What is a business case?

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The Business Case

Volker Hoyer

=mcminstitute Universität St. Gallen

Blumenbergplatz 9, 9000 St. Gallen

[email protected]

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Volker Hoyer

Agenda

• Definition

• Historical Development

• Advantages and Challenges

• Structure of a Business Case

– I. Initialization

– II. Design

– III. Results

– IV. Sensitivity & Risk

– V. Conclusion

• Summary

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Volker Hoyer

Definition

No common use of the term in existing literature

Analysis of multiple definitions identifies the following elements:

A business case is a tool, concept, presentation or proposal

The purpose or subject of a business case can vary broadly; it can be a decision

between make-or-buy, a choice for a new product, an investment in a new

information system, etc. The main purpose is the support of an investment decision

In a financial analysis, all cost and benefit factors of the project and its alternatives

are elaborated, quantified and documented

Besides the financial analysis, non-financial aspects need to be included in the

project evaluation

A business case is a tool that supports investment and planning decisions by projecting all relevant costs and benefits in a financial analysis and considering other non-financial business consequences.

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Volker Hoyer

Definition Business Case vs. Business Plan

Business Case

Describes a concrete project

and the outcome of a single

action

Its goal is to support planning

and decision-making

Mostly created for internal

use

Business Plan

Written proposal to develop

and manage a business,

addressing strategic and

operational issues

Its goal is to give a holistic

view of the economic

perspective of a business

unit or an organization as a

whole

Used externally for attracting

investors and informing other

stakeholders

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Definition Business Case vs. Case Study

Business Case

Supports the planning and

decision making in an actual

business situation by offering

adequate data

Case Study

Used in the educational field

to exemplary describe a

business situation and

decision

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Definition Business Case vs. Cost of Ownership vs. Cost-Benefit Analysis

Cost of ownership (also called total cost of ownership) and cost-benefit

analysis are special kinds of business case analyses

Cost of Ownership

Total cost of acquiring, installing, using, maintaining and getting rid of

something across a period of time

The “cost” side of a cost-benefit analysis

Cost-Benefit Analysis

Used for decision support, proposal evaluation, planning

Quantifies every benefit and cost, including a time dimension

Considers intangible or non-financial costs and benefits

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Volker Hoyer

Agenda

• Definition





– II. Design

– III. Results


– V. Conclusion

• Summary

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Volker Hoyer

Historical Development

Came up at the beginning of the twentieth century

Finance became its own discipline

First created for investment decisions in assets, the business case is

now applied to all kinds of subjects

Requirements on a business case increase, not only requiring cost-

benefit calculations but also emphasizing an accountability to deliver

results which can be used with confidence

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Volker Hoyer

Agenda

• Definition





– II. Design

– III. Results


– V. Conclusion

• Summary

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Volker Hoyer

Advantages of a Business Case

Decision does not rely on manager’s intuition

Companies using business cases are more successful in delivering

value from their IT investment

Reduces the uncertainty of decision-making by using a funded

financial analysis

Creates overview and transparency by including all relevant facts for

the project evaluation

Creates liability by delivering a written document to the management

Can be used as a long-term controlling instrument by evaluating the

long-term success of the project

Enables an objective comparison of alternative projects by providing

a standardized process

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Volker Hoyer

Challenges of a Business Case

Situation

Frequently met with skepticism from management and fail to gain

approval for the proposed project

Fail to deliver the calculated figures after implementing the proposal

Causes of not delivering the calculated figures

Projects, especially IT actions, contain hidden costs which are often

not considered in the business case calculations

Example: The initial loss of productivity while employees learn how

to use the newly introduced IT system

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Volker Hoyer

Challenges of a Business Case

Causes of not delivering the calculated figures

The quantification of benefits as one of the biggest challenges

Benefits which cannot be weighted in monetary terms are not

included in the financial analysis, however, could have a strong

impact

Every case involves uncertainty as it is an estimation of future

financial results

These identified challenges can be strongly reduced by following a clear structural guideline during the creation of a business case. This structure is developed in the following section.

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Volker Hoyer

Agenda

• Definition





– II. Design

– III. Results


– V. Conclusion

• Summary

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Volker Hoyer

Background

Purpose

Scenario

Scope

Cost Model

Benefit Model

Financial Metrics

Non-Financial Impact

Data Sources

Assumptions

Financial Model

Cash Flow Statement

Non-Financial Results

Sensitivity Analysis

Risk Analysis

Conclusion

Recommendation

I. Initialization II. Design III. Results IV. Sensitivity

& Risk V. Conclusion

Business Case Structure 5-Phase Structure

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Volker Hoyer

Agenda

• Definition





– II. Design

– III. Results


– V. Conclusion

• Summary

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Volker Hoyer

I. Initialization Background

General Information

Contextual background information is provided and a summary of the

current situation is given

All further information which might be important for the business

case can also be mentioned, e.g. authorship, recipient, perspective,

opportunities, threats, historical factors, etc.

Authorship

Prepared either by internal resources or external consultants

Mostly executed by a project team rather than a single person

Specialists with different backgrounds and from multiple departments

bring in cross-functional input and a broad range of know-how

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Volker Hoyer

Recipient

Mostly the management of the organization or of individual

departments, which has the responsibility to make decisions

Perspective

It must be clarified from which perspective the case is created

The most common one is the customer or end user perspective,

which evaluates the potential of purchasing a new product or

implementing a specific project

The solution provider perspective deals with the questions of

whether it is worthwhile for a company to develop a new product and

if a specific product should be made or bought

I. Initialization Background

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Volker Hoyer

I. Initialization Purpose & Scenario

Purpose

The purpose statement is precisely specified, defining why a

business case is built

An initial clear definition is necessary as it needs to be understood by

involved parties

Scenario

Different possible future scenarios or solutions are developed in

order to analyze and compare them

The “business as usual” scenario or baseline scenario can also be

an alternative for the future if continuing under present conditions

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Volker Hoyer

I. Initialization Scope

Time Horizon

Determines the length of the analysis period

Organizational Scope

States whether the project is only introduced to a specific business

unit or to the whole company

Geographical Scope

Becomes necessary for a company operating in different countries

and/or at multiple locations and the decision needs to be made

where the project is introduced

Personnel Scope

Defines whether certain personnel are included, e.g. only full-time

staff but not part time workers, or labor but not management

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Volker Hoyer

Agenda

• Definition





– II. Design

– III. Results


– V. Conclusion

• Summary

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Volker Hoyer

Used for communication & helps to identify hidden items

Cost Model Example:

II. Design Cost and Benefit Model

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Volker Hoyer

Benefit Model Example:

II. Design Cost and Benefit Model

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Volker Hoyer

Financial Metrics

Identified benefits and costs are translated into corresponding

financial metrics and measures, which are used for later calculations

Example: The number of complaints to the IT department is used as

a financial metric for increased user satisfaction thanks to a new

customer support software


These cost and benefit items cannot be expressed in financial values

and are not included in the financial analysis

As they also contribute to the outcome of a proposed investment,

they need to be considered as well

II. Design Financial Metrics & Non-Financial Impact

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Volker Hoyer


A tangible comparison can be made to make non-financial results

traceable:

Through expressing the item in percentages

Example: the non-financial benefit of increased employee morale leads

to a decreased staff turnover, which is measured in percentages and

compared to the turnover in other scenarios

Through standardized indices which are developed based on survey

results

If quantification fails, the costs and benefits can simply be recorded

and described in words

II. Design Financial Metrics & Non-Financial Impact

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Volker Hoyer

From what data sources the cost and benefit values are taken?

The sources have to be documented in order to judge the data

quality and to increase credibility

Possible Sources

Previous business cases, business plans, budgets or published

benchmarks

Literature analysis

Interviews

Questionnaire, observations, focus group discussions

II. Design Data Sources

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Volker Hoyer

Agenda

• Definition





– II. Design

– III. Results


– V. Conclusion

• Summary

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Volker Hoyer

A business case underlies several assumptions which are clarified

for each scenario

This ensures validity and enables predictions about future results

Very important element of a business case!

Example: Introduction of an IT platform into an organization

Global assumptions: Number of employees using the platform, average

salary of employees

Cost-specific assumptions: Hosting costs, administration costs

Benefit-specific assumptions: Number of working processes which can

be processed faster

III. Results Assumptions

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Volker Hoyer

Financial values are assigned to the cost and benefit items

Example:

III. Results Financial Model

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Volker Hoyer

The heart of the business case

Developed for each scenario, displaying the projected benefits (cash

inflow) and costs (cash outflow) over a certain time period

Example:

III. Results Cash Flow Statement

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Volker Hoyer

In addition, overall financial metrics are defined and calculated to

summarize the business case results

Return on Investment

Popular metric due to its simplicity

Measures the efficiency of the investment

A simple ROI is calculated by dividing the investments gains (total

benefits - total costs) by the total costs

Limitation: ROI does not consider the time value of money


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Volker Hoyer

Net Present Value

One of the most robust and frequently used metrics

The value of investment is adjusted to reflect the time value of

money

The net cash flows of all years are discounted using a discount or

interest rate i. The discounted cash flow amounts to the NPV.

It is critical to determine the discount rate as organizations use

different standards. It often lies between 8% and 15%.

A NPV higher than zero indicates that the investment adds value to

the organization and should be undertaken.


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Volker Hoyer

Internal Rate of Return

Flip side of the NPV

The discount rate at which an investment causes a NPV of zero and

below which an investment causes a positive NPV

It can easily be calculated by using a formula in Excel

Examples:


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Volker Hoyer

Non-financial results are generated, which are either expressed in

percentages or standardized indices

Example of non-financial benefits through the introduction of an IT

platform:

III. Results Non-Financial Results

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Measures how variations in assumptions or input data will affect the

overall results of the scenarios

Initial values of assumptions, which are regarded as uncertain, are

individually increased and lowered in 10% increments

Example:

IV. Sensitivity & Risk Sensitivity Analysis

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Volker Hoyer

Predicted results are always uncertain to some degree and the

question is raised as to how likely other financial results are

An assessment of the likelihood, impact and controllability of the

critical factors is made

Example:

IV. Sensitivity & Risk Risk Analysis

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Volker Hoyer

Conclusion

Summary of the whole business case on one sheet

By linking the results to the subject and purpose of the case, a

conclusion is drawn

Recommendations

Based on the results, specific actions are recommended to the

management

Examples:

Which investment should be made based on the analysis results

How to manage controllable risk factors

V. Conclusion Conclusion & Recommendations

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Volker Hoyer

Summary

Business case as a tool that supports investment and planning

decisions by calculating all relevant costs and benefits

Consideration of non-financial business consequences

In today‘s business situations, it is essential for organizations to have

required skills for developing a business case

Reduction of uncertainty in investments

Quantification of cost and especially benefit items as a big challenge

Following a clear structural guideline of five phases allows coping

with the challenges

Importance of listing all assumptions made

Provision of recommendations to the management

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Bibliography

Bernotat, J., & Stein, J. (2007). 10 Tipps & Tricks zum Business Case. Projekt Management, 2, 43-47.

Brugger, R. (2009). Der IT Business Case. Berlin: Springer-Verlag.

Bucherer, E., Raus, M., & Stroh, F. (2008). Business Cases for new Software Products. Internal use. St. Gallen: SAP

Research.

Cannon, H. A. (2006). Making the Business Case. How to create, write and implement a successful business plan.

London: Chartered Institute of Personnel and Development.

Pasko, H., et al. (1998). Creating and Using a Business Case for Information Technology Projects. Retrieved July 10,

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Perkins, B. (2005). Business Cases: What, Why and How. Computerworld, 39 (24), 43.

Pratt, M. K. (2005). 7 Steps to a Business Case. Computerworld, 39 (41), 35-36.

Schmidt, M. J. (2002). The Business Case Guide. Boston: Solution Matrix Ltd.

Schmidt, M. J. (2003a). Business Case Essentials: A Guide to Structure and Content. Retrieved July 10, 2009, from

http://materias.fi.uba.ar/7558/Lecturas/Business_Case_Essentials.pdf

Schmidt, M. J. (2003b). What's a Business Case? And Other Frequently Asked Questions. Retrieved July 8, 2009, from

http://materias.fi.uba.ar/7558/Lecturas/Whats_a_Business_Case.pdf

Schmidt, M. J. (2008). The IT Business Case: Key to Accuracy and Credibility. Boston: Solution Matrix Ltd.

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Taschner, A. (2008). Business Cases: Ein anwendungsorientierter Leitfaden. Wiesbaden: Gabler Verlag.

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7 (1), 1-15.

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