTATION  Identify additional conclusions the audience must reach based on the audience analysis.  Identify the proof that can be provided to support each conclusion the audience is required to reach.  Order your conclusions and proofs in descending order of importance to your audience. What will they want to hear first?  Identify the appropriate language to use with the given audience.  Is your language personal?  Are you communicating in the active voice?  Are you using language that is simple and easy to understand? A business case presentation must stand alone. 42
  • 43. BUSINESS CASE REPORT FORMAT A perfect business case will leave no questions in a readers mind, and will allow a logical and informed decision to be made. A) PREAMBLE  Describe the "big" picture. B) PROBLEM DEFINITION  Clearly identify the problem being solved. C) RECOMMENDED SOLUTION  Identify the alternative chosen early in the report. D) SELECTION CRITERIA  Offer a description of the criteria used to make the choice 43
  • 44. BUSINESS CASE REPORT FORMAT E) ALTERNATIVES  Demonstrate to the reader that a sufficient number of good quality alternatives were considered. F) ANALYSIS OF ALTERNATIVES  Non-financial issues and Financial Issues G) IMPLEMENTATION PLAN & FOLLOW UP  Offer a detailed implementation plan including project timelines and management responsibilities, as well as a description of the measurement tools that will be used to track progress and identify project benefits and costs. H) RISK ASSESSMENT  A detailed description of all risk elements, including project specific risk and environmental risks should be included. 44
  • 45. PROVING YOUR CONCLUSIONS It is not sufficient evidence to simply say, "I believe this to be true" or "It is common knowledge that..." Credible evidence will be presented as:  Example  Expert testimony  Analogies  Statistics  Personal experiences The emphasis should be on quality over quantity. Too much evidence can be as confusing as too little. 45
  • 46. CONCLUSIONS REGARDING PRESENTATIONS Business communications are concise, factual and to the point. An illogical or unsupported approach to communicating solutions to problems may result in deferred action, even though the chosen action best solves the problem. The most efficient communicators will tailor the presentation to the needs and perceptions of the audience. 46
  • 47. CONCLUSIONS REGARDING PRESENTATIONS Good communications will actually improve the decision making process. It may be advisable to have your document reviewed by a colleague prior to final submission. The author is often too close to the document to notice deficiencies in presentation style. Make a point of learning from every proposal you submit, the good ones and the bad ones. Make a point of using the financial analyst for your business unit or department. This person can make your job easier. 47
  • 48. Chapter summary  Making a choice is easy if the analysis is complete and logical,  controlling the project is easy if expectations re reasonable and variances are reviewed frequently, and  making a presentation is easy if a model is used that satisfies the logic of the listener. Its all easy if you follow a model. It becomes difficult, confusing and frustrating when you depart from logic and start being random or relying on gut feel or personal opinion. 48
  • 49. Closing Remarks There is one last aspect of business casing that needs to be covered. It deals with performance measurement, or showing evidence that the results we are looking for are actually occurring. The concept of performance measurement and performance management are cover in section 3, chapters 10-12. 49