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Creating Bulletproof Business Cases - Part 4: Cost-Benefit Analysis

By Richard Larson, PMP, CBAP, Watermark Learning and Elizabeth Larson, PMP, CBAP, CSM, Watermark Learning

The previous portions of this series on business cases presented an overview of the main components and the first two stages that we call Situation Analysis: the S and A, and the next two that we call Solution Analysis, the R and I. The next stage in our discussion of bulletproof business cases explores the Evaluation step of SARIE.

SARIE: E – Evaluation

Remember that a business case should facilitate decision-making by executives to evaluate how proposed projects will meet business needs. They should include cost-benefit and other information to support the proposal. When used correctly, the executive team will then judge how cost-effectively the proposed solution meets business needs compared to alternative proposals. The cost-benefit analysis and measurement maps directly to the “E” part of SARIE, namely the Evaluation stage.

Essential Components of a Business Case

An actual business case template may have 10-20 sections in it, depending on the organization. All of the SARIE elements covered so far should be included, such as the outputs of the techniques like root cause analysis, weighted rankings, feasibility analysis, etc. Rather than covering every other possible inclusion, we will focus our discussion on three elements not previously addressed.

Risks

One essential element to include in a bulletproof business case is an initial risk assessment. Mitigating the risks may lead to increased costs, or perhaps even abandoning a business case if the risks are judged to be too great. Risks may include solution feasibility, technical, financial, and organizational risks. Assume that the decision-makers have a list of risks in their heads, and they will challenge an overly optimistic business case.

Benefits

Benefits are obtained from business “owners,” to use the BABOK® Guide term, but how we present them can make or break a business case. Our proposals should include mostly tangible benefits, and when backed with solid supporting measures, help create a bulletproof business case. Tangible benefits can be “monetized,” such as sales and market growth, reduced costs, fewer defects, etc.

Intangible benefits are acceptable if the business judges them to be significant and in line with the organization’s strategy. Increased customer satisfaction, improved employee morale, corporate image, etc., while not directly monetary, might still be valuable to the organization.

Costs

Costs are easier to obtain, just by their very nature. It is easier to monetize them when you have vendor RFPs and other inputs to base them on. Examples include the cost of software packages, custom programming, equipment, labor, advertising, government fees, etc. One source recommends you spend one-fourth of your cost-benefit research time on costs and three fourths of your cost-benefit time on benefits (Keen & Digrius, 2003).

Financial Analysis

Business cases are strengthened considerably by including solid financial tools, such as Net Present Value, Rate of Return, etc. Different organizations tend to favor and use specific tools, and we may want to engage help from our organization’s financial analysts. Below are four of the most commonly used financial formulas. Space dictates we don’t cover their details, but we think all four should be included in a bulletproof business case. 
  • Pay Back Period (PBP). 
  • Return on Investment (ROI). 
  • Internal Rate of Return (IRR). 
  • Net Present Value (NPV).
Summary

The last segment of SARIE projects the costs and benefits of a recommendation, and sets the stage for measuring the actual results. Financial analysis is an essential component in a bulletproof business case. None of the formulae mentioned require an accounting degree to master, especially with the help of Microsoft Excel®. Based on the solution size and scope, we may still want to consult financial analysts in our organization for assistance.

The final article will wrap up our series and conclude with tips on presenting a business case.



References

Keen, J. M. & Digrius, B. (2003). Making Technology Investments Profitable: ROI Road Map to Better Business Cases. John Wiley and Sons, Inc. Hoboken, NJ.

International Institute of Business Analysis (IIBA). (2009). A Guide to the Business Analysis Body of Knowledge® (BABOK® Guide) Version 2.0. Toronto, Ontario, Canada. International Institute of Business Analysis.