Business case approach summary

1. Business Cases
Juan Arangote, CMA

2. Misconceptions about Business Cases
• Excel spreadsheets that show financial aspects of
projects (i.e. revenues, costs, investments
ROI, payback, etc.
• Required by Finance for presentation to decision body
• Convoluted documentation and approvals that can be
frustrating
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

3. Why do a business cases analysis?
$
Time
FTE
ROI
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

4. Define and differentiate
Excel spreadsheets highlighting the
Financial models financials of the project (i.e.
revenues, costs and investments
ROI, payback, etc.)
Working description of a business
Business models (i.e. strategy, SWOT, functions such
as
sales, marketing, production, financ
e).
Business cases Persuasive argument for a particular
action / decision
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

5. Align Business Cases
to Strategy
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

6. Sample Strategy Map
Shareholder Wealth
Customer Financial
Defend & grow “Stars” Revitalize “weak links”
Acquisition New product Rationalize product line Strategic Partners
Best Value
Customer Partnership Image
Business
Emerging mkt Customer Strategic Reputable
Process
expansion Support Alliances Partners
Rewards Operational & Performance
People &
Culture
System Technical Skills Measurement
•Consistent •Nurture innovation •Congruent and relevant
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

7. Benefits
• Positive outcomes/impact of business case
• Derived from business objective
• Each must be validated
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

8. Types of Benefits
• Financial vs Non-Financial
• Immediate vs Long-term
• Hard vs Soft Benefits
• Direct vs Indirect (Societal)
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

9. Costs
• Resources or activities needed to achieve benefits
• Derived from action
• “Fleshed-out” through a cost-influence diagram
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

10. Categories of Costs
• Financial vs non-financial
• Cash vs non-cash (i.e. accounting/accrual)
• Direct vs indirect
• Start-up vs ongoing
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

11. Are there soft costs?
• Risks absorbed
• Employee morale
• Societal costs (cascaded costs)
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

12. Cost Derivation Perspectives
Resource-based Identifies resources that cause cost
Activity-based Activities drive use of resources. Suited
for projects where major costs are
personnel.
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

13. Business case drivers
• Drivers are KEY assumptions
• Influence success/failure of business case
• May comprise of several assumptions
• Must be stress-tested
• NOT ALL ASSUMPTIONS ARE DRIVERS
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

14. Metrics
• Measures to indicate success
• Specified at the start of the business case
• Clearly understand
• Elements
• Formula
• When to measure
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

15. Common Financial Measures
• Net present value (NPV)
• Internal rate of return (IRR)
• Payback period
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

16. Special measures
• Important measures of companies
• Industry standards
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

17. Definition of Risks
• All Business Cases face risk
• The chance of an event that impedes realization of
objectives
• What can go wrong!
• Risk profile can be unique for each company
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

18. Risks Perspective
• Internal • External
Financial Customer
Operation Employee
• Controllable • Non-
controllable
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases

19. Sensitivity Analysis vs Simulation
Sensitivity Analysis Simulation
• Change one variable • Change variables at the
• Hold others constant same time
• Determine impact to • Determine impact to
metrics metrics
• Tedious for multiple • Use software (Crystal Ball
variables or @Risk)
• Masks critical • Statistically identifies
assumptions critical assumptions
J. Arangote Financial Models
Copyright © 2009. All Rights Reserved. Consulting Business Cases