Business Case Development (K Level 4/5) Flashcards
Why are business cases important?
A business case is created only after investigation into potential solutions has taken place, but before any commitment is made to a solution.
The purpose of a business case is to present multiple courses of action to a decision maker and make recommendations.
Who is the business case for?
- Decision-makers
- Helps them make informed choices about resource allocation and strategic priorities
What option should always be considered in biz case & why?
- Do nothing
- Sometimes it is the viable option
- Offers a comparison of what might happen with no change (could be catastrophic) against which other options can be compared
Business case best practice
Sell benefits before discussion costs
Ensure size of the problem/opportunity is fully explored before presenting time/effort/money needed
Business cases created after____ & before___
Biz cases created after a preliminary investigation (of problem/opportunity)
Before major resources are committed
Elements of a business case
- Introduction
- Management Summary
- Description of current situation
- Options
- C/B analysis
- Risk assessment
- Impact assessment
- Recommendation
- Appendix
Introduction - Business case
- Sets the scene
- Describes method used
- Those who contributed
Management summary - Business case
→ very important - could be only part senior stakeholders read
→ distil whole biz case into 3 paragraphs: 1. What study was about/what was found out about the issues under consideration 2. Options considered (principal advantage/disadvantages) 3. Clear recommendation statement and decision required
Description of current situation: - Business case
→ current situation explain and problems/ opportunities identified
→ normally short (senior stakeholders will know this) unless uncovered problems/opportunities are different from what originally thought
Options - Business case
options presented and reasons for rejection
Cost/Benefit - Business case
Analysis of costs/benefits: inc investment appraisal
→ benefits before costs (more convincing)
→ Challenge: some organisations do not value intangible benefits. If allowed, best practice is to clarify why they’re benefit so but leave decision makers to put their own valuations
→ Another challenge: c/b analysis is based on assumption. Better to under claim than over claim.
Impact vs Risk
impact (will) risk (might)
Impact Assessment - Business case
→ impact on organisation for each option
Potential impacts:
→ organisation structure: reorganise departments
→ interdepartmental relationships: new SLAs?
→ appraisal/promotion criteria: targets/objectives may change to encourage different behaviours e.g. customer focus
Risk Assessment - Business case
→ if lots of risk, put show stoppers in body and rest in appendix
For each risk:
- Description
E.g. uncertainty over future leads to key staff resigning, leaving knowledge gaps - Impact: assess the extent of harm if risk occurs (quantified preferred, if not use low/med/high)
3.Probability: precise measures or low/med/high
4.Countermeasures: reduce likelihood of occurring or lessen the impact if it does e.g. insurance (transferring impact)
- Ownership
Recommendation - Business case
Biz case summarised and required decision set out. Outline of main tasks/timescale useful (Gannt chart)
Appendix - Business case
any detailed supporting info (details C/B calculations)
Types of cost
Tangible and intangible cost
Types of tangible cost
One off (Hardware / redundancy)
Ongoing (Hardware maintenance / salaries of new staff)
Tangible cost examples
Project staff cost
Equipment - HW/SW
Staff training
Relocation
What is a tangible cost
A cost incurred by a business change project which has a monetary value attached
What is an intangible cost
A cost incurred by a business change project where a monetary value is unavailable
Intangible cost examples
Recruitment
Disruption/loss of productivity (short term impact hard to quantify, if parallel running then tangible)
What is a tangible benefit
A benefit to be realised by a business change project for which a monetary value can be predicted.
Tangible benefits - examples
Staff saving (salary)
Faster customer response
Improved speed of working
Reduced inventory (JIT systems)
What is an intangible benefit?
A benefit to be realised by a business change project for which a monetary value cannot be predicted.
Intangible benefit - examples
Increase job / customer satisfaction
More creative problem solving (managers focs on strategic issues)
Better market image
All options presented in the biz case should be ____
Feasible
Gap analysis to business case process
- Identify possible options (to address gaps)
- Shortlist (based on feasibility)
- Evaluate short list
- Produce business case
Perspectives to evaluate feasibility
- Business
- Technical
- Financial
What techniques can be used to shortlist options
Feasibility (B/T/F)
VMOST - how well do options align with defined way forward for an organisation
PESTLT/SWOT - review in light of external factors & internal capabilities
Force field - understand the forces that support/oppose adoption
When would ‘do nothing’ not be a viable option?
Enforces/regulatory changes
Outlines what would happen if we did not comply / shows consequences
Choice on ‘how’ we comply
Business Feasibility - consideration factors
Strategic fit
- Does the option align/advance the strategy
Timely
- Implemented in time for regulatory deadline/get ahead of competition
Management structure / organisational culture
Architectural alignment
Technical Feasibility - consideration factors
Availability of technology
- Is it available?
Scalable
- Can it be scaled to meet potential organisational changes
Compatible
- with other systems?
Proven
- Tried and testing but unimaginative or cutting edge but not tried before (risks)
Financial Feasibility - consideration factors
Within budget?
Sufficient funds available?
Acceptable ROI? (Meet organisational targets)
When should risk analysis be reviewed?
Whenever the business case is reviewed
Risk analysis stages
Identify risk
Assess risk
Plan risk response
Ways to identify risks
Interview
Workshops
Consulting experienced BAs/PMs
Review post project reviews
Going through typical risk areas
‘Assessment of risk’ includes
Impact (S/M/L)
Probability (H/M/L)
What to consider when assessing risks?
This can be difficult as people assess severity and likelihood in different ways
Best practice: obtain collective view from as many people as possible
Risk management approaches/risk response
Avoidance
Mitigation
Transference
Acceptance
Risk avoidance
Lessen probability, ideally to zero
Not always possible
E.g. risk off the shelf may not meet specific need, as a result bespoke solution (more expensive)
Risk Mitigation
Reduce scale of impact if risk occurs
E.g. purchase cancellation clause in contract if system proves unsuitable (re-tendering cost incurred but better than implementing unfit solution)
Risk Transference
Shift impact to another party
E.g. insurance
Risk Acceptance
Sometimes the avoidance/mitigation/transfer actions are more costly than allowing the risk to occur or the risk impact low or not much that can realistically be done
Decision makers need to be aware
E.g. in construction project risk of unexpected geological challenges
When would risk acceptance be appropriate
avoidance/mitigation/transfer actions are more costly than allowing the risk to occur
the risk impact low
not much that can realistically be done
What is the next step once a realistic action is identified?
Assign risk owner
Risk owner
Someone tasked with making actioned risk happen
What makes an effective risk owner?
- Understanding of the risk and possible impact
- Authority to ensure required actions are taken
What are some difficulties incurred with risk analysis?
Reluctance to mention risks in fear of deterring investment
Balancing positive presentation with risk identification
Difficulty in identifying unique project risks.
How to assess the impact of risks
- Clear definition of impact levels e.g. large impact extends the project timeline by more than 10%
- Assess how the risk aligns with project objectives
- Quantify where possible (% increase in budget e.g.)
- Review historic data (past projects/industry benchmarks)
How to assess the probability or risks
- Define probability scale E.g. high probability might be associated with more than 30%
- Expert opinions - SME’s / expertise in organisation
- Use any data available (e.g. historical project data / industry statistics)
Why should risk assessment not be a one time activity
Circumstances change / new information available
E.g. Risk: We cannot higher a skilled architect/developer
Change in market condition / recruitment relationship ends
Why consider impacts?
Which ever option is chosen, there will be changes in the organisation
Impacts need to be presented to decision makers so they have complete information
How to identify potential impacts?
- Engage with stakeholders
- Historic data review (examine & learn from past projects)
What impacts should be considered?
Organisational Structure:
- Re organise departments or functions
Interdepartmental relations:
- Changes in relationships between departments.
- Formalizing relationships through service level agreements.
Management style:
-Adoption of a different management style e.g. removal of middle management & empowerment of frontline staff
Recruitment Policy and Methods:
- E.g. if specific skills skills needed - practical test over interview
Supplier relations:
- ways of working with supplier may need to be re-defined e.g. collaborative relationship
When should the business case be reviewed?
Business case is a living breathing document - revised whenever necessary e.g. more detailed understanding of costs/benefits
Specific points on the project lifecycle require formal review
Lifecycle of a business case
The business case is initiated before major resources are committed, confirmed at different milestones, and revisited during and after deployment.
What are decision gates and why are they used?
‘Decision gates’ are review points in the business case lifecycle
Purpose: Projects must pass tests, (alignment to goals & viability) before progressing to the next stage.
Examples of when a biz case would not pass decision gate?
A thorough analysis reveals complex technical challenges not apparent in the feasibility study (significantly delay/increase costs)
Cost Escalation: The estimated costs for development have escalated beyond the initially projected budget. This could be due to unforeseen technical complexities, increased resource requirements, or other factors.
What tool can help with impact analysis
POPIT
Lifecycle for business case (linear projects)
Feasibility study (ball park figures)
BC reviewed before major resources
Requirements analysis and specification
BC confirmed after detailed req - ballpark figures revised
Solution design
BC confirmed once dev costs estimated
Solution development/ implementation
BC revisited before deployment
Operation of new processes/systems
Realisation: benefits realisation against biz case
why is it necessary for business case to be revisited before deployment
E.g. Update with actual development costs
why is it necessary for business case to be revisited after detailed analysis
E.g. revise ballpark figures
why is it necessary for business case to be revisited after define phase
E.g. inclusion of reliable development costs
Business case in agile
- Initial biz case after options agreed
- Revisit & extend biz case at each release (back log evaluated - req may be deferre)
- Completed work provides data to refine costs and time estimates for remaining requirements
One thing agile and linear have in common r.e. biz case
Significant changes in the organization’s environment prompt a business case review to ensure project justification
Investment appraisal techniques
- Payback (break even)
- Discounted cash flow / NPV
- Internal rate of return
Payback - investment appraisal technique
Time taken (in year) to pay back the initial investment - when the cumulative benefits exceed the cumulative costs
Payback - investment appraisal method
- Calculate costs per year
- Calculate benefits per year
- Calculate cash flow per year (benefits less costs)
- Calculate cumulative cash flow
BE is when the cumulative cashflow is +
Payback - investment appraisal method
Advantages/disadvantages
Advantage:
- Straight forward and well understood by all (not just accountants)
- If interests are low it provides a reasonable prediction
Disadvantages:
- Does not factor in the ‘time value of money’
- Doesn’t consider whole project (may turn away projects that have brilliant cash flows in later periods as only focussed on breakeven)
NPV/Discounted cashflow - Investment appraisal technique
Investment appraisal technique that takes into account the time value of money
Net cash flow for each year are discounted (x by discount factor)to adjust for the declining value of money
Net present value
Addition of the discounted cash flows (net cash flow x by discount factor)
NPV = overall absolute value of the project after all yearly net cash flows are adjusted to todays value of money
What does NPV tell us
+: Accept
-: Reject
0: Breakeven
NPV/Discounted cashflow - Investment appraisal technique method
- Calculate costs per year
- Calculate benefits per year
- Calculate cash flow per year (benefits less costs) - net cash flow
(same as payback/breakeven)
- Calculate present value (DCF) for each year by multiplying net cash flow by discount factor
- Calculate NPV of project (adding up all present value)
- Evaluate (+ = accept)
NPV- investment appraisal method
Advantages/disadvantages
Advantage:
- Absolute measure (£ - it is factual)
- Considers time value of money
- Clear accept/reject decision
Disadvantage:
- Complex to explain
Payback - investment appraisal method
Discount factor calculation
-Y
(1+n/100) ^
Internal rate of return - investment appraisal method
IRR = Discount rate at which NPV is 0
What does IRR represent
The % return on a project that can be used to compare projects (& other investment options such as leaving in the bank)
How is the IRR calculated?
Reversing the DCF/NPV calculation
‘At what point would financial costs and benefits precisely balance each other?’
IRR vs ‘cost of money’
IRR compared with ‘cost of money’ e.g. if IRR = 3% but borrowing money = 5% the project is not worth proceeding (unless non financial reasons such as compliance/regulations)
IRR & Project size
IRR does not take into account project size - projects with smaller IRR produce more £
IRR - investment appraisal method
Advantages/disadvantages
Advantages:
- single figure IRR
- useful to compare projects and the cost of money
Disadvantages:
- does not take into account project size (tends to make smaller projects seem more attractive)
Why is complete investment appraisal
Help determine if a project is wroth undertaking and helps chose between projects competing for financial resources
Why is it important for an organisation to use a standard mechanism for investment appraisal
- Fair comparison can be made
When would payback technique be suitable?
- Short term investment (within a year so no need to discount)
- interest / inflation rates are low
- Liquidity concerns - focus is on how fast the initial investment can be recouped
When would DCF be suitable?
- Long term investment (DCF)
When would IRR be suitable?
- Comparing projects (as well as other investment options e.g. leaving money in bank)
Does every project need to be justified on purely financial grounds?
Non-financial justifications can be equally as important e.g. if legal/compliance/strategic alignment
impacts/risks should also be looked at e.g. strong financial case but would require re-structuring of departments, this may not be suitable in the present moment
E.g. investing in EVs may not have a strong financial case (big asset/infrastructure costs) but may align with organisational vision to ‘be the greenest transport provider’
Business case throughout Business change lifecycle
A: draft biz case of the C/B/I/R of all options
D: updated business case - revise ballpark figures
D: further update business case - update with actual development costs
I: Update / ensure organisation is well prepared
R: have business benefits been realised? & gives a basis for selecting future projects
