The Business Case for Business Cases
Introduction
Good business decisions do not happen by accident. They rely on appropriate levels of research and analysis. A business case enables a decision maker to analyze a business situation in a thorough and concise manner, with the objective of making an accurate decision. Accurate decisions limit risk while increasing chances for success.
Business Case vs. Business Plan
A business case is different than a business plan. A business plan is a long-range projection of an entire business, typically used to secure financing or investors. A business plan also enables overall strategic planning for the business. Once a business plan is completed, it is rarely updated or referred to. It quickly becomes dated and is of little use for running a business day to day.
In contrast, a business case is a tool used for making business decisions on a daily basis. Decisions involving special pricing, capital investment, product development, projects, contracts, partners, customer support levels, etc… should all be analyzed via a business case.
To draw an analogy, the business plan is similar to a sports team’s ‘game plan’. The competition and market are analyzed for strengths and weaknesses. The organization then puts in place a strategy it believes will enable success.
In this analogy, the business case is the tactical decision making during the game, such as play calling, player substitution, time-outs, etc… The game plan (business plan) does not address the constant barrage of decisions and changing situations.
This analogy works as we all know the best-laid plans on paper often change drastically due to circumstances, many of which are beyond our control. The business case’s true power is its flexibility as a dynamic, real-time decision making tool which can be continuously applied to any business decision situation. It allows all unforeseen opportunities and threats to be exploited or addressed as they arise.
Business Case Components
i. Pro-Forma
The centerpiece of a business case is the pro-forma, or projection of revenue and expenses. The pro-forma will yield the Margin, Internal Rate of Return, and Payback Period. This is sometimes referred to as a Return On Investment (ROI) analysis.
The Pro-forma will always contain certain sets of assumptions such as costs components and the amount and timing of revenues. A sensitivity analysis should always be performed on the pro-forma. A sensitivity analysis is simply changing one or more of the assumptions to see how the numbers change. This allows the risks to be gauged and key success drivers identified.
For example, if a 10% reduction in forecasted revenues has a drastic negative impact on the bottom line, and then there is a high degree of risk if revenues fall short of assumptions. If the same 10% reduction in forecasted revenues results in only a small percentage change in the margin, then there is a low degree of risk in such a shortfall. Using this method, various assumptions or sets of assumptions can be tested to determine their impact on the business case.
The pro forma should also be adjusted to reflect a ‘worst case’ scenario. This will also help to determine the level of downside financial risk in the decision.
ii. Narrative
While the pro-forma is crucial, it rarely provides the complete picture. There are always other factors to consider such as strategic direction, customer relationships, and market conditions, to name a few. Therefore the business case should always include a write up on such factors. Organizational history, weaknesses or strengths should be considered. Soft benefits or costs should also be outlined.
A business case should be concise, direct, and honest. It should attempt to answer in advance tough questions executive management will most likely ask.
Why use a business case?
A business case is a powerful business decision-making tool for a few different reasons. First it forces the decision makers to follow a predetermined process or format to ensure all factors have been considered. Next it inherently points the user to determine the risk factors and other major success factors. Finally it allows multiple parties to review the case and its assumptions.
The alternative to a businesses case is decision making ‘on the fly’, ‘on instinct’, or ‘back of the envelop’. All of these are shortcuts to doing the work and formally documenting the research, assumptions, and analysis.
Standardizing the decision making process
Everyone makes decisions differently. This leads to an organization of individuals deciding different things using methods. Is there any wonder why the success of many organizations’ business decisions are a mixed bag of good, bad, and indifferent?
Standardizing an organization on a business case template is a vast improvement. Add to that a standardization of certain assumptions and the improvement goes up again. Such assumptions should be continuously monitored against actuals and adjusted accordingly for new cases. Analyzing against actuals allows a continuous feedback loop under which assumptions can be validated and fine tuned according to experience. This in turn will allow more accurate assumptions, increased comfort level, and ultimately better business decisions.
Executive Management can request the business case and know exactly what to expect. This can have a dramatically positive affect on decision-making. Management now has a clear and complete set of details for every major decision. It is in a familiar format, populated with pre-approved assumptions, and contains complete information to make an informed decision. Contrast this to the hodge podge of emails typical of decision making in most organizations and you can begin to realize the power of a standardized business case.
Given all the attention and resources available to business plans, it is surprising the lack of information, training, and expertise available for business cases. Expect that to change as more organizations realize business cases play a crucial role in decision making by limiting risk and increasing chances for success.
