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  1. 1. Business Case rimerAl emp
  2. 2. BUSINESS CASE PRIMERCONTENTSIntroduction 3 Phase 7: Prepare the Report 16 Typical Contents 3 Responsibility 16 Process 4 Length 16 Content 16Phase 1: Assess Needs 5 Format 17 Goals 5 Illustrations 17 Audience 5 Recommendations 17 Executive Summary 17Phase 2: Define the Business Opportunity 6 Definition 6 Phase 8: Review, Revise & Present the Business Scope 6 Case 18 Objectives 6 Review 18 Realization 6 Revision 18 Review 6 Presentation 18Phase 3: Plan the Work Effort 7 Appendix A: Sample Business Case 19 Team Selection 7 Executive Summary 19 Stakeholder Identification 7 Business Opportunity 19 Schedule 7 Alternatives 19 Responsibilities and Tasks 7 Benefits 19 Costs 20Phase 4: Investigate Alternatives 8 Financial Analysis 20 Alternatives 8 Assumptions 21 Benefits 8 Sensitivity Analysis 21 Costs 9 Project Description 21 Assumptions 9 Implementation Plan 21 Constraints 10 Recommendations 21 Market Analysis 10 Organizational Considerations 10 Appendix B: Recommended Books 22 Sensitivity Analysis 10 The Business Case Guide (Second Edition) 22 BCA: Business Case Analysis 22Phase 5: Evaluate Alternatives 11 Financial Analysis 11 Index 23 Selection 14 About the Author 24Phase 6: Define the Project 15 Project Description 15 Implementation Plan 152 Copyright © 2006 Impact Technical Publications. All rights reserved.
  3. 3. BUSINESS CASE PRIMERINTRODUCTIONA business case is a justification for a businessproject. A business case requests funding for a Are business cases and business plans similar?project internally from an organization’s financial No. They are both used to generate financing. That’sdecision-makers or externally from investors. all they have in common.A business case compares the costs of a project with A business plan is a method to achieve the goals of athe benefits that it provides. The business case business. A business plan is used to:must show that the benefits outweigh the costs. In ▫ Develop ideas about how to conduct a businessmany instances, it must include a financial analysis ▫ Finance the businessthat calculates the project’s return on investment ▫ Evaluate the performance of the business(ROI). Typical sections include: ▫ Executive SummaryAlthough financial information is important, a ▫ General Business Descriptionbusiness case is more than a financial justification ▫ Products and Servicesfor a project. It is a business justification. The busi- ▫ Marketing Planness case should show that the project will help the ▫ Competitive Analysisorganization meet its goals. ▫ Operational Plan ▫ Management and OrganizationTypical Contents ▫ Capitalization and Structure ▫ Financial PlanTypical business-case topics include: Executive Summary This information is from The Ernst & Young Busi- Business Opportunity ness Plan Guide by Siegel, Ford, and Bornstein (John Alternatives Wiley & Sons, Inc., New York, 1993). The book is Benefits available for purchase at: Costs http://www.ImpactOnTheNet.com/bc-books.html Financial Analysis Assumptions Constraints The executive summary highlights the key points in Market Analysis the business case. These include important benefits Organizational Considerations and the return on investment. Sensitivity Analysis Project Description The business opportunity describes the motivation Implementation Plan for the project that the business case will propose. Recommendations The business opportunity includes a definition, a statement of scope, and a discussion of objectivesYour business case need not include all of these that the project will help the organization achieve.topics, but they make an excellent checklist. 3
  4. 4. BUSINESS CASE PRIMERA business case analyzes the alternatives to a pro- risks involved in undertaking the project. Risksposed project. For example, an online learning also may result from not undertaking the project.business case might compare the benefits and costsof classroom learning. All business cases involve at The project description should provide enoughleast two alternatives: doing or not doing a project. information that the people who must approve the business case can decide whether the project isBenefits increase revenue, reduce costs, and provide both viable and worth doing.strategic advantage over competitors. Don’t neglect the implementation plan! The rest ofCosts include equipment (purchase and mainte- the business case is meaningless if the project can-nance) and labor (training and operation). not be implemented successfully.Financial analysis compares benefits to costs and The recommendations summarize the main pointsanalyzes the value of a project as an investment. of a business case and offer suggestions on how toThe analysis may include a cash flow statement, proceed with the project.return on investment, net present value, internalrate of return, and payback period. This primer discusses each of the above topics at the point in the business case development processAssumptions are events that a business case assumes where the team first works with the topic.will happen. For example, a business case mightassume approval of a product by a regulatory Processagency. The business case process that this primer recom-Constraints are schedule, resource, budget, staffing, mends has eight phases:technical, and other limitations that may impact 1 Assess needsthe success of a project. For example, a project 2 Define the business opportunitymight require that all employees have access to a 3 Plan the work effortcentral database. 4 Investigate alternatives 5 Evaluate alternativesMarket analysis examines changes in the business 6 Define the projectenvironment that impact the success of a project 7 Prepare the reportsuch as technological innovations and shifts in cus- 8 Review, revise & present the business casetomer demographics. If you must prepare a business case quickly, youOrganizational considerations examine how a may be tempted to take short cuts through theproject impacts an organization. A project’s success process so that you can prepare the report as soonmight depend on management support and as possible. Don’t do it! If you neglect any of theemployee acceptance. phases, your business case will not achieve its potential. Without a persuasive business case, yourSensitivity analysis evaluates the probability that a project is less likely to be funded.project can be implemented successfully and the4
  5. 5. BUSINESS CASE PRIMERPHASE 1: ASSESS NEEDSIn Phase 1, you define the goals that your business funding. One of your goals might be to show thatcase should achieve and the audience that must your project is the best choice.approve the business case for it to achieve its goals. There is no magic formula that will tell you whatGoals your goals are. You must analyze what you are try- ing to accomplish.The goal of your business case may seem obvious:to fund your project. But funding a project may be Audiencethe last step in an elaborate approval process. Your goals depend on your audience. Who mustYour most important business case goal may be to you convince? What information must you providemarket your proposed project throughout your your audience to persuade them to approve theorganization. If marketing is your goal, your busi- business case?ness case will still need financial information, but itmight show the value of similar projects at other A theoretically perfect business case will not beorganizations and extrapolate the data from other approved if it does not persuade its audience thatorganizations to your organization. its project is worth pursuing.For example, you are proposing a complicated and Reviewing business cases for projects that memberscostly business re-engineering project, which of your audience have approved may help youinvolves major changes to your organization. The determine what information you should include ingoal of the initial business case is to build manage- your business case.ment support for the proposed project. Showingthat business re-engineering is a good idea with Learning your audience’s concerns and providingmany potential benefits is much more important information to answer them is an important partthan describing a specific project in detail if your of obtaining approval. For example, your projectorganization is not ready to support the project. involves complicated and expensive advanced tech-Approval of the initial business case will result in nologies, and a member of the approval committeethe support you need to prepare a second business is suspicious of advanced technology projects. Findcase with a detailed description of your proposed out all you can about that person’s concerns.project, detailed financial information, and a Approval of the business case may depend on howdetailed implementation plan. well you address those concerns.Even if you have a straight-forward project, you If your chief financial officer wants specific finan-may have other goals besides funding. For exam- cial metrics presented in a specific format, obtainple, you are competing with other projects for samples of the metrics and the format. Use them in your business case. 5
  6. 6. BUSINESS CASE PRIMERPHASE 2: DEFINE THE BUSINESS OPPORTUNITYIn Phase 2, you define the business opportunity: the Objectivesmotivation for the project that the business casewill propose. The business opportunity includes a Describe what the business opportunity willdefinition, a statement of scope, and a discussion accomplish. The objectives of an online learningof objectives. The business opportunity may also opportunity might be to reduce the cost of traininginclude a description of what the organization will and to reduce the time required deliver training onbe like after the opportunity has been realized. new policies and procedures.Note: Many articles and books on business cases Metrics will make your objectives much morerefer to a problem rather than to an opportunity. I compelling. For example, your online learningrecommend viewing all problems as opportunities objectives might be to reduce the cost of trainingfor improvement. A short-sighted solution to a by 50% and to reduce the time required to deliverproblem may simply make the problem disappear. training on new policies and procedures by 75%.A business opportunity uses the problem as a You may not yet have the information you need forspringboard to improve the business. metrics. If you don’t, keep metrics in mind during Phase 4: Investigate Alternatives.Definition RealizationThe definition of an online learning businessopportunity might be: The realization describes what the organization will be like after it has taken advantage of the busi- To deliver educational courses over the intranet ness opportunity. This section is important if a that train all employees on human resources, business case proposes changes that have a major accounting, and payroll policies and procedures. impact on customers, employees, products, poli- cies, processes, finances, markets, or competitors.Scope Note: If a business opportunity involves solving aScope includes boundaries, limits, schedules, and problem, the realization is the solution.budgets. The scope of an online learning businessopportunity might be: Review The scope includes all human resources, account- Once you have defined the business opportunity, ing, and payroll policies and procedures that review it with the business case initiator. This apply to employees. When changes to policies review helps ensure agreement on the extent of the and procedures occur, training will be updated project that the business case will propose. You within two business days. Implementation will don’t want to be halfway through the business case occur within six months of business case approval when you find out that the initiator had a totally at a maximum cost of $200,000. different project in mind!6
  7. 7. BUSINESS CASE PRIMERPHASE 3: PLAN THE WORK EFFORTIn Phase 3, you plan the business case work effort. Stakeholder IdentificationYou select the team, identify stakeholders, establishthe schedule, and assign responsibilities and tasks. The stakeholders include executives, managers, and technical specialists responsible for:Business case work efforts vary from organization Review of business case financial informationto organization and within an organization from Approval of the business caseproject to project. A portion of the work effort Implementation, operation, and acceptance ofmay have been completed prior to your involve- the project proposed in the business casement. If so, document the planning that has beencompleted, make changes if necessary, and then The goal is to keep stakeholders informed of busi-finish the planning. ness case progress and to solicit their input at key points. Marty J. Schmidt recommends forming aTeam Selection “core team” of stakeholders and meeting with them several times during the development of the busi-The size of the team is related to the size of the ness case to make sure that they understand andproposed project. If the business case involves support the proposed project.2replacing the personal computers in a departmentwith 18 employees,1 one person may perform all Scheduleroles. If the business case involves a major businessre-engineering project, the team may include a When you were assigned responsibility for thedozen or more members. business case, you may have been given a deadline. If not, discuss a tentative deadline with the sponsorA multiple-member team should include: and team members. Develop the initial schedule A sponsor, usually an executive, who publicizes based on the tentative deadline. You will know the business case work effort and interfaces more about the work effort after the team investi- with the organization’s senior management gates alternatives in Phase 4. At that point, you Technical specialists may need to adjust the schedule. Business analysts A financial analyst Responsibilities and Tasks A writer, who prepares the business case report Meet with the team and discuss alternative ways toAny team member may be the business case project achieve the business opportunity. Assign generalmanager. responsibilities and initial investigative tasks. 1. Brannock, James W., “The 8-Day BCA” in BCA: 2. Schmidt, Marty J., “The Core Team: Key to Cred- Business Case Analysis, pages 13-77 (STS Publica- ibility” in The Business Case Guide, Second Edition, tions, Plant City, Florida, 2004). For a brief review pages 19-23 (Solution Matrix Ltd., Boston, 2002). of this book, see page 22. For a brief review of this book, see page 22. 7
  8. 8. BUSINESS CASE PRIMERP H A S E 4: I N V E S T I G A T E A L T E R N A T I V E SIn Phase 4, you investigate alternatives by gather- might compare the benefits and costs of two alter-ing information about their benefits, costs, native implementations:assumptions, constraints, risks, and so on. All at once throughout the company On a departmental basis starting with humanAlternatives resource policies and proceduresThere are three kinds of alternatives: Benefits Alteratives to the business opportunity Alternative projects Examine the benefits of each alternative that you Alternative implementations of a project have chosen to investigate.Alteratives to the Business Opportunity Benefits provide three types of business value: Increased revenueAll business cases examine at least two alternatives: Reduced costspursuing or not pursuing a business opportunity Strategic advantage(that is, approving or rejecting a business case). Abusiness case for an online learning opportunity Increased Revenuemight compare the benefits and costs of onlinelearning with the benefits and costs of the organi- A business case for producing a new productzation’s current method of training employees: would include the anticipated increase in revenueclassroom learning. from sale of the product.Alternative Projects Reduced CostsA business case may examine alternative projects to A business case for improving a process wouldrealize a business opportunity. If an organization is include the anticipated savings in equipment,not providing any formal training for employees, labor, or both. Calculating the labor savings maythen a business case for an employee training require research.opportunity might compare the benefits and costsof three alternatives: formal online training, formal For example, you are investigating the benefits ofclassroom training, and no formal training at all. purchasing an expensive office-automation prod- uct. The product distributes and updates sharedAlternative Implementations of a Project files and prevents errors caused by overwriting the most current copy of a file with a previous version.A business case may examine alternative imple- Both automatic updating and preventing errorsmentations of a project to realize a business oppor- reduce labor costs. But you can’t include thetunity. A business case for an opportunity to reduced labor costs in your financial analysis unlessreplace classroom training with online training you quantify them.8
  9. 9. BUSINESS CASE PRIMERIf you research the current process, you might find Labor costs include wages, salaries, and overheadthat an administrative assistant spends three hours costs like benefits, office space, office equipment,a week distributing and updating shared files. and technical support.Twice a month a current copy of a file is overwrit-ten by a previous copy. The administrative assistant Another cost is lost productivity. A project mayspends an hour correcting each problem. require staff to implement it. That reduces the pro- ductivity of the staff. Also, employees are often lessBy eliminating this manual work, the office-auto- productive while they are learning how to use newmation product would save five hours of adminis- business tools and processes.trative time each week. Take the cost per hour foran administrative assistant and multiply it by five Assumptionsto get the product’s weekly savings in labor costs.Use that figure in your financial analysis. Assumptions are events that the business case assumes will happen. For example, the businessStrategic Advantage case might assume approval from a regulatory agency. Critical assumptions must occur for aThese benefits help an organization achieve its project to succeed. For example, a critical assump-goals and compete effectively. tion for an online learning business case might be that all employees will have access to a personalFor example, a more accurate and current sales computer during work hours.forecasting system would enable decision-makersto react faster to changes in the market. Decision- This and the following topics (constraints, marketmakers would have the information they need to analysis, organizational considerations, and sensi-adjust prices faster and launch promotional cam- tivity analysis) may apply to all the alternatives. Ifpaigns faster. That would give their company an so, document the topics once. For example, twoadvantage over its competitors. alternative projects to develop a new telecommuni- cation product might assume that regulatoryAlthough gathering financial data on strategic approval will be received prior to the release of theadvantage is usually difficult, quantifying benefits product.that provide strategic advantage may make the dif-ference between business case success and failure. On the other hand, different alternatives may involve different assumptions, constraints, and soCosts on. If so, document the topics separately for each alternative. For example, one alternative imple-Examine the costs of each alternative that you have mentation of a business re-engineering projectchosen to investigate. might assume that the organization will not relo- cate any of its facilities during the implementationTypical costs include equipment (purchase and period. Relocation might not impact the othermaintenance) and labor (training and operation). alternatives. 9
  10. 10. BUSINESS CASE PRIMERConstraints For example, a business re-engineering project may depend on employees accepting new job assign-Constraints are schedule, resource, budget, staffing, ments and tasks. The business case should explaintechnical, and other limitations that may impact how employee acceptance will be attained andthe success of a project. include the associated costs.For example, a project to develop a new product Sensitivity Analysismight be constrained by a six-month window ofopportunity during which the product must be Sensitivity analysis evaluates the probability that areleased in the marketplace. A business re-engi- project can be implemented successfully and theneering project might be constrained by the risks involved in undertaking the project. When-requirements that all employees have access to a ever possible, the sensitivity analysis should includecentral database. mechanisms to monitor and manage risks to assure successful implementation of the project.Market Analysis If a project’s viability depends on the cost of rawMarket analysis examines changes in the business materials, a sensitivity analysis would evaluate theenvironment that impact the success of a project. probability that the cost of raw materials willThese changes include technological innovations, increase. The sensitivity analysis would proposeexpanding and contracting markets, and shifts in contingencies – such as the use of different rawcustomer demographics. materials – if the costs do increase.For example, market analysis might show that the If a project’s viability depends on realizing laborprice of new low-end computers has been falling at savings, a sensitivity analysis might examine possi-a yearly rate of 20%. A project to develop a new ble scenarios if the labor savings fail to materialize.low-end computer might depend on the price oflow-end computers falling no more than 30% in Risks may be beyond a project’s control. For exam-12 months. ple, risks involved in a project that depends on a third-party proprietary software product might beOrganizational Considerations product abandonment or obsolescence.Organizational considerations examine how a There may be risks involved in not undertaking aproject impacts an organization. A project’s success project. For example, the risk of not undertaking amight depend on management support and business re-engineering project might be that cur-employee acceptance. If so, the business case rent product design, manufacturing, and distribu-should explain how the project will gain that sup- tion processes will become so inefficient that theport and acceptance. company will be unable to compete effectively.10
  11. 11. PHASE 5: EVALUATE ALTERNATIVESIn Phase 5, you evaluate the pros and cons of each Delivery of benefits that do not have financialalternative investigated in Phase 4, and you select data; for example, benefits that provide strate-the best alternative (or alternatives) to propose in gic advantagethe business case. Time-critical assumptions, constraints, mar- ket analysis, organizational considerations, andThe evaluation involves a financial analysis of each sensitivity analysisalternative. A critical assumption, constraint, mar-ket analysis, organizational consideration, or sensi- Cash Flow Statementtivity analysis may eliminate an alternative fromconsideration despite a favorable financial analysis. A cash flow statement shows how an alternative will impact the flow of cash into and out of your orga-Financial Analysis nization. You need this information to perform the financial analyses in this phase:Financial analysis compares benefits to costs and Return on investmentanalyzes the value of a project as an investment. To Net present valuestart a financial analysis, choose an analysis period Payback periodand prepare a cash flow statement. Internal rate of returnNote: The extent of your financial analysis depends Let’s create a simple cash flow statement for a pro-on your goals and audience. There is no sense in posed project. After we have identified costs andcomputing detailed financial information such as savings (that is, after we have conducted Phase 4:net present value and internal rate of return if your Investigate Alternatives), we will assign the costs andaudience wants a ballpark estimate of the return on savings to a time line.investment and payback period. Here is our proposed project. ABC CompanyAnalysis Period wants to purchase a new office-automation prod- uct with an estimated life cycle of three years.The financial analysis of all the alternatives should Based on the estimated lifecycle, we will use abe for the same period. three-year time line with four dates: year 0 (start of project), year 1, year 2, and year 3.Often a longer period is better. The alternativeshave more time in which to recover purchase and The product costs $10,000. The installation fee isimplementation costs. $2,000, and the cost of the annual maintenance contract is $500.Establish a time line that includes dates for: Cash flow into the organization through quan- The new product will replace leased equipment tified benefits and out of the organization that costs $2,000 a year, and it will save five hours through costs a week of administrative time. 11
  12. 12. BUSINESS CASE PRIMERThe total cost per hour (including overhead) for an product should be replaced. For that reason, year 3administrative assistant at ABC Company is $30. does not include:At $30 per hour, the new product will save $7,800 Paying the maintenance fee for year 4per year (5 hrs./week x $30/hr. x 52 weeks/year). The savings from not leasing equipmentABC Company plans to purchase and install the Return on Investmentnew product when the next payment for the leasedequipment is due. A project’s return on investment (ROI) is its savings (quantified benefits) over a specified period dividedTo prepare the three-year cash flow statement, we by its costs over the same period. Multiple themust answer three questions: result by 100 to obtain the ROI percentage. Will the $500 annual cost of the maintenance contract change after the first year? ROI = (Savings/Costs) x 100 Will the $2,000 annual savings from replace- ment of the leased equipment change? Here is an example of a simple ROI calculation for Will the savings per hour from the reduction ABC Company’s project. in labor change after the first year? Immediate (year 0)To keep our example simple, we will assume that savings: $2,000costs and savings will not change from year to year. costs: $12,500Table 1 shows the cash flow statement for our pro- Year 1posed project. savings: $9,800 costs: $500Table 1: Cash Flow StatementCosts Year 0 Year 1 Year 2 Year 3 Through end of first yearEquip. purchase (10,000) 0 0 0 savings: $11,800 costs: $13,000Installation fee (2,000) 0 0 0Maint. fee (500) (500) (500) 0 To calculate the ROI after one year, divide $11,800Subtotal (12,500) (500) (500) 0 (savings) by $13,000 (costs). The result is 0.91.1Savings Multiply by 100. The ROI is 91%. A project thatLeased equip. 2,000 2,000 2,000 0 breaks even has an ROI of 100%. There is noLabor 0 7,800 7,800 7,800 return on investment after one year.Subtotal 2,000 9,800 9,800 7,800Cash Flow (10,500) 9,300 9,300 7,800 Year 2 savings: $9,800When the project starts (year 0), $10,500 will flow costs: $500out of ABC Company. The project will bring in$9,300 during year 1, $9,300 during year 2, and 1. Don’t go overboard with decimals. In our example,$7,800 during year 3. At the end of year 3, the new labor savings is an estimate. It’s accuracy does not justify a result with more than two decimal places.12
  13. 13. BUSINESS CASE PRIMER Through end of second year NPV = NCY0 + NCY1 + NCY2 + NCY3 + ... + NCYn savings: $21,600 1 (1+r) (1+r)2 (1+r)3 + ... + (1+r)n costs: $13,500 NC = net cash flowTo calculate the ROI after two years, divide Y0 = immediate$21,600 by $13,500. Multiple by 100. The result Y1 = year 1is 160%. The project returns 160% of its invest- Y2 = year 2ment after two years. Yn = year n (last year in computation) r = discount rate Year 3 savings: $7,800 Let’s examine a project with two alternatives: buy- costs: $0 ing equipment for $12,000 or leasing it for $4,100 a year over three years. The financial staff has given Through end of third year us a discount rate of 5% (r = 0.05). savings: $29,400 costs: $13,500 At first glance, purchasing the equipment appears to be the better choice. But let’s compute the netThe ROI after three years is 218%. present value for each alternative.This simple example does not take into account The NPV for purchasing the equipment isthe net present value of the money used to pur- $12,000 because we pay for it immediately.chase the office-automation product. NPV = 12,000Y0 = $12,000 1Net Present ValueThe net present value (NPV) adjusts the net cash To compute the NPV for leasing the equipment,flow by the value of money over time. Savings and we use the NPV formula for Y0, Y1, and Y2. Wecosts are greater the sooner they occur. If you can pay $4,100 immediately, $4,100 after one year,buy equipment for $12,000 or lease it for $4,000 a and $4,100 after two years.year over three years (without paying any interestor other finance charges), leasing the equipment is NPV = 4,100Y0 + 4,100Y1 + 4,100Y2 1 1.05 (1.05)2the better choice because your organization canearn interest on $8,000 during the first year and on$4,000 during the second year. NPV = 4,100 + 3,905 + 3,719 = $11,724To determine net present value, ask your financial The difference between purchasing and leasing isanalysts what value they are using for the annual $276. Leasing is the better choice.discount rate (or investment yield rate). Use thatrate to adjust the savings and costs for each year. To compute the NPV for ABC Company’s project, we start with the net cash flow for each year fromHere’s the formula: Table 1. ABC Company’s discount rate is 5%. 13
  14. 14. BUSINESS CASE PRIMER NPV = -10,500 + 9,300 + 9,300 + 7,800 Payback Period 1 1.05 1.1025 1.1576 The payback period is the time required for the sav- NPV = -10,500 + 8857 + 8435 + 6738 = $13,530 ings (quantified benefits) to equal the costs.The NPV for our three-year ABC Company For our ABC Company project, the NPV after oneproject is $13,530. year is negative $1,643. The NPV after two years is $6,792. The payback period occurs between oneInternal Rate of Return and two years after the project starts.The internal rate of return (IRR) is the discount The difference between the NPV after one yearrate (investment yield) at which a project’s net and the NPV after two years is $8,435. The NPVpresent value equals zero. All other factors being increases by $843.50 each tenth of a year.equal, the project with the higher internal rate ofreturn is better. NPV after 1.0 year: -$1,643.00 NPV after 1.1 years: -$799.50If project #1 is the equivalent of investing money NPV after 1.2 years: $44.00at 40% (IRR = 40%) and project #2 is the equiva-lent of investing money at 15% (IRR = 15%), The payback period for ABC Company’s project isproject #1 is the better choice. 1.2 years.Remember our NPV formula? Selection NPV = NCY0 + NCY1 + NCY2 + NCY3 + ... + NCYn Review your analysis for each alternative. 1 (1+r) (1+r)2 (1+r)3 + ... + (1+r)n Eliminate alternatives with a high probability ofTo compute the NPV, we assigned a value to r. failure as indicated by your analysis of their assumptions, constraints, markets, organizationalTo computer the IRR, we assign NPV a value of considerations, and sensitivities.zero. We must solve an equation – which requireseither skill with algebra or luck with the “let’s make Eliminate alternatives with weak financial perfor-r equal this” method. Here is the equation for our mance as indicated by your financial analysis.three-year ABC Company project: Examine the remaining alternatives. Balance the 0 = -10,500 + 9,300 + 9,300 + 7,800 projected financial performance against the 1 (1+r) (1+r)2 (1+r)3 assumptions, constraints, markets, organizational considerations, and sensitivities.Using the “let’s make r equal this” method, wecompute r to be approximately 0.68. The IRR for Select the best alternative or alternatives to proposethe ABC Company’s proposed project is 68%. as the business case project.14
  15. 15. BUSINESS CASE PRIMERPHASE 6: DEFINE THE PROJECTIn Phase 6, you define the business case project. If back to Phase 4: Investigate Alternatives. After youyou selected multiple alternatives in Phase 5: Eval- resolve the problems, the probability of successfuluate Alternatives, then define each alternative as a funding and implementation will increase.separate project. The projects may share assump-tions, constraints, market analysis, organizational Tip for high-tech business cases! If your projectconsiderations, and sensitivity analysis that apply involves complicated technologies that are unclearto all of the alternatives. to the people who must approve your business case, they may refuse to fund the project. Docu-A business case is a business justification, not sim- menting and quantifying benefits may not beply a financial justification. Defining the project is enough. The audience may need to understandan important part of the business justification. how the technologies used in the project enable the benefits. If other documents explain how thePhase 6 may be iterative with phases 4 and 5. As project will work, refer to them. If you must writeyou define the project, you may identify additional your own material, see Impact Technical Publica-benefits and costs as well as new assumptions, con- tions’ White Paper Writing Guide. “Phase 6: Write”straints, markets, organizational considerations, tells you how to explain technical concepts clearly.and sensitivities. If so, investigate the new informa- You can download the guide at:tion and re-evaluate the alternatives. http://www.ImpactOnTheNet.com/wp-guide.pdfProject Description Implementation PlanThe project description should: Give an overview of the project Develop an implementation plan with major Define the project’s major components and project tasks and milestones. Typical tasks include activities acquisition, development, testing, deployment, Document the project’s scope and boundaries and training. Explain all changes that the project will make to the organization and its policies, processes, The implementation plan should account for all products, services, and markets important assumptions, constraints, markets, orga- nizational considerations, and sensitivities. TheThe project description should provide enough rest of the business case is meaningless if theinformation that the approval committee can project cannot be implemented successfully.decide whether the project is both viable andworth doing. The implementation plan should include feedback mechanisms tied to milestones. After the businessAs you describe the project and explain how it will case has been approved, use the feedback to moni-be implemented, you may discover potential prob- tor the implementation and to evaluate the successlems with the selected alternative. If you do, go of the project. 15
  16. 16. BUSINESS CASE PRIMERP H A S E 7: P R E P A R E THE REPORTIn Phase 7, you prepare the business case report. complicated. It requires an extensive report withThe report may be a document, a slide presenta- in-depth analysis of benefits and costs as well as ation, or both. detailed project description and implementation plan.Tip! Prepare a document even if it is not required.Most business cases are distributed as handouts. A Contentdocument is easier to read than a handout of pre-sentation slides and makes its points much more The typical contents given in the Introductioneffectively. make a good checklist for the content of a business case report:Responsibility Executive Summary Business OpportunityOne team member should be responsible for writ- Alternativesing the report. All other team members provide Benefitsinput, but the writer makes sure that the content Costshas a logical organization and a unified style. The Financial Analysiswriter also makes sure that all definitions, descrip- Assumptionstions, and examples are clear and complementary. ConstraintsDon’t use multiple definitions for the same con- Market Analysiscept. This can be a major problem when several Organizational Considerationsteam members submit input. Sensitivity Analysis Project DescriptionLength Implementation Plan RecommendationsThe length of a business case report depends onthe complexity of the project. Replacing a depart- Include those sections for which you have informa-ment’s personal computers with new equipment is tion and group them according to the alternativesa simple project. Analyzing the financial informa- you are presenting.tion involved in using current equipment, upgrad-ing current equipment, purchasing new For example, you want to present informationequipment, or leasing new equipment, as James W. about two alternatives and propose one of them inBrannock1 does, should be sufficient. Implement- the business case. Each alternative has its owning a business re-engineering project is much more assumptions and sensitivities. Neither alternative has constraints, market analysis, or organizational considerations. 1. Brannock, James W., “Business Case Analysis Example of Final Briefing” in BCA: Business Case Analysis, pages 367-379 (STS Publications, Plant Your report’s contents might look like this: City, Florida, 2004).16
  17. 17. BUSINESS CASE PRIMER Executive Summary in the White Paper Writing Guide. You can down- Business Opportunity load the guide at: Alternative #1 ▪ Benefits http://www.ImpactOnTheNet.com/wp-guide.pdf ▪ Costs ▪ Financial Analysis Illustrations ▪ Assumptions ▪ Sensitivity Analysis Charts are an important way to convey financial Alternative #2 information. Diagrams may clarify the description ▪ Benefits of a project. For more information, see “Phase 7: ▪ Costs Illustrations” in the White Paper Writing Guide. ▪ Financial Analysis ▪ Assumptions Recommendations ▪ Sensitivity Analysis Project Description The recommendations summarize the main points Implementation Plan in the business case report and offer suggestions on Recommendations how to proceed with the proposed project. For example, a report might recommend approving theNote: I have not yet discussed the Recommenda- business case within two months to take advantagetions and Executive Summary. Write those sections of a market opportunity.last, after you have written all the other sections. Highlighting the business opportunity and theAlthough a typical business case contains a large financial information that supports the businessamount of financial data, narrative flow is impor- opportunity is often a good idea.tant. You are telling a story to encourage your audi-ence to fund your project. Summarize the financial Executive Summaryinformation in the text. Put large amounts offinancial data in appendixes. Write the executive summary last. It should com- municate the essence of the business case in a fewFormat well-chosen words. Depending on the complexity of the business case, the executive summary may beA business case report should have a restrained and anywhere from a few paragraphs to several pages.formal appearance. It should not be difficult toread. Don’t cram text and endless tables of data The executive summary should highlight the keyinto the smallest space possible. There is no point points in the business case. These include impor-in writing a business case report if your audience tant benefits and financial information like returnwon’t read it! on investment. Critical assumptions, constraints, market analysis, organizational considerations, andPage designs that work well for white papers are sensitivity analysis may also be included. A portionexcellent for business case reports. For formatting of your audience may read only the executive sum-suggestions, see “Phase 5: Design the Look & Feel” mary. Make sure it is persuasive! 17
  18. 18. BUSINESS CASE PRIMERP H A S E 8: R E V I E W , R E V I S E & P R E S E N T THE BUSINESS CASEIn Phase 8, you review the business case to maxi- non-quantified benefits should be reasonable. Themize its credibility, revise it, and present it to the report should state the critical assumptions, con-approval committee. straints, market analysis, organizational consider- ations, and sensitivity analysis for all alternatives.Review Stakeholder ReviewThe reviewers are your business case team and yourstakeholders. I recommend two separate reviews: a If possible, review the business case with the stake-team review followed by a stakeholder review. holders after you review it with the team. If you don’t have time for separate reviews, have the teamTeam Review and the stakeholders review the business case together. Avoid presenting the business case to theThe review should cover the entire report to the approval committee without first reviewing it withapproval committee. If the team will distribute a the stakeholders.written document and give a presentation, reviewthe document and run through the presentation. RevisionNote: If you developed the business case on your When you have consensus on the report’s organiza-own, review it with your subject matter experts and tion, content, and tone, prepare the final version.others who provided input. Don’t forget to proofread the final version. MakeThe report should support your business case goals sure that no mistakes have crept into the businessand meet the information needs of your audience. case document or presentation at the last minute.Check the report against your needs assessment inPhase 1. PresentationThe business case should be complete and objec- If the business case report involves both a docu-tive. Review the financial information and the ment and a presentation, distribute the documentproject information to make sure that the report to the approval committee before you give the pre-will be credible to the approval committee. sentation. If the committee has not specified the time period, a week should be sufficient.The report should contain all the information thatthe approval committee will need to reach a knowl- Remember that the approval committee may ques-edgeable and informed decision about the project. tion information in the business case. Be prepared to provide answers or to research the information,The report should give each alternative’s strengths make adjustments, and present a follow-up report.and weaknesses fairly. All implementation sched-ules, financial projections, and delivery dates for Good luck with your presentation!18
  19. 19. BUSINESS CASE PRIMERA P P E N D I X A: S A M P L E B U S I N E S S C A S EThis sample is a business case for the hypothetical Remember: never force the contents of a businessABC Company project discussed in “Financial case into a template. The contents of your businessAnalysis” on page 11. The sample shows the typical case must meet your needs as explained in Phase 1:contents of a business case. Assess Needs on page 5. Business Case for New Office Automation Equipment Date: April 15, 2006Executive Summary AlternativesThis business case recommends purchasing Elec- The business case team examined the three leadingtroWorkFlow, an office-automation product that office-automation products. Two of them werewill save $23,400 in labor costs over three years. eliminated from consideration because they cost from $40,000 to $60,000 over three years. BothProcess and data improvements resulting from products deliver the same benefits as ElectroWork-ElectroWorkFlow should increase productivity Flow. Because the products scale well, they are via-throughout ABC Company. For example, the pro- ble at companies much larger than ABC Company.ductivity of the financial modeling staff mayincrease by up to 40 hours a year. BenefitsElectroWorkFlow will cost $13,500 over three ElectroWorkFlow will provide all the capabilitiesyears; it will replace leased office-automation and benefits of ABC Company’s current office-equipment that costs $6,000 over three years. automation product.The return on investment (ROI) over three years is ElectroWorkFlow will eliminate the $2000 annual218%. The payback period is 1.2 years. cost of the current leased equipment.1Business Opportunity ElectroWorkFlow will solve two problems that require on average five hours of work each week byABC Company has an opportunity to save 260 administrative assistants:hours of office labor annually by automating time- Automatic distribution and updating of sharedconsuming and error-prone manual tasks. files Elimination of errors when overwriting filesThis opportunity aligns with ABC Company’sobjective to grow efficiently and to devote its 1. The lease cost is not expected to change over theresources to revenue generating functions. next three years. 19
  20. 20. BUSINESS CASE PRIMERAutomatic Distribution and Updating of Shared CostsFiles ElectroWorkFlow purchase price: $10,000.Administrative assistants at ABC Company spendon average three hours a week distributing and Estimated life cycle: three years.updating shared files. ElectroWorkFlow will auto-mate these processes. Installation fee: $2,000.By automatically distributing and updating shared Annual maintenance contract: $500.2files, ElectroWorkFlow will save an estimated$4,680 per year1 in labor costs. Financial AnalysisElimination of Errors when Overwriting Files Cash Flow Statement (three years)ABC Company’s current office-automation prod- Year 0 Year 1 Year 2 Year 3uct has no built-in safeguards to prevent users from Costs 7-1-06 7-1-07 7-1-08 7-1-09accidentally making changes to an obsolete version Equip. purchase (10,000) 0 0 0of a file and then overwriting the current version Installation fee (2,000) 0 0 0with the obsolete version. On average, users acci- Maint. fee (500) (500) (500) 0dentally overwrite current files with obsolete files Subtotal (12,500) (500) (500) 0twice a month. Administrative assistants spend an Savingshour correcting each problem. Leased equip. 2,000 2,000 2,000 0 Labor 0 7,800 7,800 7,800By eliminating these errors, ElectroWorkFlow will Subtotal 2,000 9,800 9,800 7,800save an estimated $3,120 per year in labor costs. Cash Flow (10,500) 9,300 9,300 7,800Improved Financial Modeling ABC Company’s discount rate as of April 1, 2006,Financial modelers use roughly two dozen shared is 0.05.files. When current data in these shared files isoverwritten with obsolete data, financial modelers Return on investment (ROI): 218%must recheck and redo their models. No recordsare kept for this work, but anecdotal evidence sug- Net present value (NPV): $13,530gests that up to 40 hours per year may be wastedredoing financial models. At $50 per hour, this lost Internal rate of return (IRR): 68%time costs ABC Company up to $2,000 a year. Payback period: 1.2 years 1. The total cost per hour (including overhead) for an 2. The maintenance contract contains a clause that administrative assistant at ABC Company is $30. locks in this rate for three years.20
  21. 21. BUSINESS CASE PRIMERAssumptions ABC Company realizes the anticipated labor sav- ings. If administrative assistants encounter prob-The volume of shared files will remain the same or lems, they will report them to the IT support staff.increase over the next three years. The office manager will prepare a monthly reportSignificant changes will not occur in the way most on administrative assistant labor savings and sub-shared files are distributed, used, and updated. mit it to the directors of IT and finance.Sensitivity Analysis Implementation PlanTo realize $7,800 in annual labor savings, ABC ElectroWorkFlow will be installed over the week-Company must reduce administrative assistant end of June 24-25, 2006.(AA) labor by 260 hours per year. Note:The lease for the current office-automationCurrently, ABC Company employs three full-time equipment expires on July 1, 2006.AAs and one part-time AA who works on average34 hours per week. In 2005 ABC Company hired ElectroWorkFlow will be production ready at 6:00a leased worker to perform 120 hours of AA tasks. am on Monday, June 26, 2006.By eliminating the leased worker (120 hours saved) A member of the IT staff will be trained from 9-12and reducing the part-time AA to 31 hours per am on June 26, 2006.week (140 hours saved), ABC Company will save260 hours per year in AA labor. Administrative assistants will be trained from 1-4 pm on June 26, 2006.Project Description RecommendationsWhen the business case is approved, the IT depart-ment will schedule installation of ElectroWork- This business case recommends purchase of Elec-Flow over a weekend. troWorkFlow on June 23, 2006, and installation over the weekend of June 24-25, 2006.ElectroWorkFlow installers will perform all officeautomation conversion and testing work with the The $2,000 annual lease for the current equipmentassistance of ABC Company’s regular weekend IT expires on June 30, 2006. To avoid renewing thestaff. lease, ABC Company should install ElectroWork- Flow no later than June 24-25, 2006. If necessary,ElectroWorkFlow trainers will provide a half day of ABC Company can install ElectroWorkFlow overtraining to a member of the IT staff and a half-day another weekend in June 2006.of training to the administrative assistants. This schedule will enable ABC Company to realizeThe office manager will monitor the administrative the project’s net present value of $13,530 by Julyassistants’ time reports each week to make sure that 1, 2009. 21
  22. 22. BUSINESS CASE PRIMERAPPENDIX B: RECOMMENDED BOOKSLinks for purchasing these books are available at BCA: Business Case Analysisthe Impact Technical Publications Web site: James W. Brannock http://www.ImpactOnTheNet.com/bc-books.html Amazon.com describes this book as a “how to”The Web site also recommends several books about guide for business and economic decisions thatinformation technology business cases. “shows a comprehensive, yet surprisingly easy to learn set of examples, concepts and techniques forThe Business Case Guide (Second Edition) conducting such studies. It offers a simple guide to basic analysis of business situations.”Marty J. Schmidt The 66-page chapter on “The 8-Day BCA” justi-This impressively comprehensive book has ten fies the cost of the book. The chapter walks readerstimes more information than the Business Case through the process of analyzing and developing aPrimer you are reading. The book starts with an simple business case for replacing the personaloverview of basic concepts and then examines in computers in an office. The chapter includes expla-detail both the contents of a business case and the nations of all calculations in the example businessprocess of developing a business case. case including net present value, total ownership costs, and cash flow.As Schmidt explains in Chapter 1, “The BusinessCase Guide is designed to help you understand the Other chapters of interest:structure and the content that make a business case “Economic Analysis,” which discusses the con-compelling and useful. It is also designed to lead cept of present value, breakeven analysis, sav-you through the steps in developing a solid busi- ings-to-investment ratio, benefit-to-cost ratio,ness case: defining the case, designing the case, and payback among multiple projectsdeveloping cost and benefit data, analyzing the “Business Case Analysis Purpose and Events”results, and packaging, presenting, and using the “Business Case Analysis Example of Final Pre-case.” sentation” (25 slides)Although at times the book bogs down in detail Much of the rest of the book discusses - to quote(the discussion of the date to put on the business the back cover - “economic and management sci-case occupies the better part of a page!), it presents ence techniques.” These techniques may be of lim-most of the material clearly and thoroughly. The ited interest to readers who want to mastertwo helpful appendixes contain a sample business fundamentals quickly so that they can prepare ancase and an overview of financial metrics for those effective business case.of us who need a refresher course in finance andaccounting.22
  23. 23. BUSINESS CASE PRIMERINDEXA team 7 OAlternatives topics 3 Opportunity 6 evaluating 11 writing 16 Organizational considerations 10 investigating 8 Business opportunity 6 selecting 14 Business plan 3Analysis P Payback period 14 financial 11 C Phases in process 4 market 10 Cash flow statement 11 sensitivity 10 Plan the work effort 7 Checklist 16Analysis period 11 Prepare the report 16 Conclusions. See Recommendations.Approval 18 Present value 13 Constraints 10Assess needs 5 Presentation for approval 18 Contents 3, 16Assumptions 9 Process description 4 Costs 9Audience 5 Project description 15 D implementation plan 15B Define the business opportunity 6Benefits 8Books 22 Define the project 15 RBusiness case Rate of return 14 alternatives 8, 11 E Recommendations 17 approval 18 Evaluate alternatives 11 Report 16 assumptions 9 Executive summary 17 Responsibilities 7 audience 5 Return on investment 12 benefits 8 Review, revise & present the business books 22 F case 18 constraints 10 Financial analysis 11 Risks 10 contents 3, 16 ROI. See Return on investment. costs 9 G defined 3 Goals 5 S executive summary 17 financial analysis 11 Sample business case 19 goals 5 I Savings 8 implementation plan 15 Implementation plan 15 Schedule 7 market analysis 10 Internal rate of return 14 Sensitivity analysis 10 opportunity 6 Investigate alternatives 8 Slide presentation 16 organizational considerations 10 planning 7 Investment return 12 Stakeholders 7, 18 presenting 18 IRR. See Internal rate of return. Strategic advantage 9 process 4 Summary. See Executive summary. project description 15 M recommendations 17 Market analysis 10 T responsibilities 7 Team 7 reviewing and revising 18 sample 19 N Topics 3 schedule 7 Needs assessment 5 sensitivity analysis 10 Net present value 13 W stakeholders 7 NPV. See Net present value. Work effort 7 23
  24. 24. ABOUT THE AUTHORAl Kemp’s business cases, white papers, and product technical overviewshave helped secure 40 million dollars for high-tech start-up companiesand advanced technology projects at Fortune 500 companies. Withstrong business experience and extensive technical skills, Mr. Kemp spe-cializes in educating prospective customers and investors on highly tech-nical topics. A technical and marketing communication consultant since1987, Mr. Kemp is the owner of Impact Technical Publications. Heholds an M.A. in English from the University of Chicago and a B.A. inwriting from the University of Illinois. Copyright © 2006 Impact Technical Publications. All rights reserved. This primer uses the names of a fictitious organiza- tion (ABC Company) and product (ElectroWork- Flow). Any resemblance between this organization and product and any real organization or product with the same name is purely coincidental. 7090 Routt Street, Arvada, Colorado 80004 USA 303.431.8259 www.ImpactOnTheNet.com