Business Case Analysis -
What a Project Manager should know: Part 2
In part 1 of this article we looked at the importance of the Business Case, and where it should fall in the lifecycle of a project. In this part we dive into the components that make up a Business Case.
How to Write a Business Case-Overview
“Far better an approximate answer to the right question than the exact answer to the wrong question, which can always be made precise.”
John Tukey, of Princeton University
The key element in the business case is the process change that the business case is intended to support. Something is either going to be done for the first time, done differently or done faster. The implied accuracy of the numbers is irrelevant if you are solving the wrong problem. The place to start is always with the end customer. Not the user of the information system that is being requested but the company’s actual end customer, because the further back you get from the end customer the greater the possibility that you are automating an extraneous process.
How much time should you spend on analysing the underlying process improvements proposed in the business case as opposed to simply costing them out? The answer is “How much time do you have?” If the project is part of a formal reengineering undertaking, then the process work is well documented and clearly articulated and will require no more than a review by the project manager. If the project is driven by the perceived needs of the end user community it is best to schedule a business case equivalent of a Joint Application Development (JAD) session and go over the whys and the wherefores.
Analysis of Business Case Components
Having determined that the right process is underpinning the business case the next task is to review the specific costs and benefits of the proposed solution vs. the status quo. The goal of the process is to determine that the future on-going benefits less the future on-going costs are greater than the current costs plus any one-time costs to develop and implement the new system/process.
Costs and Benefits – As Is System
The costs and benefits of the current system are usually fairly easy to derive. The number of people currently assigned to the task being changed or eliminated can often be determined through the company’s personnel records or through interviews with supervising managers. Similarly, amounts paid to outside vendors who do work which the new process will eliminate can be defined through the company’s financial records. These costs can then be aggregated and adjusted to determine the baseline view cost that will be used for comparison with the costs of the new system.
The key word to note from the above paragraph is the word adjusted. One fallacy in most business cases is the assumption that doing nothing is the steady state; that the current situation will continue even if no investment is made. This assumption is critically important. A classic example of this was Gillette’s decision not to introduce a stainless-steel blade, despite the knowledge that it gave a closer more comfortable shave. By the time they finally got a product to market they had permanently lost 15% of their previous market share. It’s very easy to see how this could happen and the scenario repeats itself daily across Industry. The one factor that was considered inviolate in the business case was that over some rather lengthy time frame there would be no significant decline in the market share of carbon steel blades. Stainless steel blades had to show a return that was unrealistic because the comparison assumption was wrong.
There is an additional key point to stress here; the underlying factor that Gillette ignored was the customer. Ultimately the customer not the company controls the marketplace and customers buy for a reason that can be summed up as perceived value for their money. In the Gillette situation described above the deteriorating market share was easy to understand. The customer requirement was for a close shave, not for a razor blade, and since a stainless-steel product met that goal better than a carbon steel blade the customer changed their buying habits.
Rule of Thumb: The current system will not stay static. Revenue may go down due to deteriorating market share and/or operating costs may go up either in actuality or in comparison to the competition due to lack of innovation. Assign a negative degree of risk to these factors when doing the financial analysis to avoid over stating the benefits of the new system.
On Going – Benefits – New System
Method One, as introduced in Part 1, begins its section on Ongoing Benefits by stating “When a system can be justified on cost savings alone, the business case is relatively clear” but that statement ignores the creativity and wiggle room most project managers allow themselves in this area. To begin with there are three categories of cost savings: hard cost savings, soft cost savings and something in between. An example of a hard savings is something that eliminates a function and therefore saves either the Rands paid to an outside vendor or an entire position. Hammer’s example of the virtual elimination of accounts payable by one company can be taken as an example. The Process Reengineering team redefined the process such that purchasing entered the transaction into the system and the receiver approved it and the “middleware” position formally occupied by accounts payable went away. While there are some potential issues with this often-quoted story, this is at least on the surface a clearly defined cost savings.
An example of a savings that appears to be hard but often ends up being soft (i.e. no clearly defined reduction in operating expense) is a productivity improvement that will reduce the time an employee spends doing a job. The problem arises when this savings is taken across an entire population and then quantified into the number of heads that are “eligible for reduction.” A business case that is successful on this basis is fraught with peril. When the post implementation review takes place, everyone is surprised to find out there are not any real heads that can be eliminated. Saving 10% of Sally’s time if there are not 10 Sally’s in one location does not mean that Sally’s position can be eliminated.
How to determine whether a headcount savings is hard or soft:
- determine the work being eliminated
- determine who currently does the work
- determine what percentage of their time is currently spent doing that work.
- determine where they are located geographically and whether it’s possible to reassign work such that headcount can be reduced.
Rule of Thumb: Be very careful using a fully burdened (wage, plus direct non-wage, plus benefits plus allocated overhead including management and facilities) labour rate when determining savings. Unless you’re recommending eliminating an entire division or downsizing by the thousands rather than hundreds these saving will be overstated.
In part 3 of this article we deep-dive into the costs associated with a Business Case, and what Project Managers should look out for.
Written by Klaus Wohlfarth
Rules of Thumb Source: Donna Fitzgerald (Donna Fitgerald internet presentation)