book kemp 06 business case primer

Business Case

rimer

Al

emp

BUSINESS CASE PRIMER

2

Copyright 2006 Impact Technical Publications. All rights reserved.

C

ONTENTS

Introduction 3

Typical Contents 3Process 4

Phase 1: Assess Needs 5

Goals 5Audience 5

Phase 2: Define the Business Opportunity 6

Definition 6Scope 6Objectives 6Realization 6Review 6

Phase 3: Plan the Work Effort 7

Team Selection 7Stakeholder Identification 7Schedule 7Responsibilities and Tasks 7

Phase 4: Investigate Alternatives 8

Alternatives 8Benefits 8Costs 9Assumptions 9Constraints 10Market Analysis 10Organizational Considerations 10Sensitivity Analysis 10

Phase 5: Evaluate Alternatives 11

Financial Analysis 11Selection 14

Phase 6: Define the Project 15

Project Description 15Implementation Plan 15

Phase 7: Prepare the Report 16

Responsibility 16Length 16Content 16Format 17Illustrations 17Recommendations 17Executive Summary 17

Phase 8: Review, Revise & Present the Business Case 18

Review 18Revision 18Presentation 18

Appendix A: Sample Business Case 19

Executive Summary 19Business Opportunity 19Alternatives 19Benefits 19Costs 20Financial Analysis 20Assumptions 21Sensitivity Analysis 21Project Description 21Implementation Plan 21Recommendations 21

Appendix B: Recommended Books 22

The Business Case Guide (Second Edition) 22BCA: Business Case Analysis 22

Index 23

About the Author 24


I

NTRODUCT ION

3

A business case is a justification for a businessproject. A business case requests funding for aproject internally from an organizations financialdecision-makers or externally from investors.

A business case compares the costs of a project withthe benefits that it provides. The business casemust show that the benefits outweigh the costs. Inmany instances, it must include a financial analysisthat calculates the projects return on investment(ROI).

Although financial information is important, abusiness case is more than a financial justificationfor a project. It is a business justification. The busi-ness case should show that the project will help theorganization meet its goals.

Typical Contents

Typical business-case topics include: Executive Summary Business Opportunity Alternatives Benefits Costs Financial Analysis Assumptions Constraints Market Analysis Organizational Considerations Sensitivity Analysis Project Description Implementation Plan Recommendations

Your business case need not include all of thesetopics, but they make an excellent checklist.

Are business cases and business plans similar?

No. They are both used to generate financing. Thatsall they have in common.

A business plan is a method to achieve the goals of abusiness. A business plan is used to: Develop ideas about how to conduct a business Finance the business Evaluate the performance of the business

Typical sections include: Executive Summary General Business Description Products and Services Marketing Plan Competitive Analysis Operational Plan Management and Organization Capitalization and Structure Financial Plan

This information is from The Ernst & Young Busi-ness Plan Guide by Siegel, Ford, and Bornstein (JohnWiley & Sons, Inc., New York, 1993). The book isavailable for purchase at:

http://www.ImpactOnTheNet.com/bc-books.html

The executive summary highlights the key points inthe business case. These include important benefitsand the return on investment.

The business opportunity describes the motivationfor the project that the business case will propose.The business opportunity includes a definition, astatement of scope, and a discussion of objectivesthat the project will help the organization achieve.


A business case analyzes the

alternatives

to a pro-posed project. For example, an online learning

risks involved in undertaking the project. Risksalso may result from

not

undertaking the project.

4

business case might compare the benefits and costsof classroom learning. All business cases involve atleast two alternatives: doing or not doing a project.

Benefits increase revenue, reduce costs, and providestrategic advantage over competitors.

Costs include equipment (purchase and mainte-nance) and labor (training and operation).

Financial analysis compares benefits to costs andanalyzes the value of a project as an investment.The analysis may include a cash flow statement,return on investment, net present value, internalrate of return, and payback period.

Assumptions are events that a business case assumeswill happen. For example, a business case mightassume approval of a product by a regulatoryagency.

Constraints are schedule, resource, budget, staffing,technical, and other limitations that may impactthe success of a project. For example, a projectmight require that all employees have access to acentral database.

Market analysis examines changes in the businessenvironment that impact the success of a projectsuch as technological innovations and shifts in cus-tomer demographics.

Organizational considerations examine how aproject impacts an organization. A projects successmight depend on management support andemployee acceptance.

Sensitivity analysis evaluates the probability that aproject can be implemented successfully and the

The project description should provide enoughinformation that the people who must approve thebusiness case can decide whether the project isboth viable and worth doing.

Dont neglect the implementation plan! The rest ofthe business case is meaningless if the project can-not be implemented successfully.

The recommendations summarize the main pointsof a business case and offer suggestions on how toproceed with the project.

This primer discusses each of the above topics atthe point in the business case development processwhere the team first works with the topic.

Process

The business case process that this primer recom-mends has eight phases:1 Assess needs2 Define the business opportunity3 Plan the work effort4 Investigate alternatives5 Evaluate alternatives6 Define the project7 Prepare the report8 Review, revise & present the business case

If you must prepare a business case quickly, youmay be tempted to take short cuts through theprocess so that you can prepare the report as soonas possible. Dont do it! If you neglect any of thephases, your business case will not achieve itspotential. Without a persuasive business case, yourproject is less likely to be funded.


P

HASE

1: A

SSESS

N

EEDS

5

In Phase 1, you define the goals that your businesscase should achieve and the audience that mustapprove the business case for it to achieve its goals.

Goals

The goal of your business case may seem obvious:to fund your project. But funding a project may bethe last step in an elaborate approval process.

Your most important business case goal may be tomarket your proposed project throughout yourorganization. If marketing is your goal, your busi-ness case will still need financial information, but itmight show the value of similar projects at otherorganizations and extrapolate the data from otherorganizations to your organization.

For example, you are proposing a complicated andcostly business re-engineering project, whichinvolves major changes to your organization. Thegoal of the initial business case is to build manage-ment support for the proposed project. Showingthat business re-engineering is a good idea withmany potential benefits is much more importantthan describing a specific project in detail if yourorganization is not ready to support the project.Approval of the initial business case will result inthe support you need to prepare a second businesscase with a detailed description of your proposedproject, detailed financial information, and adetailed implementation plan.

Even if you have a straight-forward project, youmay have other goals besides funding. For exam-ple, you are competing with other projects for

funding. One of your goals might be to show thatyour project is the best choice.

There is no magic formula that will tell you whatyour goals are. You must analyze what you are try-ing to accomplish.

Audience

Your goals depend on your audience. Who mustyou convince? What information must you provideyour audience to persuade them to approve thebusiness case?

A theoretically perfect business case will not beapproved if it does not persuade its audience thatits project is worth pursuing.

Reviewing business cases for projects that membersof your audience have approved may help youdetermine what information you should include inyour business case.

Learning your audiences concerns and providinginformation to answer them is an important partof obtaining approval. For example, your projectinvolves complicated and expensive advanced tech-nologies, and a member of the approval committeeis suspicious of advanced technology projects. Findout all you can about that persons concerns.Approval of the business case may depend on howwell you address those concerns.

If your chief financial officer wants specific finan-cial metrics presented in a specific format, obtainsamples of the metrics and the format. Use them inyour business case.


P

HASE

2: D

EF INE

THE

B

US INESS

OPPORTUNITY6

In Phase 2, you define the business opportunity: themotivation for the project that the business casewill propose. The business opportunity includes adefinition, a statement of scope, and a discussionof objectives. The business opportunity may alsoinclude a description of what the organization willbe like after the opportunity has been realized.

Note: Many articles and books on business casesrefer to a problem rather than to an opportunity. Irecommend viewing all problems as opportunitiesfor improvement. A short-sighted solution to aproblem may simply make the problem disappear.A business opportunity uses the problem as aspringboard to improve the business.

Definition

The definition of an online learning businessopportunity might be:

To deliver educational courses over the intranetthat train all employees on human resources,accounting, and payroll policies and procedures.

Scope

Scope includes boundaries, limits, schedules, andbudgets. The scope of an online learning businessopportunity might be:

The scope includes all human resources, account-ing, and payroll policies and procedures thatapply to employees. When changes to policiesand procedures occur, training will be updatedwithin two business days. Implementation willoccur within six months of business case approvalat a maximum cost of $200,000.

Objectives

Describe what the business opportunity willaccomplish. The objectives of an online learningopportunity might be to reduce the cost of trainingand to reduce the time required deliver training onnew policies and procedures.

Metrics will make your objectives much morecompelling. For example, your online learningobjectives might be to reduce the cost of trainingby 50% and to reduce the time required to delivertraining on new policies and procedures by 75%.You may not yet have the information you need formetrics. If you dont, keep metrics in mind duringPhase 4: Investigate Alternatives.

Realization

The realization describes what the organizationwill be like after it has taken advantage of the busi-ness opportunity. This section is important if abusiness case proposes changes that have a majorimpact on customers, employees, products, poli-cies, processes, finances, markets, or competitors.

Note: If a business opportunity involves solving aproblem, the realization is the solution.

Review

Once you have defined the business opportunity,review it with the business case initiator. Thisreview helps ensure agreement on the extent of theproject that the business case will propose. Youdont want to be halfway through the business casewhen you find out that the initiator had a totallydifferent project in mind!


PHASE 3: PLAN THE WORK EFFORT7

In Phase 3, you plan the business case work effort.You select the team, identify stakeholders, establishthe schedule, and assign responsibilities and tasks.

Business case work efforts vary from organizationto organization and within an organization fromproject to project. A portion of the work effortmay have been completed prior to your involve-ment. If so, document the planning that has beencompleted, make changes if necessary, and thenfinish the planning.

Team Selection

The size of the team is related to the size of theproposed project. If the business case involvesreplacing the personal computers in a departmentwith 18 employees,1 one person may perform allroles. If the business case involves a major businessre-engineering project, the team may include adozen or more members.

A multiple-member team should include: A sponsor, usually an executive, who publicizes

the business case work effort and interfaceswith the organizations senior management

Technical specialists Business analysts A financial analyst A writer, who prepares the business case report

Any team member may be the business case projectmanager.

Stakeholder Identification

The stakeholders include executives, managers,and technical specialists responsible for: Review of business case financial information Approval of the business case Implementation, operation, and acceptance of

the project proposed in the business case

The goal is to keep stakeholders informed of busi-ness case progress and to solicit their input at keypoints. Marty J. Schmidt recommends forming acore team of stakeholders and meeting with themseveral times during the development of the busi-ness case to make sure that they understand andsupport the proposed project.2

Schedule

When you were assigned responsibility for thebusiness case, you may have been given a deadline.If not, discuss a tentative deadline with the sponsorand team members. Develop the initial schedulebased on the tentative deadline. You will knowmore about the work effort after the team investi-gates alternatives in Phase 4. At that point, youmay need to adjust the schedule.

Responsibilities and Tasks

Meet with the team and discuss alternative ways toachieve the business opportunity. Assign generalresponsibilities and initial investigative tasks.

1. Brannock, James W., The 8-Day BCA in BCA:Business Case Analysis, pages 13-77 (STS Publica-tions, Plant City, Florida, 2004). For a brief reviewof this book, see page 22.

2. Schmidt, Marty J., The Core Team: Key to Cred-ibility in The Business Case Guide, Second Edition,pages 19-23 (Solution Matrix Ltd., Boston, 2002).For a brief review of this book, see page 22.


PHASE 4: INVEST IGATE ALTERNAT IVES8

In Phase 4, you investigate alternatives by gather-ing information about their benefits, costs,assumptions, constraints, risks, and so on.

Alternatives

There are three kinds of alternatives: Alteratives to the business opportunity Alternative projects Alternative implementations of a project

Alteratives to the Business Opportunity

All business cases examine at least two alternatives:pursuing or not pursuing a business opportunity(that is, approving or rejecting a business case). Abusiness case for an online learning opportunitymight compare the benefits and costs of onlinelearning with the benefits and costs of the organi-zations current method of training employees:classroom learning.

Alternative Projects

A business case may examine alternative projects torealize a business opportunity. If an organization isnot providing any formal training for employees,then a business case for an employee trainingopportunity might compare the benefits and costsof three alternatives: formal online training, formalclassroom training, and no formal training at all.

Alternative Implementations of a Project

A business case may examine alternative imple-mentations of a project to realize a business oppor-tunity. A business case for an opportunity toreplace classroom training with online training

might compare the benefits and costs of two alter-native implementations: All at once throughout the company On a departmental basis starting with human

resource policies and procedures

Benefits

Examine the benefits of each alternative that youhave chosen to investigate.

Benefits provide three types of business value: Increased revenue Reduced costs Strategic advantage

Increased Revenue

A business case for producing a new productwould include the anticipated increase in revenuefrom sale of the product.

Reduced Costs

A business case for improving a process wouldinclude the anticipated savings in equipment,labor, or both. Calculating the labor savings mayrequire research.

For example, you are investigating the benefits ofpurchasing an expensive office-automation prod-uct. The product distributes and updates sharedfiles and prevents errors caused by overwriting themost current copy of a file with a previous version.Both automatic updating and preventing errorsreduce labor costs. But you cant include thereduced labor costs in your financial analysis unlessyou quantify them.


If you research the current process, you might findthat an administrative assistant spends three hours

Labor costs include wages, salaries, and overheadcosts like benefits, office space, office equipment,9

a week distributing and updating shared files.Twice a month a current copy of a file is overwrit-ten by a previous copy. The administrative assistantspends an hour correcting each problem.

By eliminating this manual work, the office-auto-mation product would save five hours of adminis-trative time each week. Take the cost per hour foran administrative assistant and multiply it by fiveto get the products weekly savings in labor costs.Use that figure in your financial analysis.

Strategic Advantage

These benefits help an organization achieve itsgoals and compete effectively.

For example, a more accurate and current salesforecasting system would enable decision-makersto react faster to changes in the market. Decision-makers would have the information they need toadjust prices faster and launch promotional cam-paigns faster. That would give their company anadvantage over its competitors.

Although gathering financial data on strategicadvantage is usually difficult, quantifying benefitsthat provide strategic advantage may make the dif-ference between business case success and failure.

Costs

Examine the costs of each alternative that you havechosen to investigate.

Typical costs include equipment (purchase andmaintenance) and labor (training and operation).

and technical support.

Another cost is lost productivity. A project mayrequire staff to implement it. That reduces the pro-ductivity of the staff. Also, employees are often lessproductive while they are learning how to use newbusiness tools and processes.

Assumptions

Assumptions are events that the business caseassumes will happen. For example, the businesscase might assume approval from a regulatoryagency. Critical assumptions must occur for aproject to succeed. For example, a critical assump-tion for an online learning business case might bethat all employees will have access to a personalcomputer during work hours.

This and the following topics (constraints, marketanalysis, organizational considerations, and sensi-tivity analysis) may apply to all the alternatives. Ifso, document the topics once. For example, twoalternative projects to develop a new telecommuni-cation product might assume that regulatoryapproval will be received prior to the release of theproduct.

On the other hand, different alternatives mayinvolve different assumptions, constraints, and soon. If so, document the topics separately for eachalternative. For example, one alternative imple-mentation of a business re-engineering projectmight assume that the organization will not relo-cate any of its facilities during the implementationperiod. Relocation might not impact the otheralternatives.


Constraints For example, a business re-engineering project maydepend on employees accepting new job assign-10

Constraints are schedule, resource, budget, staffing,technical, and other limitations that may impactthe success of a project.

For example, a project to develop a new productmight be constrained by a six-month window ofopportunity during which the product must bereleased in the marketplace. A business re-engi-neering project might be constrained by therequirements that all employees have access to acentral database.

Market Analysis

Market analysis examines changes in the businessenvironment that impact the success of a project.These changes include technological innovations,expanding and contracting markets, and shifts incustomer demographics.

For example, market analysis might show that theprice of new low-end computers has been falling ata yearly rate of 20%. A project to develop a newlow-end computer might depend on the price oflow-end computers falling no more than 30% in12 months.

Organizational Considerations

Organizational considerations examine how aproject impacts an organization. A projects successmight depend on management support andemployee acceptance. If so, the business caseshould explain how the project will gain that sup-port and acceptance.

ments and tasks. The business case should explainhow employee acceptance will be attained andinclude the associated costs.

Sensitivity Analysis

Sensitivity analysis evaluates the probability that aproject can be implemented successfully and therisks involved in undertaking the project. When-ever possible, the sensitivity analysis should includemechanisms to monitor and manage risks to assuresuccessful implementation of the project.

If a projects viability depends on the cost of rawmaterials, a sensitivity analysis would evaluate theprobability that the cost of raw materials willincrease. The sensitivity analysis would proposecontingencies such as the use of different rawmaterials if the costs do increase.

If a projects viability depends on realizing laborsavings, a sensitivity analysis might examine possi-ble scenarios if the labor savings fail to materialize.

Risks may be beyond a projects control. For exam-ple, risks involved in a project that depends on athird-party proprietary software product might beproduct abandonment or obsolescence.

There may be risks involved in not undertaking aproject. For example, the risk of not undertaking abusiness re-engineering project might be that cur-rent product design, manufacturing, and distribu-tion processes will become so inefficient that thecompany will be unable to compete effectively.

PHASE 5: EVALUATE ALTERNAT IVES11

In Phase 5, you evaluate the pros and cons of eachalternative investigated in Phase 4, and you selectthe best alternative (or alternatives) to propose inthe business case.

The evaluation involves a financial analysis of eachalternative. A critical assumption, constraint, mar-ket analysis, organizational consideration, or sensi-tivity analysis may eliminate an alternative fromconsideration despite a favorable financial analysis.

Financial Analysis

Financial analysis compares benefits to costs andanalyzes the value of a project as an investment. Tostart a financial analysis, choose an analysis periodand prepare a cash flow statement.

Note: The extent of your financial analysis dependson your goals and audience. There is no sense incomputing detailed financial information such asnet present value and internal rate of return if youraudience wants a ballpark estimate of the return oninvestment and payback period.

Analysis Period

The financial analysis of all the alternatives shouldbe for the same period.

Often a longer period is better. The alternativeshave more time in which to recover purchase andimplementation costs.

Establish a time line that includes dates for: Cash flow into the organization through quan-

tified benefits and out of the organizationthrough costs

Delivery of benefits that do not have financialdata; for example, benefits that provide strate-gic advantage

Time-critical assumptions, constraints, mar-ket analysis, organizational considerations, andsensitivity analysis

Cash Flow Statement

A cash flow statement shows how an alternative willimpact the flow of cash into and out of your orga-nization. You need this information to perform thefinancial analyses in this phase: Return on investment Net present value Payback period Internal rate of return

Lets create a simple cash flow statement for a pro-posed project. After we have identified costs andsavings (that is, after we have conducted Phase 4:Investigate Alternatives), we will assign the costs andsavings to a time line.

Here is our proposed project. ABC Companywants to purchase a new office-automation prod-uct with an estimated life cycle of three years.Based on the estimated lifecycle, we will use athree-year time line with four dates: year 0 (start ofproject), year 1, year 2, and year 3.

The product costs $10,000. The installation fee is$2,000, and the cost of the annual maintenancecontract is $500.

The new product will replace leased equipmentthat costs $2,000 a year, and it will save five hoursa week of administrative time.


The total cost per hour (including overhead) for anadministrative assistant at ABC Company is $30.

product should be replaced. For that reason, year 3does not include:12

At $30 per hour, the new product will save $7,800per year (5 hrs./week x $30/hr. x 52 weeks/year).

ABC Company plans to purchase and install thenew product when the next payment for the leasedequipment is due.

To prepare the three-year cash flow statement, wemust answer three questions: Will the $500 annual cost of the maintenance

contract change after the first year? Will the $2,000 annual savings from replace-

ment of the leased equipment change? Will the savings per hour from the reduction

in labor change after the first year?

To keep our example simple, we will assume thatcosts and savings will not change from year to year.

Table 1 shows the cash flow statement for our pro-posed project.

When the project starts (year 0), $10,500 will flowout of ABC Company. The project will bring in$9,300 during year 1, $9,300 during year 2, and$7,800 during year 3. At the end of year 3, the new

Paying the maintenance fee for year 4 The savings from not leasing equipment

Return on Investment

A projects return on investment (ROI) is its savings(quantified benefits) over a specified period dividedby its costs over the same period. Multiple theresult by 100 to obtain the ROI percentage.

ROI = (Savings/Costs) x 100

Here is an example of a simple ROI calculation forABC Companys project.

Immediate (year 0)savings: $2,000costs: $12,500

Year 1savings: $9,800costs: $500

Through end of first yearsavings: $11,800costs: $13,000

To calculate the ROI after one year, divide $11,800(savings) by $13,000 (costs). The result is 0.91.1

Multiply by 100. The ROI is 91%. A project thatbreaks even has an ROI of 100%. There is noreturn on investment after one year.


Table 1: Cash Flow StatementCosts Year 0 Year 1 Year 2 Year 3

Equip. purchase (10,000) 0 0 0

Installation fee (2,000) 0 0 0

Maint. fee (500) (500) (500) 0

Subtotal (12,500) (500) (500) 0

Savings

Leased equip. 2,000 2,000 2,000 0

Labor 0 7,800 7,800 7,800

Subtotal 2,000 9,800 9,800 7,800

Cash Flow (10,500) 9,300 9,300 7,800

1. Dont go overboard with decimals. In our example,labor savings is an estimate. Its accuracy does notjustify a result with more than two decimal places.


Through end of second yearsavings: $21,600

NPV = NCY0 + NCY1 + NCY2 + NCY3 + ... + NCYn

1 (1+r) (1+r)2 (1+r)3 + ... + (1+r)n13

costs: $13,500

To calculate the ROI after two years, divide$21,600 by $13,500. Multiple by 100. The resultis 160%. The project returns 160% of its invest-ment after two years.


Through end of third yearsavings: $29,400costs: $13,500

The ROI after three years is 218%.

This simple example does not take into accountthe net present value of the money used to pur-chase the office-automation product.

Net Present Value

The net present value (NPV) adjusts the net cashflow by the value of money over time. Savings andcosts are greater the sooner they occur. If you canbuy equipment for $12,000 or lease it for $4,000 ayear over three years (without paying any interestor other finance charges), leasing the equipment isthe better choice because your organization canearn interest on $8,000 during the first year and on$4,000 during the second year.

To determine net present value, ask your financialanalysts what value they are using for the annualdiscount rate (or investment yield rate). Use thatrate to adjust the savings and costs for each year.

Heres the formula:

NC = net cash flow

Y0 = immediate

Y1 = year 1

Y2 = year 2

Yn = year n (last year in computation)

r = discount rate

Lets examine a project with two alternatives: buy-ing equipment for $12,000 or leasing it for $4,100a year over three years. The financial staff has givenus a discount rate of 5% (r = 0.05).

At first glance, purchasing the equipment appearsto be the better choice. But lets compute the netpresent value for each alternative.

The NPV for purchasing the equipment is$12,000 because we pay for it immediately.

NPV = 12,000Y0 = $12,000 1

To compute the NPV for leasing the equipment,we use the NPV formula for Y0, Y1, and Y2. Wepay $4,100 immediately, $4,100 after one year,and $4,100 after two years.

NPV = 4,100Y0 + 4,100Y1 + 4,100Y2

1 1.05 (1.05)2

NPV = 4,100 + 3,905 + 3,719 = $11,724

The difference between purchasing and leasing is$276. Leasing is the better choice.

To compute the NPV for ABC Companys project,we start with the net cash flow for each year fromTable 1. ABC Companys discount rate is 5%.


NPV = -10,500 + 9,300 + 9,300 + 7,800 1 1.05 1.1025 1.1576

Payback Period14

NPV = -10,500 + 8857 + 8435 + 6738 = $13,530

The NPV for our three-year ABC Companyproject is $13,530.

Internal Rate of Return

The internal rate of return (IRR) is the discountrate (investment yield) at which a projects netpresent value equals zero. All other factors beingequal, the project with the higher internal rate ofreturn is better.

If project #1 is the equivalent of investing moneyat 40% (IRR = 40%) and project #2 is the equiva-lent of investing money at 15% (IRR = 15%),project #1 is the better choice.

Remember our NPV formula?

NPV = NCY0 + NCY1 + NCY2 + NCY3 + ... + NCYn

1 (1+r) (1+r)2 (1+r)3 + ... + (1+r)n

To compute the NPV, we assigned a value to r.

To computer the IRR, we assign NPV a value ofzero. We must solve an equation which requireseither skill with algebra or luck with the lets maker equal this method. Here is the equation for ourthree-year ABC Company project:

0 = -10,500 + 9,300 + 9,300 + 7,800 1 (1+r) (1+r)2 (1+r)3

Using the lets make r equal this method, wecompute r to be approximately 0.68. The IRR forthe ABC Companys proposed project is 68%.

The payback period is the time required for the sav-ings (quantified benefits) to equal the costs.

For our ABC Company project, the NPV after oneyear is negative $1,643. The NPV after two years is$6,792. The payback period occurs between oneand two years after the project starts.

The difference between the NPV after one yearand the NPV after two years is $8,435. The NPVincreases by $843.50 each tenth of a year.

NPV after 1.0 year: -$1,643.00NPV after 1.1 years: -$799.50NPV after 1.2 years: $44.00

The payback period for ABC Companys project is1.2 years.

Selection

Review your analysis for each alternative.

Eliminate alternatives with a high probability offailure as indicated by your analysis of theirassumptions, constraints, markets, organizationalconsiderations, and sensitivities.

Eliminate alternatives with weak financial perfor-mance as indicated by your financial analysis.

Examine the remaining alternatives. Balance theprojected financial performance against theassumptions, constraints, markets, organizationalconsiderations, and sensitivities.

Select the best alternative or alternatives to proposeas the business case project.


PHASE 6: DEF INE THE PROJECT15

In Phase 6, you define the business case project. Ifyou selected multiple alternatives in Phase 5: Eval-uate Alternatives, then define each alternative as aseparate project. The projects may share assump-tions, constraints, market analysis, organizationalconsiderations, and sensitivity analysis that applyto all of the alternatives.

A business case is a business justification, not sim-ply a financial justification. Defining the project isan important part of the business justification.

Phase 6 may be iterative with phases 4 and 5. Asyou define the project, you may identify additionalbenefits and costs as well as new assumptions, con-straints, markets, organizational considerations,and sensitivities. If so, investigate the new informa-tion and re-evaluate the alternatives.

Project Description

The project description should: Give an overview of the project Define the projects major components and

activities Document the projects scope and boundaries Explain all changes that the project will make

to the organization and its policies, processes,products, services, and markets

The project description should provide enoughinformation that the approval committee candecide whether the project is both viable andworth doing.

As you describe the project and explain how it willbe implemented, you may discover potential prob-lems with the selected alternative. If you do, go

back to Phase 4: Investigate Alternatives. After youresolve the problems, the probability of successfulfunding and implementation will increase.

Tip for high-tech business cases! If your projectinvolves complicated technologies that are unclearto the people who must approve your businesscase, they may refuse to fund the project. Docu-menting and quantifying benefits may not beenough. The audience may need to understandhow the technologies used in the project enable thebenefits. If other documents explain how theproject will work, refer to them. If you must writeyour own material, see Impact Technical Publica-tions White Paper Writing Guide. Phase 6: Writetells you how to explain technical concepts clearly.You can download the guide at:

http://www.ImpactOnTheNet.com/wp-guide.pdf

Implementation Plan

Develop an implementation plan with majorproject tasks and milestones. Typical tasks includeacquisition, development, testing, deployment,and training.

The implementation plan should account for allimportant assumptions, constraints, markets, orga-nizational considerations, and sensitivities. Therest of the business case is meaningless if theproject cannot be implemented successfully.

The implementation plan should include feedbackmechanisms tied to milestones. After the businesscase has been approved, use the feedback to moni-tor the implementation and to evaluate the successof the project.


PHASE 7: PREPARE THE REPORT16

In Phase 7, you prepare the business case report.The report may be a document, a slide presenta-tion, or both.

Tip! Prepare a document even if it is not required.Most business cases are distributed as handouts. Adocument is easier to read than a handout of pre-sentation slides and makes its points much moreeffectively.

Responsibility

One team member should be responsible for writ-ing the report. All other team members provideinput, but the writer makes sure that the contenthas a logical organization and a unified style. Thewriter also makes sure that all definitions, descrip-tions, and examples are clear and complementary.Dont use multiple definitions for the same con-cept. This can be a major problem when severalteam members submit input.

Length

The length of a business case report depends onthe complexity of the project. Replacing a depart-ments personal computers with new equipment isa simple project. Analyzing the financial informa-tion involved in using current equipment, upgrad-ing current equipment, purchasing newequipment, or leasing new equipment, as James W.Brannock1 does, should be sufficient. Implement-ing a business re-engineering project is much more

complicated. It requires an extensive report within-depth analysis of benefits and costs as well as adetailed project description and implementationplan.

Content

The typical contents given in the Introductionmake a good checklist for the content of a businesscase report: Executive Summary Business Opportunity Alternatives Benefits Costs Financial Analysis Assumptions Constraints Market Analysis Organizational Considerations Sensitivity Analysis Project Description Implementation Plan Recommendations

Include those sections for which you have informa-tion and group them according to the alternativesyou are presenting.

For example, you want to present informationabout two alternatives and propose one of them inthe business case. Each alternative has its ownassumptions and sensitivities. Neither alternativehas constraints, market analysis, or organizationalconsiderations.

Your reports contents might look like this:

1. Brannock, James W., Business Case AnalysisExample of Final Briefing in BCA: Business CaseAnalysis, pages 367-379 (STS Publications, PlantCity, Florida, 2004).


Executive Summary Business Opportunity

in the White Paper Writing Guide. You can down-load the guide at:17

Alternative #1 Benefits Costs Financial Analysis Assumptions Sensitivity Analysis

Alternative #2 Benefits Costs Financial Analysis Assumptions Sensitivity Analysis

Project Description Implementation Plan Recommendations

Note: I have not yet discussed the Recommenda-tions and Executive Summary. Write those sectionslast, after you have written all the other sections.

Although a typical business case contains a largeamount of financial data, narrative flow is impor-tant. You are telling a story to encourage your audi-ence to fund your project. Summarize the financialinformation in the text. Put large amounts offinancial data in appendixes.

Format

A business case report should have a restrained andformal appearance. It should not be difficult toread. Dont cram text and endless tables of datainto the smallest space possible. There is no pointin writing a business case report if your audiencewont read it!

Page designs that work well for white papers areexcellent for business case reports. For formattingsuggestions, see Phase 5: Design the Look & Feel

http://www.ImpactOnTheNet.com/wp-guide.pdf

Illustrations

Charts are an important way to convey financialinformation. Diagrams may clarify the descriptionof a project. For more information, see Phase 7:Illustrations in the White Paper Writing Guide.

Recommendations

The recommendations summarize the main pointsin the business case report and offer suggestions onhow to proceed with the proposed project. Forexample, a report might recommend approving thebusiness case within two months to take advantageof a market opportunity.

Highlighting the business opportunity and thefinancial information that supports the businessopportunity is often a good idea.

Executive Summary

Write the executive summary last. It should com-municate the essence of the business case in a fewwell-chosen words. Depending on the complexityof the business case, the executive summary may beanywhere from a few paragraphs to several pages.

The executive summary should highlight the keypoints in the business case. These include impor-tant benefits and financial information like returnon investment. Critical assumptions, constraints,market analysis, organizational considerations, andsensitivity analysis may also be included. A portionof your audience may read only the executive sum-mary. Make sure it is persuasive!


PHASE 8: REVIEW, REVISE & PRESENT THE BUS INESS CASE18

In Phase 8, you review the business case to maxi-mize its credibility, revise it, and present it to theapproval committee.

Review

The reviewers are your business case team and yourstakeholders. I recommend two separate reviews: ateam review followed by a stakeholder review.

Team Review

The review should cover the entire report to theapproval committee. If the team will distribute awritten document and give a presentation, reviewthe document and run through the presentation.

Note: If you developed the business case on yourown, review it with your subject matter experts andothers who provided input.

The report should support your business case goalsand meet the information needs of your audience.Check the report against your needs assessment inPhase 1.

The business case should be complete and objec-tive. Review the financial information and theproject information to make sure that the reportwill be credible to the approval committee.

The report should contain all the information thatthe approval committee will need to reach a knowl-edgeable and informed decision about the project.

The report should give each alternatives strengthsand weaknesses fairly. All implementation sched-ules, financial projections, and delivery dates for

non-quantified benefits should be reasonable. Thereport should state the critical assumptions, con-straints, market analysis, organizational consider-ations, and sensitivity analysis for all alternatives.

Stakeholder Review

If possible, review the business case with the stake-holders after you review it with the team. If youdont have time for separate reviews, have the teamand the stakeholders review the business casetogether. Avoid presenting the business case to theapproval committee without first reviewing it withthe stakeholders.

Revision

When you have consensus on the reports organiza-tion, content, and tone, prepare the final version.

Dont forget to proofread the final version. Makesure that no mistakes have crept into the businesscase document or presentation at the last minute.

Presentation

If the business case report involves both a docu-ment and a presentation, distribute the documentto the approval committee before you give the pre-sentation. If the committee has not specified thetime period, a week should be sufficient.

Remember that the approval committee may ques-tion information in the business case. Be preparedto provide answers or to research the information,make adjustments, and present a follow-up report.

Good luck with your presentation!


APPENDIX A: SAMPLE BUS INESS CASE19

This sample is a business case for the hypotheticalABC Company project discussed in FinancialAnalysis on page 11. The sample shows the typicalcontents of a business case.

Remember: never force the contents of a businesscase into a template. The contents of your businesscase must meet your needs as explained in Phase 1:Assess Needs on page 5.

Business Case for New Office Automation Equipment

Date: April 15, 2006

Executive Summary

This business case recommends purchasing Elec-troWorkFlow, an office-automation product thatwill save $23,400 in labor costs over three years.

Process and data improvements resulting fromElectroWorkFlow should increase productivitythroughout ABC Company. For example, the pro-ductivity of the financial modeling staff mayincrease by up to 40 hours a year.

ElectroWorkFlow will cost $13,500 over threeyears; it will replace leased office-automationequipment that costs $6,000 over three years.

The return on investment (ROI) over three years is218%. The payback period is 1.2 years.

Business Opportunity

ABC Company has an opportunity to save 260hours of office labor annually by automating time-consuming and error-prone manual tasks.

This opportunity aligns with ABC Companysobjective to grow efficiently and to devote itsresources to revenue generating functions.

Alternatives

The business case team examined the three leadingoffice-automation products. Two of them wereeliminated from consideration because they costfrom $40,000 to $60,000 over three years. Bothproducts deliver the same benefits as ElectroWork-Flow. Because the products scale well, they are via-ble at companies much larger than ABC Company.

Benefits

ElectroWorkFlow will provide all the capabilitiesand benefits of ABC Companys current office-automation product.

ElectroWorkFlow will eliminate the $2000 annualcost of the current leased equipment.1

ElectroWorkFlow will solve two problems thatrequire on average five hours of work each week byadministrative assistants: Automatic distribution and updating of shared

files Elimination of errors when overwriting files

1. The lease cost is not expected to change over thenext three years.


Automatic Distribution and Updating of Shared Files

Costs20

Administrative assistants at ABC Company spendon average three hours a week distributing andupdating shared files. ElectroWorkFlow will auto-mate these processes.

By automatically distributing and updating sharedfiles, ElectroWorkFlow will save an estimated$4,680 per year1 in labor costs.

Elimination of Errors when Overwriting Files

ABC Companys current office-automation prod-uct has no built-in safeguards to prevent users fromaccidentally making changes to an obsolete versionof a file and then overwriting the current versionwith the obsolete version. On average, users acci-dentally overwrite current files with obsolete filestwice a month. Administrative assistants spend anhour correcting each problem.

By eliminating these errors, ElectroWorkFlow willsave an estimated $3,120 per year in labor costs.

Improved Financial Modeling

Financial modelers use roughly two dozen sharedfiles. When current data in these shared files isoverwritten with obsolete data, financial modelersmust recheck and redo their models. No recordsare kept for this work, but anecdotal evidence sug-gests that up to 40 hours per year may be wastedredoing financial models. At $50 per hour, this losttime costs ABC Company up to $2,000 a year.

ElectroWorkFlow purchase price: $10,000.

Estimated life cycle: three years.

Installation fee: $2,000.

Annual maintenance contract: $500.2

Financial Analysis

Cash Flow Statement (three years)

ABC Companys discount rate as of April 1, 2006,is 0.05.

Return on investment (ROI): 218%

Net present value (NPV): $13,530

Internal rate of return (IRR): 68%

Payback period: 1.2 years

1. The total cost per hour (including overhead) for anadministrative assistant at ABC Company is $30.

2. The maintenance contract contains a clause thatlocks in this rate for three years.

CostsYear 07-1-06

Year 17-1-07

Year 27-1-08

Year 37-1-09

Equip. purchase (10,000) 0 0 0

Installation fee (2,000) 0 0 0

Maint. fee (500) (500) (500) 0

Subtotal (12,500) (500) (500) 0

Savings

Leased equip. 2,000 2,000 2,000 0

Labor 0 7,800 7,800 7,800

Subtotal 2,000 9,800 9,800 7,800

Cash Flow (10,500) 9,300 9,300 7,800


Assumptions ABC Company realizes the anticipated labor sav-ings. If administrative assistants encounter prob-21

The volume of shared files will remain the same orincrease over the next three years.

Significant changes will not occur in the way mostshared files are distributed, used, and updated.

Sensitivity Analysis

To realize $7,800 in annual labor savings, ABCCompany must reduce administrative assistant(AA) labor by 260 hours per year.

Currently, ABC Company employs three full-timeAAs and one part-time AA who works on average34 hours per week. In 2005 ABC Company hireda leased worker to perform 120 hours of AA tasks.

By eliminating the leased worker (120 hours saved)and reducing the part-time AA to 31 hours perweek (140 hours saved), ABC Company will save260 hours per year in AA labor.

Project Description

When the business case is approved, the IT depart-ment will schedule installation of ElectroWork-Flow over a weekend.

ElectroWorkFlow installers will perform all officeautomation conversion and testing work with theassistance of ABC Companys regular weekend ITstaff.

ElectroWorkFlow trainers will provide a half day oftraining to a member of the IT staff and a half-dayof training to the administrative assistants.

The office manager will monitor the administrativeassistants time reports each week to make sure that

lems, they will report them to the IT support staff.

The office manager will prepare a monthly reporton administrative assistant labor savings and sub-mit it to the directors of IT and finance.

Implementation Plan

ElectroWorkFlow will be installed over the week-end of June 24-25, 2006.

Note: The lease for the current office-automationequipment expires on July 1, 2006.

ElectroWorkFlow will be production ready at 6:00am on Monday, June 26, 2006.

A member of the IT staff will be trained from 9-12am on June 26, 2006.

Administrative assistants will be trained from 1-4pm on June 26, 2006.

Recommendations

This business case recommends purchase of Elec-troWorkFlow on June 23, 2006, and installationover the weekend of June 24-25, 2006.

The $2,000 annual lease for the current equipmentexpires on June 30, 2006. To avoid renewing thelease, ABC Company should install ElectroWork-Flow no later than June 24-25, 2006. If necessary,ABC Company can install ElectroWorkFlow overanother weekend in June 2006.

This schedule will enable ABC Company to realizethe projects net present value of $13,530 by July1, 2009.


APPENDIX B: RECOMMENDED BOOKS22

Links for purchasing these books are available atthe Impact Technical Publications Web site:

http://www.ImpactOnTheNet.com/bc-books.html

The Web site also recommends several books aboutinformation technology business cases.

The Business Case Guide (Second Edition)

Marty J. Schmidt

This impressively comprehensive book has tentimes more information than the Business CasePrimer you are reading. The book starts with anoverview of basic concepts and then examines indetail both the contents of a business case and theprocess of developing a business case.

As Schmidt explains in Chapter 1, The BusinessCase Guide is designed to help you understand thestructure and the content that make a business casecompelling and useful. It is also designed to leadyou through the steps in developing a solid busi-ness case: defining the case, designing the case,developing cost and benefit data, analyzing theresults, and packaging, presenting, and using thecase.

Although at times the book bogs down in detail(the discussion of the date to put on the businesscase occupies the better part of a page!), it presentsmost of the material clearly and thoroughly. Thetwo helpful appendixes contain a sample businesscase and an overview of financial metrics for thoseof us who need a refresher course in finance andaccounting.

BCA: Business Case Analysis

James W. Brannock

Amazon.com describes this book as a how toguide for business and economic decisions thatshows a comprehensive, yet surprisingly easy tolearn set of examples, concepts and techniques forconducting such studies. It offers a simple guide tobasic analysis of business situations.

The 66-page chapter on The 8-Day BCA justi-fies the cost of the book. The chapter walks readersthrough the process of analyzing and developing asimple business case for replacing the personalcomputers in an office. The chapter includes expla-nations of all calculations in the example businesscase including net present value, total ownershipcosts, and cash flow.

Other chapters of interest: Economic Analysis, which discusses the con-

cept of present value, breakeven analysis, sav-ings-to-investment ratio, benefit-to-cost ratio,and payback among multiple projects

Business Case Analysis Purpose and Events Business Case Analysis Example of Final Pre-

sentation (25 slides)

Much of the rest of the book discusses - to quotethe back cover - economic and management sci-ence techniques. These techniques may be of lim-ited interest to readers who want to masterfundamentals quickly so that they can prepare aneffective business case.


23

INDEX

AAlternatives

evaluating 11investigating 8selecting 14

Analysisfinancial 11market 10sensitivity 10

Analysis period 11Approval 18Assess needs 5Assumptions 9Audience 5

BBenefits 8Books 22Business case

alternatives 8, 11approval 18assumptions 9audience 5benefits 8books 22constraints 10contents 3, 16costs 9defined 3executive summary 17financial analysis 11goals 5implementation plan 15market analysis 10opportunity 6organizational considerations 10planning 7presenting 18process 4project description 15recommendations 17responsibilities 7reviewing and revising 18sample 19schedule 7sensitivity analysis 10stakeholders 7

team 7topics 3writing 16

Business opportunity 6Business plan 3

CCash flow statement 11Checklist 16Conclusions. See Recommendations.Constraints 10Contents 3, 16Costs 9

DDefine the business opportunity 6Define the project 15

EEvaluate alternatives 11Executive summary 17

FFinancial analysis 11

GGoals 5

IImplementation plan 15Internal rate of return 14Investigate alternatives 8Investment return 12IRR. See Internal rate of return.

MMarket analysis 10

NNeeds assessment 5Net present value 13NPV. See Net present value.

OOpportunity 6Organizational considerations 10

PPayback period 14Phases in process 4Plan the work effort 7Prepare the report 16Present value 13Presentation for approval 18Process description 4Project

description 15implementation plan 15

RRate of return 14Recommendations 17Report 16Responsibilities 7Return on investment 12Review, revise & present the business

case 18Risks 10ROI. See Return on investment.

SSample business case 19Savings 8Schedule 7Sensitivity analysis 10Slide presentation 16Stakeholders 7, 18Strategic advantage 9Summary. See Executive summary.

TTeam 7Topics 3

WWork effort 7

ABOUT THE AUTHOR

Al Kemps 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 organizationand product and any real organization or productwith the same name is purely coincidental.

7090 Routt Street, Arvada, Colorado 80004 USA303.431.8259 www.ImpactOnTheNet.com

ContentsIntroductionTypical ContentsProcess

Phase 1: Assess NeedsGoalsAudience

Phase 2: Define the Business OpportunityDefinitionScopeObjectivesRealizationReview

Phase 3: Plan the Work EffortTeam SelectionStakeholder IdentificationScheduleResponsibilities and Tasks

Phase 4: Investigate AlternativesAlternativesBenefitsCostsAssumptionsConstraintsMarket AnalysisOrganizational ConsiderationsSensitivity Analysis

Phase 5: Evaluate AlternativesFinancial AnalysisSelection

Phase 6: Define the ProjectProject DescriptionImplementation Plan

Phase 7: Prepare the ReportResponsibilityLengthContentFormatIllustrationsRecommendationsExecutive Summary

Phase 8: Review, Revise & Present the Business CaseReviewRevisionPresentation

Appendix A: Sample Business CaseExecutive SummaryBusiness OpportunityAlternativesBenefitsCostsFinancial AnalysisAssumptionsSensitivity AnalysisProject DescriptionImplementation PlanRecommendations

Appendix B: Recommended BooksThe Business Case Guide (Second Edition)BCA: Business Case Analysis

IndexAbout the Author

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