The Business Case           Volker Hoyer =mcminstitute Universität St. Gallen Blumenbergplatz 9, 9000 St. Gallen         v...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
Definition      No common use of the term in existing literature      Analysis of multiple definitions identifies the fo...
DefinitionBusiness Case vs. Business PlanBusiness Case                         Business Plan   Describes a concrete proje...
DefinitionBusiness Case vs. Case StudyBusiness Case                        Case Study   Supports the planning and        ...
DefinitionBusiness Case vs. Cost of Ownership vs. Cost-Benefit AnalysisCost of ownership (also called total cost of owners...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
Historical Development   Came up at the beginning of the twentieth century   Finance became its own discipline   First ...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
Advantages of a Business Case   Decision does not rely on manager’s intuition   Companies using business cases are more ...
Challenges of a Business CaseSituation   Frequently met with skepticism from management and fail to gain    approval for ...
Challenges of a Business Case  Causes of not delivering the calculated figures     The quantification of benefits as one ...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
Business Case Structure               5-Phase Structure                                                                 IV...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
I. InitializationBackgroundGeneral Information   Contextual background information is provided and a summary of the    cu...
I. InitializationBackgroundRecipient   Mostly the management of the organization or of individual    departments, which h...
I. InitializationPurpose & ScenarioPurpose   The purpose statement is precisely specified, defining why a    business cas...
I. InitializationScopeTime Horizon   Determines the length of the analysis periodOrganizational Scope   States whether t...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
II. DesignCost and Benefit ModelUsed for communication & helps to identify hidden items   Cost Model Example:             ...
II. DesignCost and Benefit Model  Benefit Model Example:                           © =mcminstitute                        ...
II. DesignFinancial Metrics & Non-Financial ImpactFinancial Metrics   Identified benefits and costs are translated into c...
II. DesignFinancial Metrics & Non-Financial ImpactNon-Financial Impact   A tangible comparison can be made to make non-fi...
II. DesignData Sources   From what data sources the cost and benefit values are taken?   The sources have to be document...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
III. ResultsAssumptions   A business case underlies several assumptions which are clarified    for each scenario   This ...
III. ResultsFinancial ModelFinancial values are assigned to the cost and benefit itemsExample:                            ...
III. ResultsCash Flow Statement   The heart of the business case   Developed for each scenario, displaying the projected...
III. ResultsCash Flow StatementIn addition, overall financial metrics are defined and calculated tosummarize the business ...
III. ResultsCash Flow StatementNet Present Value   One of the most robust and frequently used metrics   The value of inv...
III. ResultsCash Flow StatementInternal Rate of Return   Flip side of the NPV   The discount rate at which an investment...
III. ResultsNon-Financial ResultsNon-financial results are generated, which are either expressed inpercentages or standard...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
IV. Sensitivity & RiskSensitivity Analysis   Measures how variations in assumptions or input data will affect the    over...
IV. Sensitivity & RiskRisk Analysis   Predicted results are always uncertain to some degree and the    question is raised...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
V. ConclusionConclusion & RecommendationsConclusion   Summary of the whole business case on one sheet   By linking the r...
Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case   – I. Initialization ...
Summary   Business case as a tool that supports investment and planning    decisions by calculating all relevant costs an...
Questions            ?                © =mcminstitute                   Volker Hoyer
BibliographyBernotat, J., & Stein, J. (2007). 10 Tipps & Tricks zum Business Case. Projekt Management, 2, 43-47.Brugger, R...
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What is a business case?

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What is a business case?

  1. 1. The Business Case Volker Hoyer =mcminstitute Universität St. Gallen Blumenbergplatz 9, 9000 St. Gallen volker.hoyer@unisg.ch © =mcminstitute
  2. 2. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  3. 3. Definition  No common use of the term in existing literature  Analysis of multiple definitions identifies the following elements:  A business case is a tool, concept, presentation or proposal  The purpose or subject of a business case can vary broadly; it can be a decision between make-or-buy, a choice for a new product, an investment in a new information system, etc. The main purpose is the support of an investment decision  In a financial analysis, all cost and benefit factors of the project and its alternatives are elaborated, quantified and documented  Besides the financial analysis, non-financial aspects need to be included in the project evaluationA business case is a tool that supports investment and planning decisionsby projecting all relevant costs and benefits in a financial analysis andconsidering other non-financial business consequences. © =mcminstitute Volker Hoyer
  4. 4. DefinitionBusiness Case vs. Business PlanBusiness Case Business Plan Describes a concrete project  Written proposal to develop and the outcome of a single and manage a business, action addressing strategic and Its goal is to support planning operational issues and decision-making  Its goal is to give a holistic Mostly created for internal view of the economic use perspective of a business unit or an organization as a whole  Used externally for attracting investors and informing other stakeholders © =mcminstitute Volker Hoyer
  5. 5. DefinitionBusiness Case vs. Case StudyBusiness Case Case Study Supports the planning and  Used in the educational field decision making in an actual to exemplary describe a business situation by offering business situation and adequate data decision © =mcminstitute Volker Hoyer
  6. 6. DefinitionBusiness Case vs. Cost of Ownership vs. Cost-Benefit AnalysisCost of ownership (also called total cost of ownership) and cost-benefitanalysis are special kinds of business case analysesCost of Ownership Total cost of acquiring, installing, using, maintaining and getting rid of something across a period of time The “cost” side of a cost-benefit analysisCost-Benefit Analysis Used for decision support, proposal evaluation, planning Quantifies every benefit and cost, including a time dimension Considers intangible or non-financial costs and benefits © =mcminstitute Volker Hoyer
  7. 7. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  8. 8. Historical Development Came up at the beginning of the twentieth century Finance became its own discipline First created for investment decisions in assets, the business case is now applied to all kinds of subjects Requirements on a business case increase, not only requiring cost- benefit calculations but also emphasizing an accountability to deliver results which can be used with confidence © =mcminstitute Volker Hoyer
  9. 9. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  10. 10. Advantages of a Business Case Decision does not rely on manager’s intuition Companies using business cases are more successful in delivering value from their IT investment Reduces the uncertainty of decision-making by using a funded financial analysis Creates overview and transparency by including all relevant facts for the project evaluation Creates liability by delivering a written document to the management Can be used as a long-term controlling instrument by evaluating the long-term success of the project Enables an objective comparison of alternative projects by providing a standardized process © =mcminstitute Volker Hoyer
  11. 11. Challenges of a Business CaseSituation Frequently met with skepticism from management and fail to gain approval for the proposed project Fail to deliver the calculated figures after implementing the proposalCauses of not delivering the calculated figures Projects, especially IT actions, contain hidden costs which are often not considered in the business case calculations Example: The initial loss of productivity while employees learn how to use the newly introduced IT system © =mcminstitute Volker Hoyer
  12. 12. Challenges of a Business Case Causes of not delivering the calculated figures  The quantification of benefits as one of the biggest challenges  Benefits which cannot be weighted in monetary terms are not included in the financial analysis, however, could have a strong impact  Every case involves uncertainty as it is an estimation of future financial resultsThese identified challenges can be strongly reduced by following a clearstructural guideline during the creation of a business case.This structure is developed in the following section. © =mcminstitute Volker Hoyer
  13. 13. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  14. 14. Business Case Structure 5-Phase Structure IV. Sensitivity I. Initialization II. Design III. Results V. Conclusion & Risk Background  Cost Model  Assumptions  Sensitivity  Conclusion Purpose  Benefit Model  Financial Model Analysis  Recommendation Scenario  Financial Metrics  Cash Flow  Risk Analysis Scope  Non-Financial Statement Impact  Non-Financial  Data Sources Results © =mcminstitute Volker Hoyer
  15. 15. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  16. 16. I. InitializationBackgroundGeneral Information Contextual background information is provided and a summary of the current situation is given All further information which might be important for the business case can also be mentioned, e.g. authorship, recipient, perspective, opportunities, threats, historical factors, etc.Authorship Prepared either by internal resources or external consultants Mostly executed by a project team rather than a single person Specialists with different backgrounds and from multiple departments bring in cross-functional input and a broad range of know-how © =mcminstitute Volker Hoyer
  17. 17. I. InitializationBackgroundRecipient Mostly the management of the organization or of individual departments, which has the responsibility to make decisionsPerspective It must be clarified from which perspective the case is created The most common one is the customer or end user perspective, which evaluates the potential of purchasing a new product or implementing a specific project The solution provider perspective deals with the questions of whether it is worthwhile for a company to develop a new product and if a specific product should be made or bought © =mcminstitute Volker Hoyer
  18. 18. I. InitializationPurpose & ScenarioPurpose The purpose statement is precisely specified, defining why a business case is built An initial clear definition is necessary as it needs to be understood by involved partiesScenario Different possible future scenarios or solutions are developed in order to analyze and compare them The “business as usual” scenario or baseline scenario can also be an alternative for the future if continuing under present conditions © =mcminstitute Volker Hoyer
  19. 19. I. InitializationScopeTime Horizon Determines the length of the analysis periodOrganizational Scope States whether the project is only introduced to a specific business unit or to the whole companyGeographical Scope Becomes necessary for a company operating in different countries and/or at multiple locations and the decision needs to be made where the project is introducedPersonnel Scope Defines whether certain personnel are included, e.g. only full-time staff but not part time workers, or labor but not management © =mcminstitute Volker Hoyer
  20. 20. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  21. 21. II. DesignCost and Benefit ModelUsed for communication & helps to identify hidden items Cost Model Example: © =mcminstitute Volker Hoyer
  22. 22. II. DesignCost and Benefit Model Benefit Model Example: © =mcminstitute Volker Hoyer
  23. 23. II. DesignFinancial Metrics & Non-Financial ImpactFinancial Metrics Identified benefits and costs are translated into corresponding financial metrics and measures, which are used for later calculations Example: The number of complaints to the IT department is used as a financial metric for increased user satisfaction thanks to a new customer support softwareNon-Financial Impact These cost and benefit items cannot be expressed in financial values and are not included in the financial analysis As they also contribute to the outcome of a proposed investment, they need to be considered as well © =mcminstitute Volker Hoyer
  24. 24. II. DesignFinancial Metrics & Non-Financial ImpactNon-Financial Impact A tangible comparison can be made to make non-financial results traceable:  Through expressing the item in percentages Example: the non-financial benefit of increased employee morale leads to a decreased staff turnover, which is measured in percentages and compared to the turnover in other scenarios  Through standardized indices which are developed based on survey results If quantification fails, the costs and benefits can simply be recorded and described in words © =mcminstitute Volker Hoyer
  25. 25. II. DesignData Sources From what data sources the cost and benefit values are taken? The sources have to be documented in order to judge the data quality and to increase credibilityPossible Sources Previous business cases, business plans, budgets or published benchmarks Literature analysis Interviews Questionnaire, observations, focus group discussions © =mcminstitute Volker Hoyer
  26. 26. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  27. 27. III. ResultsAssumptions A business case underlies several assumptions which are clarified for each scenario This ensures validity and enables predictions about future results Very important element of a business case! Example: Introduction of an IT platform into an organization  Global assumptions: Number of employees using the platform, average salary of employees  Cost-specific assumptions: Hosting costs, administration costs  Benefit-specific assumptions: Number of working processes which can be processed faster © =mcminstitute Volker Hoyer
  28. 28. III. ResultsFinancial ModelFinancial values are assigned to the cost and benefit itemsExample: © =mcminstitute Volker Hoyer
  29. 29. III. ResultsCash Flow Statement The heart of the business case Developed for each scenario, displaying the projected benefits (cash inflow) and costs (cash outflow) over a certain time period Example: © =mcminstitute Volker Hoyer
  30. 30. III. ResultsCash Flow StatementIn addition, overall financial metrics are defined and calculated tosummarize the business case resultsReturn on Investment Popular metric due to its simplicity Measures the efficiency of the investment A simple ROI is calculated by dividing the investments gains (total benefits - total costs) by the total costs Limitation: ROI does not consider the time value of money © =mcminstitute Volker Hoyer
  31. 31. III. ResultsCash Flow StatementNet Present Value One of the most robust and frequently used metrics The value of investment is adjusted to reflect the time value of money The net cash flows of all years are discounted using a discount or interest rate i. The discounted cash flow amounts to the NPV. It is critical to determine the discount rate as organizations use different standards. It often lies between 8% and 15%. A NPV higher than zero indicates that the investment adds value to the organization and should be undertaken. © =mcminstitute Volker Hoyer
  32. 32. III. ResultsCash Flow StatementInternal Rate of Return Flip side of the NPV The discount rate at which an investment causes a NPV of zero and below which an investment causes a positive NPV It can easily be calculated by using a formula in Excel Examples: © =mcminstitute Volker Hoyer
  33. 33. III. ResultsNon-Financial ResultsNon-financial results are generated, which are either expressed inpercentages or standardized indices Example of non-financial benefits through the introduction of an IT platform: © =mcminstitute Volker Hoyer
  34. 34. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  35. 35. IV. Sensitivity & RiskSensitivity Analysis Measures how variations in assumptions or input data will affect the overall results of the scenarios Initial values of assumptions, which are regarded as uncertain, are individually increased and lowered in 10% increments Example: © =mcminstitute Volker Hoyer
  36. 36. IV. Sensitivity & RiskRisk Analysis Predicted results are always uncertain to some degree and the question is raised as to how likely other financial results are An assessment of the likelihood, impact and controllability of the critical factors is made Example: © =mcminstitute Volker Hoyer
  37. 37. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  38. 38. V. ConclusionConclusion & RecommendationsConclusion Summary of the whole business case on one sheet By linking the results to the subject and purpose of the case, a conclusion is drawnRecommendations Based on the results, specific actions are recommended to the management Examples:  Which investment should be made based on the analysis results  How to manage controllable risk factors © =mcminstitute Volker Hoyer
  39. 39. Agenda• Definition• Historical Development• Advantages and Challenges• Structure of a Business Case – I. Initialization – II. Design – III. Results – IV. Sensitivity & Risk – V. Conclusion• Summary © =mcminstitute Volker Hoyer
  40. 40. Summary Business case as a tool that supports investment and planning decisions by calculating all relevant costs and benefits Consideration of non-financial business consequences In today‘s business situations, it is essential for organizations to have required skills for developing a business case Reduction of uncertainty in investments Quantification of cost and especially benefit items as a big challenge Following a clear structural guideline of five phases allows coping with the challenges Importance of listing all assumptions made Provision of recommendations to the management © =mcminstitute Volker Hoyer
  41. 41. Questions ? © =mcminstitute Volker Hoyer
  42. 42. BibliographyBernotat, J., & Stein, J. (2007). 10 Tipps & Tricks zum Business Case. Projekt Management, 2, 43-47.Brugger, R. (2009). Der IT Business Case. Berlin: Springer-Verlag.Bucherer, E., Raus, M., & Stroh, F. (2008). Business Cases for new Software Products. Internal use. St. Gallen: SAP Research.Cannon, H. A. (2006). Making the Business Case. How to create, write and implement a successful business plan. London: Chartered Institute of Personnel and Development.Pasko, H., et al. (1998). Creating and Using a Business Case for Information Technology Projects. Retrieved July 10, 2009, from http://www.tbs-sct.gc.ca/emf-cag/business-rentabilisation/cubcitp-euarpti/cubcitp-euarpti-eng.pdfPerkins, B. (2005). Business Cases: What, Why and How. Computerworld, 39 (24), 43.Pratt, M. K. (2005). 7 Steps to a Business Case. Computerworld, 39 (41), 35-36.Schmidt, M. J. (2002). The Business Case Guide. Boston: Solution Matrix Ltd.Schmidt, M. J. (2003a). Business Case Essentials: A Guide to Structure and Content. Retrieved July 10, 2009, from http://materias.fi.uba.ar/7558/Lecturas/Business_Case_Essentials.pdfSchmidt, M. J. (2003b). Whats a Business Case? And Other Frequently Asked Questions. Retrieved July 8, 2009, from http://materias.fi.uba.ar/7558/Lecturas/Whats_a_Business_Case.pdfSchmidt, M. J. (2008). The IT Business Case: Key to Accuracy and Credibility. Boston: Solution Matrix Ltd.Stricker, U. (2008). Business Cases for Info Pros. New Jersey: Information Today, Inc.Taschner, A. (2008). Business Cases: Ein anwendungsorientierter Leitfaden. Wiesbaden: Gabler Verlag.Ward, J., Daniel, E., & Peppard, J. (2008). Building Better Business Cases for IT Investments. MIS Quarterly Executive, 7 (1), 1-15. © =mcminstitute Volker Hoyer
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