Building better business cases - Nick Wensley

Developing business cases© Farthing Consulting LTD

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Building Better

Business Cases


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Nick Wensley

Business Adviser, Young Enterprise

Chair MCI Kent Network

Director, Farthing Consulting Limited

Chair, APM Benefits Management SIG

IntroductionsIntroductions


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Why are we here?

To explore the need for robust business cases

Why are we here?Why are we here?


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Our objectives for today are:

• Focus on Business Cases

• Deliver a series of checklists to be used as a guide when constructing Business Cases (see slides and Annexes)

• Share lessons learned

ObjectivesObjectives


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• Definition A Business Case is a working document designed to convey the benefits and value of the programme/ project in a business sense. It is the most important set of information for the Programme/Project as it drives the decision-making process and is used continually to align progress to the business objectives that are defined within it.

• PurposeThe purpose of the Business Case is to justify the undertaking of the Programme/Project on the estimated cost of development and implementation against the Risks and anticipated business benefits. It provides a framework for informed decision making in planning and management of the Programme/Project and subsequent benefits realisation. The Programme/Project Board will monitor the ongoing viability of the Programme/Project against the Business Case.

Definitions – a Government DepartmentDefinitions – a Government Department


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Guidance on contentGuidance on content

• APM Body of Knowledge

• Delivering Public Value from Spending Proposals

• Public Sector Business Cases using the Five Case Model: a Toolkit • H.M. Treasury Green Book

I will let you have details about how to get the above at the end


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Building a Business Case - ActivityBuilding a Business Case - Activity

What are the top 10 things you would consider when building a business case


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Check ListCheck List

• Are the business case objectives well defined?• Fit with the organisation’s priorities• Is the scope realistic?• Scope of undertaking (what does it cover – min, desirable & full options?)• Are we dependent on someone for the successful delivery of outputs?• Parameters (start and end points)• Standalone project or part of programme?• Interrelationships (dependencies on others for success) • Is what will success will look like well defined ? (CSFs) • Evidence of rigorous quantitative analysis – Cost/ benefits• Consideration of risk• Sensitivity analysis


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Types of business case Types of business case

Strategic outline case • Why are we doing this?• Build a long list• Examine viability

Outline business case • Cost benefit analysis• Assessment of risk

Full business case • Full sensitivity analysis • Affordability


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The 5 case modelThe 5 case model

Business cases can be looked at in a number of ways. A particularly useful approach is to examine a number of facets;

1 - Strategic Case - The big picture 2 - Economic Case - The options 3 - Financial case - Do the numbers stack up?4 - Commercial case – Who delivers5 - Management case – Governance

The development of business cases can be seen as an iterative process, with an increasing level of detail and firmness being achieved at each stage of the process.


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STRATEGIC CASE

This should indicate the key strategic drivers, and state how the investment proposal supports policy delivery.

The outcome of this part of the case should be a set of SMART objectives which in essence define what the project is about. These will be derived from information about the organisation and its needs, and the strategic context it operates in.

ECONOMIC CASE

This should describe the options being considered and in the full business base go into considerable detail regarding the preferred option.

The outcome of this part of the case should be a clear and defined preferred option,supported by risk and benefits analyses and meeting the project’s objectives. AtOBC stage, the preferred option will inform the OJEC and the PSC; at FBC, it will be the option for which the funding is best value for money.


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FINANCIAL CASE

The outcome of this part of the case should be a clear view of whether the project is affordable or not; if there is a gap, there should be a plan indicating potential sources of funding.

COMMERCIAL CASE

This should indicate at OBC stage the procurement route (i.e. restricted, negotiated or open procedure) and the project’s PFI/PPP-ability; at FBC stage it should in addition state the contractual basis. The outcome of this part of the case, at OBC stage, should be an acceptable OJEC advertisement

MANAGEMENT CASE

The project management method should be stated, and what support there is for the investment within the organisation (e.g. Perm Sec, SRO ) and outside (external stakeholders in particular). This section is expected to pick up the management issues in all the previous areas.


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ActivityActivity

What % of importance would you apply to each of the 5 cases against the three BC types

Strategic Outline Full

Strategic

Economic

Financial

Commercial

Management


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My Suggested ListMy Suggested List

What % of importance would you apply to each of the 5 cases against the three BC types


Strategic 60 10 10

Economic 15 30 20

Financial 5 25 25

Commercial 5 20 25

Management 15 15 20


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A living documentA living document

:

strategic fit – how well does the proposed way of meeting the requirement support the organisation’s objectives and current priorities? Does the scope need to change?

options – has a wide range been explored, including innovation and/or collaboration with others?

achievability – can this project be achieved with the organisation’s current capability and capacity (such as other projects with a high priority that must be delivered at the same time)?

value for money – can this be obtained from proposed sources of supply such as current suppliers? Does the project need to be made attractive to a wider market?

affordability – is the budget available to deliver what is required? If not, can the scope be reduced or delivery extended over a longer period of time; or funding sought from other sources?

The following questions are explored at each stage of case development

The business case review cycle- a living document


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The construction processThe construction process

Size

Complexity

Structure


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My viewMy view

• The effort expended on, and size of, the business case should be proportional to the value, complexity and risk associated with the investment. Novel and/or contentious cases will require greater justification. Does the business case reflect this?

• Is the document in proportion to the value of the investment, i.e. 300 pages for £50K of expenditure is clearly not.

• How complex is the case, is it drafted in a way that facilitates understanding?

• Is the risk analysis pitched at the right level in the light of the investment?


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Stakeholder commitmentStakeholder commitment

High Low

High

Low

Cons

ult an

d ca

rry

Cons

ult

I nfo

rm

I gno

re

Stakeholder importance or influencePo

tent

ial i

mpa

ct o

n st

akeh

olderStakeholder importance or influence

Pote

ntial

im

pac

t on s

take

hold

er

How you identified all stakeholders and analysed their needs /reqs.Are stakeholders on board? Is your comms. plan sound?Can we rely on their support?Will our case have a positive or negative impact on them?

?


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Investment ObjectivesInvestment Objectives

Objectives must be clearly set out and be:

• Specific• Measurable• Action oriented• Relevant• Timely

• Baselining is critical – baseline before undertaking any activity!• If you don’t what will you measure and improve against?


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Critical Success FactorsCritical Success Factors

CSF – precondition for success

Define the critical success factors for the project, programme or business initiative – what will success look like?

Determine how success will be measured (eg: percentage take up of a new service over 6 years, with milestones for each annual improvement in take up)


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Options analysis – option constructionOptions analysis – option construction

Have appropriate scenarios been identified?

The initial options to be considered should include:

• “Do Nothing” • “Do minimum” maintain status quo• “Rolls Royce” make really explicit -beware• Further option(s) as identified• “The preferred option” (not proven at this stage)

All contribute to the long-list


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Long-listLong-list

The Business Case should demonstrate that the options appraisal considered all aspects to arrive at the best balance of cost, benefit, risk and strategic impact.


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Rejection LogicRejection Logic

The long list needs to be filtered to produce a more focused list of viable options. Ensure there is evidence that this has been undertaken?

Suitability – does the option really take on board the circumstances in which the stakeholders are operating? Does it fit with developing trends and changes in the operating environment?

Acceptability – Will the implementation plan meet the expected performance outcomes and expectations?

Feasibility – will it really work in practice? Do we have the resources / capability to make it happen?


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ShortlistShortlist

Has to include “do nothing”

Has to include “do minimum”

At least one other, preferably two viable options

Basically any option that is do-able outside the reject logic

“No magic number”


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BenefitsBenefits

Direct financial benefits: Cash releasing - those that are realised by the programme/project and can be measured in monetary terms.

Direct non-financial benefits: Non cash releasing - those that are realised by the programme/project but are difficult or impossible to measure in monetary terms (productivity or efficiency)

Indirect benefits: those that result either from the direct benefits or from other changes made by the programme/project (qualitative)

‘Soft’ or intangible benefits: usually associated with change programmes (cultural or HR issues). Often very difficult to quantify. May require proxy indicators.


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BenefitsBenefits

ACTIVITY

List some typical benefits and their categories


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Contingent benefitsContingent benefits

These are benefits where the realisation of goals is dependent on variables which are out of the scope of control of the delivery team.

These benefits are very common in a policy environment where macro level changes across society and the economy can impact the envisaged benefits from a project.

Can be addressed by: either expanding the scope, getting explicit sign up from the relevant stakeholders or downgrading/removing the benefit.

“Never promise what you can’t deliver”

Example – variables could include take up of initiatives by the population e.g. Tax Credits, a healthier population etc.


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Benefit timingBenefit timing

How and when have benefits been factored into the business case?

• Benefits rarely start from day one• Benefits scale up over time• Some have a finite lifespan (one-offs)• Over-elaboration of benefits is a common feature in challenging business cases


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If house prices rise is this good, bad, neutral, or all of these things?

If house prices rise is this good, bad, neutral, or all of these things?

Depends or your own point of view. Are you …Depends or your own point of view. Are you …

a Seller realising investmenta Seller realising investment

a Seller wanting to buy againa Seller wanting to buy again

a Buyera Buyer

taking a Macro-economic view - Inflation taking a Macro-economic view - Inflation

Benefits are about perception and can be viewed as either Benefit or Dis-benefit or even both at the same time

Benefits are about perception and can be viewed as either Benefit or Dis-benefit or even both at the same time

Are benefits really benefits?Are benefits really benefits?

The benefits named in the business case MUST be relevant to the investment and achievable through the investment

The benefits named in the business case MUST be relevant to the investment and achievable through the investment


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CostsCosts

Definitions

Fixed costs remain constant over wide ranges of activity for a specified time period (such as an office building);

Variable costs vary according to the volume of activity (external training costs, for example, varying with the number of trainees);

Semi-variable costs include both a fixed and variable component (maintenance is an example, where there is usually a set planned programme, and a responsive regime whose costs vary in proportion to activity, i.e. the number of call-outs); and,

Semi-fixed, or step costs, are fixed for a given level of activity but they eventually increase by a given amount at some critical point (after telephone call volumes reach a certain level, a new call centre may be required).


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A Typical RequirementA Typical Requirement

Cost Breakdown • Capital Costs;• Project, programme or business initiative cost; and• Operational costs of the solution.

Remember to identify both the initial outlay to start/build and the longer term ongoing costs to operate/maintain. Whole life costs approach. Try to identify the funding streams.

Sunk Costs – costs necessary to the investment but already expended. These need to be recognised but not included in any investment evaluation (sunk costs would apply to every option).


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NPV & cost of moneyNPV & cost of money

Discounting -

Is simply the opposite of compounding. If our bank account pays us 3.5% each year in interest, and we make no withdrawals, this builds up year on year – it compounds to use the financial term.

Equally if we do not add the interest, inflation will erode the real value of the money in our account. We can assume that this erosion will be cumulative (discounting) and can calculate how much our money is worth today at a set rate of erosion.

Discounting converts all costs and benefits to ‘present values’, so that they can be compared in today’s value terms. A typical recommended discount rate is 3.5%. Calculating the present value of the differences between the streams of costs and benefits provides the net present value (NPV) of an option.


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Why use present values?Why use present values?

Only way of fair comparison of investment options

Benefit and cost timing over the investment period will vary by option

Therefore future cash-flows must be resolved to a common base..


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RiskRisk

RisksRisks need to be identified, assessed and controlled. Has a register been produced? Is there evidence in the business case of a risk management strategy?

• Identifying possible risks in advance and putting mechanisms in place

to minimise the likelihood of their materialising with adverse effects;• Having processes in place to monitor risks, and access to reliable, up-

to-date information about risks;• The right balance of control in place to mitigate the adverse

consequences of the risks, if they should materialise; and,• Decision-making processes supported by a framework of risk analysis

and evaluation.


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The Risk RainbowThe Risk RainbowThe scope of risk management is wide-ranging

This model wasdeveloped from a variety ofsources including HMT risk categories

ICT risks

Disruption

Insufficient/inadequate

Reputation

Health & Safety

Missed opportunities

Plan

Com

munication

Budget

Join

ed-u

p

Info

rma

tionLeadership

Supp

liers

Eco

nom

y

Delays

Quality reduction

Capacity reduction

Impair new initiatives

Med

ia

Pol

itica

lUser dissatisfactionMonitor

Remember there is a potential cost attached to risk


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Risk categorisationRisk categorisation

The OGC’s 4 categories of risk

Strategic/corporate: commercial, financial, political, environmental, strategic, cultural, acquisition and quality risks.

Programme: procurement/acquisition, funding, organisational, projects, security, safety, quality and business continuity risks.

Project: personal, technical, cost, schedule, resource, operational support, quality and provider failure

Operations: personal, technical, cost, schedule, resource, operational support, quality, provider failure, environmental and infrastructure failure.


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Risk Quantification Risk Quantification

Risks can be given a measure.

One way of doing this this is to consider risks in terms of Likelihood, Severity and Proximity

For example:High = 10 Medium = 5 Low = 1

High L x High S x High P = 1000 Fix this NOW!

Medium L x Medium S x Medium P = 125 Monitor and track


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Evaluating Risk Evaluating Risk

Proximity is important – do not wait until the risk is imminent before planning action

All risks have a potential cost

Investment risks in a business case are not necessarily the same as project risks in a risk register

Risk profiles can dramatically change option ranking


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Risk ManagementRisk Management

• Consult early

• Avoid irreversible decisions

• Carry out pilot studies

• Build in flexibility

• Take precautionary actions

• Transfer risk through contractual arrangements (eg insurance)

• Develop less risky options- e.g. use less cutting edge technology

• Reinstate or develop different options

• Abandon the project if it starts showing signs of being too risky


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Options analysis Options analysis

Analysis and ranking of options is a combination of impacts (positive or negative) of costs, benefits and risks

Quantitative evaluation – all costs and quantifiable benefitsQualitative evaluation – risks and non-quantifiable benefits

Each option gets a rank for quantitative, risk and non-quantifiable benefits – generally of equal weight

Final rank totals identify the preferred option


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Sensitivity AnalysisSensitivity Analysis

Sensitivity

Sensitivity analysis is used to test the vulnerability of options to risks identified in the business case and potential variability of costs and benefits.

Consider HS2 (and HS3) ……..

Level of analysis needs to be appropriate to case being considered

Purpose is to evaluate at what point the preferred option changes

What needs to happen in terms of failure to realise benefits, costs rising or risks occurring before your preferred solution is no longer the best approach?


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Financial analysisFinancial analysis

Affordability – whole life

Detailed attention is given to this once the preferred option has been identified and we require sign off.

Produce estimates of the whole cost of the project, programme or business initiative. Include the costs that will be carried by the customer organisation (if applicable) as well as those that will be charged by providers.

If possible identify any possibility for cost sharing with the customer and/or delivery areas or those who benefiting from the project, programme or initiative.


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Provide a Cost Breakdown Analysis with details of:

The expected costs; (Initial Investment – Ongoing Investment – Decommissioning Cost)

Distinguish between different costs (i.e. Capital Costs, Non-capital costs etc)

When they will occur;Who will pay for each cost; andAny required contingency funding.


Affordability – cash flow


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Affordability – cash flow

As we move along the business case process more detail is required


High level figures

Further breakdown

Full details of cash flow


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Funding AnalysisFunding Analysis

Assessment of affordability and available funding. Links proposed expenditure to available budget and existing commitments.

Minimum content for this section: statement of available funding and broad estimates of projected whole-life cost of project, including departmental costs (where applicable).

Questions you must address:

Can the required budget be obtained to deliver the whole project?

If not, can the scope be reduced or project reconfigured in the light of available resources? (Revisit other options if necessary)

Could funding be sought from other sources? e.g. OGDs, private sector etc.


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Commercial AnalysisCommercial Analysis

Delivery strategy

This is about making it happen. Who will do it, how will they do it. Can they do it – risks.

Need a view on delivery in resources terms and procurement strategy

A) Do yourselfB) Get somebody else ( delivery agents)

Assess the viability of delivery shown in the business caseconsider – timescales , resources, skills

What do we need to do to make in happen in practice.


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Commercial AnalysisCommercial Analysis

Procurement strategy

Is there a need to buy goods and/or services?

• What is your knowledge of existing contracts with potential suppliers / contractors?

• Does the potential value exceed the thresholds set out in the EC Procurement Directives?

• What will be your approach to the market?

• Any particular legal and/ or contracting issues?

• How will you manage your contractor’s performance and quality?


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Management AnalysisManagement Analysis

Governance of the investmentCheck whether key roles and responsibilities have been defined :

• Who will be responsible for making the investment decision (typically the

SRO in consultation with DG/Ministers/ HM Treasury if a project or

programme);• The Senior Responsible Owner (SRO) as the named individual who will

be personally accountable for the success of the programme/ project (if

applicable);• The delivery team (programme/ project manager (if applicable);• The main stakeholders;• Key members of the programme/ project board, where applicable; and,• Other essential roles as required.• Also Identify the required resources (human) required and any specific

skills requirements e.g. Legal, Procurement, PPM etc.


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Communications planInclude key messages to stakeholders• Why are you communicating the message?• Who do you want to communicate with?• What do you want to communicate?• When should you communicate your message?• How should the message be communicated?• Which feedback channels should be used to develop understanding?• Know what you want to achieve from the communications process• Consider all messages from the other party’s frame of reference• Select the right combination of media and message for each audience• Take ownership of the two-way communications process• Ensure you have some active feedback mechanism in place to verify

understanding


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Implementation plan - FBC


Can this project be achieved with the organisation’s current capability and capacity?

If not, how can the required capability be acquired?

Can the risks be managed – e.g. scale, complexity, uncertainty?

Does the scope or timescale need to change?

Is the detail there , supported by evidence?


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Risk managementHave a full range of strategies been considered? 4Ts

Transfer the risk to a 3rd party best placed to manage it, for example, taking out an insurance policy. However, some risks cannot be transferred at all, for example “reputational” risk.

Tolerate the risk? Basically the “do nothing” option, which means the programme will use existing management arrangements to handle any results of the risk happening, typically these are “low-impact” risks

Terminate the risk by adjusting the programme in some way such that the risk no longer applies. For example, de-scoping the programme to remove activities which would lead to a particular risk being identified

Treat the risk by implementing actions that address either the probability or impact of the risk and so contain it to an acceptable level.


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Benefits realisation planning - FBC

Is the Benefits Management Strategy fully integrated into the programme plan?

Are the potential benefits clearly identified?

Is there a clear plan to manage the delivery of those potential benefits?

Does this consider the full time horizon for the project ie during implementation and beyond – as most benefits are realised afterproject closure Are the benefits understood across the business?


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The business case review cycle- a living document

The following questions are explored at each stage of case development:strategic fit – how well does the proposed way of meeting the

requirement support the organisation’s objectives and current priorities? Does the scope need to change?

options – has a wide range been explored, including innovation and/or collaboration with others?

achievability – can this project be achieved with the organisation’s current capability and capacity (such as other projects with a high priority that must be delivered at the same time)?

value for money – can this be obtained from proposed sources of supply such as current suppliers? Does the project need to be made attractive to a wider market?

affordability – is the budget available to deliver what is required? If not, can the scope be reduced or delivery extended over a longer period of time; or funding sought from other sources?


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The business case review cycle

When should you update the business case?


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Check ListCheck List

• Consider update prior to each project board meeting

(Project Board needs to ask the question does the business case still stack up?)

• As assumptions/risks/costs/benefits change

• Prior to Gateway reviews


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Have I missed anything?Have I missed anything?

• Further explanation required

• Discussion


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CloseClose

Your learning outcomes and questions


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Implementation Check List- Annex AImplementation Check List- Annex A


Can this project be achieved with the organisation’s current capability and capacity?

If not, how can the required capability be acquired?

Can the risks be managed – e.g. scale, complexity, uncertainty?

Does the scope or timescale need to change?

Is the detail there?


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Benefits Check List - BBenefits Check List - B

Is the Benefits Management Strategy fully integrated into the programme plan?

Is there evidence of active management of the potential benefits?

Are the potential benefits clearly identified?

Is there a clear plan to manage the delivery of those potential benefits?

Are the benefits understood across the business?


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5 . Benefit Realisation

4 . Monitoring and Optimising

Project Value

3 . Benefit Planning

Reviewing and Reporting

Project

Close

Project

Go Live

Build &

Test

Project

Design

Project

Definition

Project

Viability

Project

Value

1 . Identification

& Mapping

2 . Benefit Profiling6 . Benefit

Review

Value

Proposition

Outline

Business

Case

Full

Business

Case

Project

Closure

Report

Post -

Implementation

Review

Benefits

Map

Benefit

Profiles

Benefit

Realisation

Plan

Benefit

Reports and Reviews

Benefit

Handover

Report OGC

Gate 5

Feeding into Programme level plans and products

Detailed Benefits Management Approach

High Level Benefits Management Stages

Definition and Collection of Benefits

Benefits Measurement and Tracking

Benefits Realisation


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