The Business Case:
A Commercial
Perspective
Building the IT Business Case
Information Resources Management College
National Defense University
8-1-20111
Objectives
Identify significant factors influencing investment
decisions in the public and private sectors.
Evaluate and compare alternative investments in
the light of strategic business objectives.
Select and justify an investment based on a variety
of financial and non-financial criteria.
Analyze a private sector business case
development model for application to the public
sector.
2
Challenges in Federal IT Acquisitions
Political Influences
Size/Complexity
Budget Cycle
Goals and Measures
Other
3
The Basic Questions
How much should we invest in IT?
How should we allocate the IT investment
budget?
How do we know whether we’ve made the
right decision?
4
The Basic Questions
How much should we invest in IT?
How should we allocate the IT investment
budget?
How do we know whether we’ve made the
right decision?
5
Determining the IT investment budget
Last year plus Inflation plus x….
% of O&M….
Zero based budgeting….
Industry Best Practices….
Other….
6
Determining the IT investment budget
Gomolski, B. How IT Spending Varies According to Company Size.
Gartner .9 May 2005. ID G00125306. 7
Determining the IT investment budget
Gomolski, B. How IT Spending Varies According to Company Size.
Gartner .9 May 2005. ID G00125306. 8
The Basic Questions
How much should we invest in IT?
How should we allocate the IT investment
budget?
How do we know whether we’ve made the
right decision?
9
Commercial Model- an example
Keep the doors open
Infrastructure
Software maintenance
Mandated
Y2K
Sarbannes-Oxley
Privacy
New Initiatives
Tactical
Strategic
10
Investment by Type by Sector
Light, M., Rosser, B. & Hayward S.
Realizing the Benefits of Project and
Portfolio Management. Gartner. 4
January, 2005. ID G00125673.
11
The Business Case Model- Purpose
Aid Management select best
value for investment dollars:
Justification
Analysis
Includes
Costs
Benefits
Risks
14
Assessment
Quantitative
Costs
Benefits
Risks
Qualitative
Costs
Benefits
Risks
Includes:
Facts
Assumptions
Constraints
15
Facts
Did we include all relevant facts bearing on
the investment?
Are they facts or are they beliefs?
Are they provable?
Are they demonstratable?
16
Assumptions
Assumption: A factor that is
considered to be true, real or
certain, without proof.. affects the
project…contains risk.
Assumptions as to benefits
External
Internal
Assumptions as to cost.
Assumptions as to schedule.
May require some testing.
Cost
Benefit
?
17
Constraints
Constraint: A factor that limits the
organization’s options.
Examples:
Cost
Schedule
Skills available
Facilities available
Legal & regulatory
Includes Exclusions
Cost
Benefit
18
Portfolio Selection
Cost
Benefit
Total investment budget
A
B
C
Problem: Allocation of investment dollars to maximize total benefit
Typical solution: Investment Review Panels and Multi-Function Analysis
Portfolio Selection
Cost
Benefit
Total investment budget
B
Problem: Different investments have different risk profiles
B’
Typical Solutions:
Use of risk adjusted discount rates.
Modeling and Simulation21
Portfolio Selection
Budget year
Net Benefit
Problem: Cost/Benefit profile over time must be considered
1 2 3
DE
F
Typical solution: Payback Period and NPV 22
Portfolio Selection
Select in order COSTTOTAL BENEFITTOTAL
A 400 10 400 10
B 500 13 900 23
C 100 4 1000 27
D 300 6 1300 33
E 200 5 1500 38
Select by lowest cost COSTTOTAL BENEFITTOTAL
C 100 4 100 4
E 200 5 300 9
D 300 6 600 15
A 400 10 1000 25
B 500 13 1500 38
PROJECT COST BENEFIT
A 400 10
B 500 13
C 100 4
D 300 6
E 200 5
Budget = 1200
Cost: 1000
Benefit: 27
Cost: 1200
Benefit: 29
Cost: 1000
Benefit: 25
Select by highest benefit COSTTOTAL BENEFITTOTAL
B 500 13 500 13
A 400 10 900 23
D 300 6 1200 29
E 200 5 1400 34
C 100 4 1500 38
24
Portfolio Selection
PROJECT COST BENEFIT RATIO
A 400 10 0.025
B 500 13 0.026
C 100 4 0.040
D 300 6 0.020
E 200 5 0.025
Select by Benefit to Cost ratio COSTTOTAL BENEFITTOTAL
C 100 4 100 4
B 500 13 600 17
E 200 5 800 22
A 400 10 1200 32
D 300 6 1500 38
Cost: 1200
Benefit: 32
25
Graphical Comparison Based on Two
Criteria
GO
CAUTION
TERMINATE
BE
NE
FIT
Risk
Hig
hM
ediu
mLow
High Medium Low
PMBOK®
26
Multifunction Selection
27
A B C
Obj 1 2 2 3
Obj 2 3 2 2
Obj 3 1 3 2
Obj 4 1 3 2
Obj 5 3 2 2
Total 10 12 11
Weight A B C
Obj 1 5 10 10 15
Obj 2 10 30 20 20
Obj 3 5 5 15 10
Obj 4 1 1 3 2
Obj 5 5 15 10 10
Total 61 58 57
Weight A B C
Obj 1 10 20 20 30
Obj 2 5 15 10 10
Obj 3 3 3 9 6
Obj 4 5 5 15 10
Obj 5 5 15 10 10
Total 58 64 66
Weight
Obj 1 5
Obj 2 10
Obj 3 5
Obj 4 1
Obj 5 5
Total
Weight
Obj 1 10
Obj 2 5
Obj 3 3
Obj 4 5
Obj 5 5
Total
Rating from 1 (min) to 3 (max) Score = Weight times rating
Multifunction Selection
A B C D
Obj 1 10 7 1 2
Obj 2 8 3 1 2
Obj 3 7 4 2 3
Obj 4 0 3 2 2
Obj 5 4 6 0 6
Total 29 23 6 15
Cost 1000 1000 300 700
Budget: 2000
28
Multifunction Selection
A B C D Total
Obj 1 10 7 17
Obj 2 8 3 11
Obj 3 7 4 11
Obj 4 0 3 3
Obj 5 4 6 10
Total 29 23 52
Cost 1000 1000 2000
A B C D Total
Obj 1 10 1 2 13
Obj 2 8 1 2 11
Obj 3 7 2 3 12
Obj 4 0 2 2 4
Obj 5 4 0 6 10
Total 29 6 15 50
Cost 1000 300 700 2000
A B C D Total
Obj 1 7 1 2 10
Obj 2 3 1 2 6
Obj 3 4 2 3 9
Obj 4 3 2 2 7
Obj 5 6 0 6 12
Total 23 6 15 44
Cost 1000 300 700 2000 29
Multifunction Selection
Selection Criteria
10 is maximum
value for any
objective
A B C D Total
Obj 1 10 7 17 10
Obj 2 8 3 11 10
Obj 3 7 4 11 10
Obj 4 0 3 3 3
Obj 5 4 6 10 6
Total 29 23 52 39
Cost 1000 1000 2000
A B C D Total
Obj 1 10 1 2 13 10
Obj 2 8 1 2 11 10
Obj 3 7 2 3 12 10
Obj 4 0 2 2 4 4
Obj 5 4 0 6 10 10
Total 29 6 15 50 44
Cost 1000 300 700 2000
A B C D Total
Obj 1 7 1 2 10 10
Obj 2 3 1 2 6 6
Obj 3 4 2 3 9 9
Obj 4 3 2 2 7 7
Obj 5 6 0 6 12 10
Total 23 6 15 44 42
Cost 1000 300 700 200030
Multifunction Selection
Selection Criteria
10 is maximum
value
Total must score
at least 5 for
each objective
A B C D Total
Obj 1 10 7 17 10
Obj 2 8 3 11 10
Obj 3 7 4 11 10
Obj 4 0 3 3 3
Obj 5 4 6 10 6
Total 29 23 52 39
Cost 1000 1000 2000
A B C D Total
Obj 1 10 1 2 13 10
Obj 2 8 1 2 11 10
Obj 3 7 2 3 12 10
Obj 4 0 2 2 4 4
Obj 5 4 0 6 10 10
Total 29 6 15 50 44
Cost 1000 300 700 2000
A B C D Total
Obj 1 7 1 2 10 10
Obj 2 3 1 2 6 6
Obj 3 4 2 3 9 9
Obj 4 3 2 2 7 7
Obj 5 6 0 6 12 10
Total 23 6 15 44 42
Cost 1000 300 700 200031
The Basic Questions
How much should we invest in IT?
How should we allocate the IT investment
budget?
How do we know whether we’ve made the
right decision?
32
Did we get what we paid for…?
Year after
Project
Completion
Net Benefit
Planned
Actual
The key:
Know the baseline
Know how to measure performance 33
Practical Exercise- IRMC Electronics
Maker of Information Technology Products. The
following data represents the results of its Data
Server Division.
Note: all $ in 000,000.
2005 2006 2007 2008 2009
Revenue 190$ 220$ 260$ 260$ 270$
Profit 19$ 20$ 24$ 23$ 22$
$0
$100
$200
$300
2005 2006 2007 2008 2009
(000,0
00)
Operating Results
Revenue
Profit
35
Practical Exercise- Competition
The Data Server Division has two major
competitors, SMNS and LECANT.
Note: all $ in 000,000.
2005 2006 2007 2008 2009
IRMC-E 190$ 220$ 260$ 260$ 270$
SMNS 30$ 40$ 60$ 80$ 100$
LECANT 20$ 50$ 65$ 55$ 100$
Total 240$ 310$ 385$ 395$ 470$
$-
$100
$200
$300
$400
$500
2005 2006 2007 2008 2009
Sa
les
Market Share
LECANT
SMNS
IRMC-E
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009
Market Share
LECANT
SMNS
IRMC-E
36
Practical Exercise- Product Segment
The market for data servers is divided into three
segments: high-end, mid-range and low-end.
Note: all $ in 000,000.
2005 2006 2007 2008 2009
High End 25% 23% 25% 26% 33%
Mid Range 29% 35% 35% 34% 31%
Low End 46% 41% 40% 39% 36%
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009
Product Distribution- Total Market
Low End
Mid Range
Revenue Profit Return
High End 27$ 4$ 15%
Mid Range 90$ 11$ 12%
Low End 153$ 7$ 5%
Total 270$ 22$ 8%
2005 2006 2007 2008 2009
High End 30% 25% 20% 15% 10%
Mid Range 33% 33% 33% 33% 33%
Low End 37% 42% 47% 52% 57%
Product Distribution- IRMC-E
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009
Low End
Mid Range
High End
37
Practical Exercise- Corporate
Objectives
IRMC-E Strategic Objectives for the next
three years:
Meet or exceed the company’s internal rate of
return of 15%.
Maintain leadership in market segment
Establish a significant presence in emerging
international markets
Reduce key technical and managerial turnover
Regain reputation for technical excellence
38
Practical Exercise- the Investment
Choices
Engineering has developed a business case proposing an investment of $1,000k to develop a high-end server to be delivered in 12 months.
Manufacturing has developed a business case proposing an investment to reduce manufacturing costs. This investment would cost $500K.
Projected financial comparisons are to be developed using the standard IRMC-E cost analysis form and the data provided by Manufacturing and Engineering/Marketing.
You are the IRMC-Electronics Data Server Division Investment Review Committee (IDSDIRC). You are to recommend which of these two investments to approve.
39
Financial Comparison
40
IRMC-Electronics Cost Analysis Form
IRR: 15%
Year: 0 1 2 3 4
Option 1: Manufacturing Improvement
Investment $ 500.0
Savings $ - $ 50.0 $ 150.0 $ 150.0 $ 150.0
Net: $ (500.0) $ 50.0 $ 150.0 $ 150.0 $ 150.0
NPV =
Option 2: New product
Investment $ 1,000
Net Profit Increase: $ 50 $ 250 $ 500 $ 1,000
Net: $ (1,000) $ 50 $ 250 $ 500 $ 1,000
NPV=
Evaluation
New
Server
Improved Mfr Other
Financial analysis
Mkt Ldrshp
Emerging Mkts
HR Turnover
Tech Reputation
Score
Risk Rating
Recommended (Y/N)
Facts
Assumptions: 41
Thoughts for Consideration
What triggers the need for a new investment?
Does this affect the case study?
Is selling an IT investment any different than
selling other types of investments?
Are the risks the same for a Government
investment and a commercial investment?
43
Challenges
Do we really achieve our ROI’s?
Do we really achieve our non-financial
objectives?
Linking IT investment to Corporate objectives is
still as much an art as a science.
Focus on quarterly results can skew judgments.
44