Product Business Case

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The UK’s Leading Reerence or Telecoms & IT

ProductManagementJournal Volume 4 £10

ConensHow o Build a Business Case Sep-by-sep guide, plus Top 10 Excel Tips p04

7 Common Misakes How o spo he warning signs p11

Scenario Planning and Sensiiviy AnalysisSeparaing ac rom cion p15

An Idio’s Guide o FinanceKey nancial jargon and erminology explained p18

Insigh: Lies, Damn Lies and Business CasesIs being objecive really rewarded? p22

BusinessCasesHo w to create outstanding business cases.

That deliver results.



0207 099 5567www.producocus.com

TrainingProduct Management and

Product Marketing

Public & Privae Courses

Focused on Telecoms and IT

Learn bes pracice

Ge indusry-leading ools, emplaes and checkliss

Be more eecive



INTRODUCTION

Product Management Journal Volume 4 3

As he recession coninues o rumble on and

compeiive markes make lie ough or

everyone, one o he hings ha sill makes

a big dierence is proessional produc

managemen. Used in is broades sense,his erm includes any role ha is cenred onhe creaion, developmen, managemen andmarkeing o producs and services.

Produc managemen is where he rade-o decisions are made beween wha’scommercially desirable, echnically possibleand operaionally ecien. Business Casesare a he hear o major decisions, which iswhy we’ve dedicaed his Journal oexploring hem in deail.

The Journal proposes a srucured approach o developing businesscases ha will really deliver resuls, as well as indicaing some o hepialls ha can rip up he unwary.

Also, as a number o cusomers have asked us, we have exended ourporolio o on-sie workshops which now includes Launching,Proposiions, Pricing, Produc Sraegy and Business Cases. We believe

hese are ve o he key areas or proessional produc managemen.Finally, our Journal aims o provide useul inormaion on relevan

opics – ips and insighs o help you do your job. I you have suggesionsor improvemen hen please ge in ouch. We hope you nd i useul, wehope you’ll hang on o i and we hope you enjoy reading i.

Who’s who?The Product Management Journal ispublished by ProducFocus as an independenpublicaion or UKproduc managers inTelecoms and IT. ProducFocus is run by IanLunn (op) and AndrewDickenson (below) .

Produc Focus can beconaced by visiingwww.producocus.comor calling 0207 099 5567.

WelcomeLeading the way or product managers in Telecoms & IT



The prime objecive o a business case is o persuade senior

managemen o inves he company’s money, ime and resources in your

invesmen projec raher han in a compeing one. Business casescome in all shapes and sizes, wheher you’re developing a new produc,

jusiying he nex version o an exising IT sysem, or aiming o explainhe raionale or buying up anoher company. Some are mosly words,ohers mosly numbers. However, mos business cases ha produc

managers creae aim opersuade heir company odevelop or enhance a produc.

A business case is aundamenal par o he

produc developmen process. I is normal or business cases o gohrough a series o ieraions o increasing rigour hroughou heproduc innovaion sage. A ‘high-level’ business case is oen urherrened in he lead-up o developmen as assumpions and cossbecome clearer.

When you se ou you may no know wheher your business case will ‘sack up’, however by he ime you nish you should have a deailedundersanding o he business opporuniies and risks or your produc.

Undersand he objecivesMos business cases sar as a business idea validaed wih some

marke research, anecdoal cusomerevidence or your gu eel. The rs sepis o nd an execuive sponsor who caresabou your success and who can provideguidance and suppor hroughou heprojec. Your nex sep is o nd ou

4 Product Management Journal Volume 4

FEATURE

How o Build aOpening Excel is only a small part o the process...

Understandthe process &

objectivesGather the inputs Do the analysis Tell the story

:

Fig.1 Theour sageso building abusiness case

“In my view, high-qualiy business cases are absoluelyvial or he long-erm healh o an organisaion. Theyprioriise invesmen decisions and he producs haare delivered creae he pros ha are needed o keephe business going in he uure.” Andrew SpenceHead o Wholesale Producs, O

2



BUSINESS CASES


wha has o be done by when, he scope and consrains you have owork wihin and he process o ollow. The oupu o his sage shouldbe a plan ha shows how you will develop and deliver he nal businesscase. You may have o do his yoursel

or i you are lucky you may have aprojec manager o suppor you.

To build he plan you need o be ableo answer he ollowing quesions:• Who needs to be involved in theeam o produce he business case eg.Finance?• Is there a prescribed process oremplae o ollow ?• Are there any key dates for whichhe business case mus be ready e.g. agae meeing?• Who are the key decision makersand wha’s imporan o hem?• What deliverables need to be produced and by when?• Are there any generally understood criteria that must be met, such as

ha all projecs need o pay-back wihin wo years?

Undersanding how he people who judge your business case will makeheir decisions is vial. I you don’ know wha heir crieria are i’s likeplaying dars on a board wihou numbers. There are dieren businessbenes o aim a bu you don’ know which ones o arge. I’s unlikelyha you’ll ever ge a perec view o he relaive imporance o eachbusiness bene, bu he more you know, he more you can cra your

Beter Case

Fig.2 Businessbenesdarboard

Critical tokeeping

customer X

Reduces therisk levels inthe business

Supportsstrategic

initiative Y

Return oninvestment

Giveseciency

savingsof £££

_ .




BUILD

business case owards hem. You may be able o nd ou wha’simporan by alking o decision makers direcly, by alking wih yoursakeholders or he business case process owners. Equally, hey mayno wan o reveal anyhing and bias your case, which doesn’ mean youshouldn’ dig anyway! I all else ails, speak o your execuive sponsor oundersand heir percepion on sakeholders drivers.

Gaher he inpusThe second sage is abou gahering he inpus you need o prepare hebusiness case. This is he daa you will use o consruc your nancialmodel and word-based jusicaion. Some o his will be known bu he

res o i may need o be assumed. In a small business you mus do mucho his yoursel; in larger businesses here are los o oher people oalk o. This is your opporuniy o gaher evidence rom wihin andouside he business o suppor he assumpions ha are made. Thisevidence mus convince people ha any assumpions are realisic,credible and objecive.

For business sraegy and markeinpu you will need o alk o:• Anyone with access to marketorecass or research repors.• Anyone with access to competitorino (or research his yoursel).• The strategy team (or whoever ownshe business sraegy).• Product marketing, to learn how yourproduc will be posiioned agains

oher producs and proposiions.• Marketing, to learn about any otherplanned launches or promoions hamigh compee or resources. (Thismay provide you opporuniies o alignand grab some o heir resources.)• Business development, sales andchannel managers.

Tiger’s Nes Monasery, Bhuan

No everyhing should be reduced o £’s and pence. Whilshe numbers always have o add-up hey are rarely he solecrieria agains which business cases are judged.

The success o a counry is oen measured usingeconomic measures such as Gross Naional Produc (GNP)however in Bhuan hey use he concep o Gross NaionalHappiness (GNH). This is an atemp o dene he counriessuccess in more han jus a moneary way using acors suchas qualiy o lie. I serves as a uniying vision or Bhuan’sve-year planning process and guides he developmen ohe counry.

“In my experience

producing a businesscase is like a ‘huninglicence’ in ha i givesyou permission oalk o all areas o hebusiness abou yourprojec and ge heirime, experise andbuy-in.” Andrew SpenceHead o WholesaleProducs, O

2



BUSINESS CASES


For sales and revenue inpu you will need o alk o:• Relevant sales channels to get a view of the sales they believe theycould make.• Finance to get a view on factors such as churn or ARPU (Averagemonthly Revenue Per User).• Other product managers to getheir experience o ake-up raesand also he assumpions heyhave used in heir previousbusiness cases.

For cos inpu you mus alk o:• Development and/or suppliers .• Marketing to understand thecos o markeing aciviies suchas launching and promoions.• Support functions to understandhe cos o providing suppor eg.any recruimen required, anynecessary IT sysem updaes.

I your daa and assumpionscome rom expers across hecompany or independenresearch hey become much morecredible han acs and gures you ‘pull ou o he air’.

In he bes companies you will be provided wih an inpu pack romFinance ha includes a se o daa and assumpions already validaed

by he business and o be used in all business cases. Alernaively heremay be someone assigned rom Finance o work wih you on hebusiness case.

In many business developmen processes here is a domainrepresenaive assigned o all new produc developmens whoseuncion is o provide experise and inpu rom heir area, e.g. someonerom Cusomer Services who undersand heir cos model, rainingneeds, sysem requiremens, uilisaion levels ec... The key objecive o

T o t a l s a l

e s r e v e

n u e

T o t a l c

o s t s

Fixed Costs

LossWedge

10

20 40 60 80 100 120 140 160 180 200

50

80

70

20

60

90

30

100

40

ProftWedge

Sales (k units)

Revenueand costs

(£k)

Break-even pointwhere revenue

equals costs (justover 90k units)

Fig3 This is a goodgraphical way oshow how proableyour produc is whenyou ell your sory.The wider he prowedge he beter.A hin pro wedge

means here is adanger he producwill never break even.Source: InernaionalDicionary oManagemen, BCA,1992



BUILD

his sage is o gaher he daa you willneed o consruc he business case,documen any assumpions and showbuy-in rom relevan eams.

Do he analysisDuring he analysis sage you sudy heinpus you’ve now gahered o build adeailed model o your produc and yourdevelopmen projec. The conens o aypical business case are shown in Fig 4.

You will need o build a spreadsheewhich will allow you o model variousscenarios and undersand sensiiviyanalysis. A ypical business case nancialmodel is broken down ino a secion onassumpions, a secion on income

(revenue), a secion on coss and hen a secion ha calculaes heprojec value in erms o pro or payback.

Tell he soryThe nal sage o he business case process is o presen or deliver hebusiness case o he appropriae decision maker(s). This may be

hrough a presenaion where you have he chanceo explain your business case in deail or hroughhe delivery o a documen or review. Thechallenge is o keep he sory clear, objecive andbelievable. I a decision maker doesn’ undersand

i, hey may no publicly admi his, bu are unlikelyo believe i. I you can, i is oen worh lobbyingdecision makers beore a meeing o undersand ihey are on-board, i hey have any concerns and ihey believe ha inpu rom heir areas has beenadequaely represened. Fundamenally, abusiness case is a ool o sell your invesmenprojec (eg. your new produc) o he business. No-

Bus iness Case Con ten ts

Ti tle page ( wi th appro vals sign-o ff ) .....................p 1

Con ten ts.................................................................................................................p2

Execu ti ve Summar y ..........................................................................p3

S tra tegic Fi t and Business Bene fi ts...................p4

Marke t Anal ysis............................................................................

............p 7

Produc t Descrip tion ......................................................

...................p9

Financial Anal ysis ...............................................................

...................p 13

Pro jec t Plan .................................................................................................

.....p 16

Opera tional Impac ts ........................................................................p20

Risks and Con tingenc y Plans ...........................................p2 1

Recommenda tion and Nex t S teps .........................p23

Appendices ...............................................

........................................................p24

Fig.4 A business caseemplae




CHECKLIST

10 Top Tips when using Excel or Business Cases

1. Use one spreadshee

2. Take los o backups

3. Spend ime on layou

4. Re-use srucure ipossible

5. Separae ou key inpus

6. I you ge help, knowwha’s been done

7. Use colour, borders andshading

8. Ensure each worksheeprins ou nealy

9. Don’ overwrie ormulaswih values

10. Documen everyassumpion

A single spreadshee makes i easy o keep rack o he overall model.I you’ve go los o daa, graphs or scenarios, use separae worksheesand link hem ogeher. Building a spreadshee model always resulsin numerous ieraions; make sure you have a clear sysem or versionconrol.

I’s very easy o make some updaes and nd laer on ha everyhinghas gone wrong. Be scrupulous abou aking regular backups - wepromise a some poin his will save your hours o re-work.

I you’ve ever had o look hrough someone else’s spreadshee oryou’ve come back o your own aer a couple o monhs you’ll knowha ime spen on layou, labelling and srucure is criical. Give he

spreadshee a sensible name. Label workshees (Shee 1 is no good).Use headings, subheadings and explanaions. Have a secion haexplains he dieren workshees and how hey link ogeher.

Try and use he same srucure in dieren pars o he workshee soyou can cu and pase hings easily e.g. sick o monhly columns, usecommon ways o oalling cumulaive gures.

When i comes o he key inpus and parameers ha aec yourmodel (e.g. % growh) keep all he cells in one secion or use a dierencolour o highligh hem. This makes i easy o model dierenscenarios raher han huning hrough he spreadshee o nd all heplaces ha changes need o be made.

You need o undersand and be able o deend every par o yourmodel. I someone helps you and uses an Excel uncion or ormulaeha you don’ undersand - how do you know i he answer is righ?Using things like the LOOKUP function and Pivot Tables can be veryeecive - bu you have o know how o use hem.

This is easy o do and makes ollowing wha’s going on much easier.Using colour, shading and borders helps you and ohers o more quicklygrasp wha’s going on when looking a a spreadshee.

I you or someone else has o undersand a spreadshee, i’s oen beso prin i ou where you can see everyhing on a single page raher hansmall pars on a PC screen. Make i easy by using ‘Se Prin Area’, ‘PrinPreview’ and ‘Page Seup’ o make sure everyhing prins nealy on asmall number o pages.

I is very easy o orge abou hese once done - hey can be dicul ospo and ruin uure calculaions.

This helps you o deend any inpu and makes he business caseaudiable. You may wan o use he cell ‘commen’ uncion or provide aable o noes.




one can predic heuure so your successress on he credibiliyo he case you make –he assumpions youuse, he evidence youcan gaher, he supporyou line-up, he rigour oyour analysis and yourpersonal credibiliy.

In conclusionThere are always manyways o spend hecompany’s money somos businesses have asandard process oproduce business cases– wih he aim o being

able o compare one agains he oher and make i easy o say ‘yes’ ohe righ ones and ‘no’ o he wrong ones.

However he rue value o business cases is ha hey are he mosrigorous assessmen o a new produc ha is done during hedevelopmen process and so orce a level o invesigaion and analysis

ha should ensure (as ar as is possible) heproduc is a success.

In an ideal world, he nancial model, is

assumpions and sensiiviies become a oolha can be used o manage he produchrough i’s liecyle. This is he ideal approachshown in Fig.5 above however in ourexperience he more common approach isoen aken.

FEATURE

Fig.5 Comparingdierenapproaches o

producing businesscases

Common

Objecive

Ge over he nex hurdleno mater wha

Rigorous assessmen oopporuniy based on objeciveassumpions rom he business

Business case assumpionsfexed o producedesired oucome

Business case producescredible and realisic model

Business case led awayand never looked a again

Well undersood and bough-inomodel used o se produc

direcion on an on-going basis

Deliverable Oucome

Creaive Ficion Secion

Ideal

Assumpion 1Assumpion 2

£0.00 Jan FebRev £12 £14

£0.00 J

Rev

: “In my experience a business case is like a courcase where he acs are documened bu he nalpresenaion is criical. Less experienced produc

managers oen ail o clearly sae heir case andassumpions. They hen ge dragged o rack inoavoidable and damaging debaes ha unpick heirunderlying assumpions.” Jonahan WrighDirecor o Wholesale Producs, Ineroue



BEST PRACTICE


Improving your skills in wriing business cases will be helped by seeing

bes pracice. A useul complemen is o see examples o bad praciceha can slow down your business case or even cause i o be rejeced.We’ve seen all o he ollowing!

1. Building on shaky oundaionsBusiness cases are buil rom a solid undersanding o he markeopporuniy mached o a diereniaed proposiion. Poor businesscases conain sweeping assumpions and claims based on gu eel,unjusied exrapolaions and preerence.

Geting he undamenals righ akes ime, which is in shor supply,so i’s easy o skimp eor on markeanalysis. However, a more signican ime-waser is o wrie a business case writenwih pages o assumpions and deails builon shaky oundaions – i will ge exposedduring he approval process and wase heime o anyone involved in he assessmen –as well as damaging your repuaion.Our recommendaion: Tap ino all yourmarke ‘lisening poss’ and company

conacs o ensure he markeundamenals are well undersood.

2. Losing he big picureWe’ve seen business cases include endless pages o deail bu ail odeliver a compelling message abou he poenial o he produc. Yourbusiness case mus clearly and persuasively ariculae who are hearge cusomers and why hey’ll value your produc. I you canno

Bad PraciceSeven common mistakes to avoid

Fig.6 Don’ build onshaky oundaions!




BAD PRACTICE

convince inernal eams o he value o your produc hen hey will,righly, consider ha prospecive cusomers are unlikely o bepersuaded. Alhough he deail is ulimaely imporan i won’ ge readi he proposiion is no compelling.Our recommendaion: Your company and prospecive cusomers havemany dieren ways o spend heir money. Concisely ariculae whyyour cusomers should value your proposiion and be clear why yourcompany should inves is money on your proposal.

3. Failing o ge buy-inThe end resul o your business case is likely o be a presenaion o

senior managemen where your case is presened along wih yourrecommendaion or unding. We’ve seen caseswhere he business case alls apar a hispoin: he business developmen managerhighlighs concerns on your orecas; cusomersuppor raise he specre o massivelyincreased coss or developmen highlighunconsidered areas needed o complee heproduc build.

Whaever he real cause o he dissension: asuble claim or addiional resources or a posiive criicism o your case,i’s your job o pre-emp hese problems and ensure ha all he eamsare aligned.Our recommendaion: Engage relevan groups early in your creaion ohe business case, reques buy-in and documen hem as co-auhors.

4. Rigorously ollowing he emplae

When wriing a business case you will commonly be provided wih asandard emplae or a avoured example o a successul business caseon which o base your work.

There’s a good reason or emplaes, hey save hinking ime andensure ha documens are well srucured and cover all he commonelemens ha migh be needed.

However, hey can also lure he unwary ino a alse sense o securiyand ime wasing. Does your paricular produc really need you o

“The mos successul business cases are hoseha are well socialised in advance o heir nalpresenaion. Quesionable poins and assumpionsare already debaed and agreed and nal approvalis smoohly concluded.” Jonahan WrighDirecor o Wholesale Producs, Ineroue



BEST PRACTICE


complee ‘Secion 10.3.2.1 Technical opions or billing soluions’?Our recommendaion: Beore you sar, ake a look a he emplae,decide wha is and is no needed, and creae a srucure ha’s relevanor your produc.

5. Risk mis-managemenEvery business case is a gamble – your role in wriing he business caseis o ariculae wha’s a sake (he cos), he payback (revenue) and heodds (risks). When i comes odocumening risks, we’ve seenbusiness cases wih page aer

page o risks, ohers wih none andsill ohers wih a sandard se orisks copied o an old businesscase bu wih no recommendaionson wha o do abou hem (knownas miigaion).

Your business case shouldcondenly sae yourexpecaions or he likelyoucome bu he realiy is hawhils your produc is in developmen here may be massive markechanges such as recessions and compeior aciviy, ha impac yourulimae success. Your managemen eam know his and hey expec amaure appraisal o wha migh go wrong.Our recommendaion: Highligh hose risks over which your businesshas some measure o conrol and only fag a small number o risks hacould have he greaes impac. I’s no enough jus o sae he risks –

you mus go one sage urher o highligh wha miigaion yourecommend.

6. Plaorms and producs – comparing apples and orangesAll businesses wih maure produc lines have o balance hedevelopmen o producs wih he ongoing developmen o heunderlying plaorms on which hese producs are buil.

Plaorms are ypically undamenal building blocks ha are par o

Fig.7 Don’orge oideniy he risks



markeable producs bu which can’be sold direcly o cusomers e.g.the graphics engine in an XBOX 360game or he plaorm on which billingor a Telco is buil. A business caseor a plaorm may, or example,deliver a more resilien archiecureproviding less downime, and hisbene is inheried by any producbuil on he plaorm.

Some businesses atemp ohave a single business case emplae

and process ha deals idenicallywih each ype o invesmen. Doing his can creae a conusing picureas he plaorm produc manager atemps o ‘claim’ all he revenue orproducs buil on heir plaorm.

Plaorm invesmen oen loses ou as he invesmen is consideredless urgen and is less likely o have commited sales orecass.However, ailing o inves in plaorms will undermine he revenueorecass or all producs ha use hem.Our recommendaion: Plaorm and produc business cases should nobe considered on a level playing eld, and he business case evaluaionprocess should refec his.

7. Geting oo atachedA nal problem wih business cases is ha despie your bes eors,

ouside acors can cause hem o be rejeced. Yourmanagemen may have a bigger picure in view andyour business case simply may no align wih heir

sraegic drivers.Our recommendaion: Don’ ake i personally, andcheck i a re-work is a viable opion. I may bepossible o combine wih anoher iniiaive orchange ocus o align beter wih he company’ssraegic direcion.


BAD PRACTICE

Fig.8 Don’compare appleswih oranges

“A business case is only as good as heassumpions i is based on. We rack wha’sbes pracice or marke developmen in

he mobile elecoms secor or more han70 operaors world wide. Given our uniqueocus we’re regularly called upon o providespecialis inpu o suppor he assumpionsmade in our clien’s business cases.” Ciaran CoburnMD, Mobile Marke Developmen




How much ime elapses beween saring o wrie a business case and

your produc being launched? How long unil i achieves payback? In rarecases hese imescales migh be measured in days and monhs, moreypically he duraion will be measured in monhs and years.

During his ime i is almos cerain ha some o he assumpionsused o careully cra he business case will be proven invalid.

The quesion hen becomes how do you deal wih and communicaehis uncerainy. Depending on he ime you have available, yourcompany’s view on risk and he scale o your business case, here willneed o be an appropriae level o analysis applied o your nancialmodel. Several approaches o increasing sophisicaion are available.As a guide, keep o he simples orm accepable o he business and inwhich you have condence.

Simple business case analysisThe simples business case analysissummarises he resources needed andhe revenue ha will accrue as a resul obringing a produc o marke. Thenancial merics required by yourbusiness case, such as NPV, ROI or the

Payback period, can hen be calculaedand repored.

Basic scenario planning - ‘mos likely’ caseA more sophisicaed approach recognises uncerainy in he businesscase. This approach uses he same Excel model bu adds wo oherscenarios o he orecas scenario creaed in he business case i.e. awors and bes case. To esablish hese scenarios, any parameer can

ScenariosScenario planning and sensitivity analysis

BEST PRACTICE

Metric

Scenario

Worstcase Forecast

Bestcase Calculation

Mostlikelycase

NPV (£m) 10 30 40 (10 x 20%) + (30 x 60%) + (40 x 20%) 28

ROI (%) 0% 15% 17% (0 x 20%) + (15 x 60%) + (17 x 20%) 12%

Payback period (months) 36 18 11 (36 x 20%) + (18 x 60%) + (11 x 20%) 20.2

Weighting 20% 60% 20%

Fig.9 BasicScenario planning– ‘mos likely’ case



be adjused. Typically, worscase will show he impac omodes cos increasescoupled wih delayed launch.Bes case migh assume earlydelivery and improved sales.

Sensiiviy analysisBusiness case emplaes candrive he produc managerdown a paricular pah,

worrying in grea deail abousmall coss and burying heauhor in valueless analysis.

Spending ime on nity-grity deail (in he ‘spreadshee-acory’), candisrac produc managers rom he criical need o undersand heundamenal drivers or heir produc’s success or ailure.

For example wha i: sales channels come on sream 6 monhs laerhan orecas; a key cos changes signicanly; your produc exceedsexpecaions and you double your projeced volume? Sensiiviy

analysis provides insigh o he business casein each o hese siuaions. Every change willno have an equal impac on he business caseand sensiiviy analysis allows he producmanager o ideniy hose areas ha wouldbe mos signican. Presening he resuls osensiiviy analysis can be done using a simplegraph, annoaed o show he boundary

condiions ha were assumed.The example in Fig.10 highlighs he need or managemen atenion

on discouning raher han concern over coss – lowering he price has amuch bigger aect on ROI than changing costs.

Deailed scenario planningDeailed scenario planning goes one sep beyond sensiiviy analysis asi akes ino accoun he likelihood o dieren uure environmens,


SCENARIOS

Launch date

Cost change

-10

-20% +10%

+15%

6 months late 2 months early

Forecast ROI

-5%

0 +10 +20

ROI (%)

Price change

Fig.10 Sensiiviyanalysis

“When our FD reviews a business case i’s abousress-esing he numbers. We know ha downhe line he acual numbers will probably be wrong,bu wha’s imporan is he order o magniude;do hey eel abou righ and do we undersand hesensiiviies and wha may need o change in heorganisaion o suppor his case?” Jason EllisHead o Daa Produc Managemen, Orange




enabling more reliable decisionmaking and allowing you oseup argeed monioring oideniy emerging issues.

Rigorous scenario planningconsumes more resourcesha are reasonable or mosbusiness cases. Regardless ofhis, a limied amoun o eorspen on scenario planning canprovide useul insigh and give

a more robus plan o acion.Based on sensiiviy

analysis, he produc manager will have been able o ideniy key areasor invesigaion. Wihin each area, scenario planning requires heproduc manager o esimae he mos probable spread o values orha area.

Approaches ha can be used o research hese include :• Market trends (e.g. market research reports).• Cost and performance trends (e.g. suppliers discussions).• Market and competitive context,e.g. PEST (Poliical, Economic, Social, Technological) analysis, orPorer 5-orces compeior analysis• Expert insight (e.g. based ondiscussions wih opical leaders)

A se o likely scenarios are deermined

based on his siuaion and rendanalysis and hese scenarios areapplied o he produc idea odeermine likely oucomes.

The ideal oucome o scenarioplanning is a business plan in which all probable scenarios mee henancial arges esablished by he business.

BEST PRACTICE

Impact Evaluation OutcomesLikely ScenariosUncertainties

ProductIdea

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£, %

£, %

£, %

Market

Performance

Cost

Competition

Expert insight

t .

Fig.11 Deailedscenario planning

“Produc managers should undersand he poliicsbehind revenue orecass. Sales eams always welcomenew producs and enhancemens ha give hemsomehing exra o sell i i doesn’ aec heir arge.Wha level o buy-in do you ge rom he sales channeli he business case resuls in heir arges being raised;ha’s he acid es or revenue orecass.” Jonahan WrighDirecor o Wholesale Producs, Ineroue



Mos produc managers only come across fnancial erminology when

wriing business cases. The acronyms can cause problems or hoseunamiliar wih heir use. This able on he ollowing page explains key

erms o give you he condence o carry ou business case analysisand o handle discussions wih your nance eam.

A key concep o undersand is he ime value o money. Thisrecognises ha money received or spenoday has a higher value han cash receivedor spen in he uure. This is because cashinvesed oday would earn ineres over aperiod o ime and i also refecs he aeco infaion where ypically each uni ocurrency buys ewer goods and service inhe uure. The way his is ypically handledin business cases is o discoun cashreceived in uure years using a calculaion

called Ne Produc Value (NPV).This calculaes he size o he payback by discouning each cashfow

back o he presen ime. In he example above he oal (or cumulaive)cash fows over our years is £2,000 however he Ne Presen Value

using a 5% annual discoun rae is only £1,500.Anoher handy measure o compare business cases is he Payback

period. This is he ime unil a projec achieves is break even poin.Whils his doesn’ make use o he ime value o money i does providea useul comparison beween projecs. A long payback periodsignicanly increases he risk in any projec as marke orecass andcoss can shi dramaically away rom wha has been assumed in hebusiness case.


FINANCIALS

TerminologyAn idiot’s guide to nance

Year

Year 1

£1,115

£181

- £1,425

81.5%

£2,000

85.7%

90.3%

95.0%

95%

(100 - 5%)

£200

-£1,500

Totals

Cash

flowMultiplier NPV

Calculation

Cumulative

profit

Year 2

Year 3

Year 4

95%

95%

£1,300

£2,000 £1,629

£0

-£1,300

- £1,500

£2,000

£1,500

Annual Discount Rate = 5% NPV Payback period

= 3 years

Fig.12 NePresen Value(NPV) andPayback period

Wise Words “Whenever peopleagree wih me Ialways eel I musbe wrong.” Oscar Wilde



GLOSSARY


Apporioned Coss Mos businesses haveoperaing coss ha canno be atribued o aspecic produc line e.g. MD’s salary, insurance andrenal. To ensure ha he business is able o undhese coss hey are apporioned o each businesscase, oen as a xed percenage o revenue.

Break Even Poin Denes how long i akes or aprojec o payback all is invesmen. Break-evenpoin is no normally calculaed using discounedcash fow, i does however provide a useulcomparison beween projecs.

Capex Capial Expendiure is he cos o developor buy a product/asset, e.g. the purchase of aphoocopier is Capex, bu buying he paper i uses isOpex. Capitalised assets are depreciated over time.

Depreciaion The coss o asses bough by acompany, eg. equipmen, buildings, are spread ouover a number o years in accouns and businesscases. For example: a producion line or yourproduc may cos £10m up-ron bu is depreciaedover 5 years giving a cos in your business caseo £2m per year. Your nance eam will se hedepreciaion ime period or dieren asses.

Direc Coss Direc coss or a produc arehose coss ha are direcly atribuable o heproducion o he produc. Someimes known asCost of Goods Sold (COGS), these are very oenvariable coss and vice versa.

Discouned Cash Flow (DCF) DCF measures hevalue o cash fow over ime. I recognises he acha money received or spen oday has a highervalue han cash received or spen in he uure(because cash invesed oday would earn ineres).To do his i discouns uure cash fows.

EBITDA Earnings Beore Ineres, Tax, Depreciaionand Ammorisaion. This is someimes used as ameasure o proabiliy as i excludes he impac oany accouning or nancing decisions.

Fixed Coss Fixed coss are hose ha do nochange wih he level o sales. I sales increase ordecrease bu nohing else changes hen xed cossremain he same. Common examples o xed cossare rens, head-oce salaries and depreciaion.

Gross Prof This is calculaed as revenue minusdirec coss.

Indirec Coss Indirec coss are coss ha can nobe direcly atribued o your produc. Indirec cossmay be eiher xed or variable and include hingssuch as axes, salaries and oce renal.

Inernal Rae o Reurn (IRR) Reects the paybackon an invesmen and is used o compare projecscompeing or invesmen unds. The businesscase IRR will normally need to be higher than bankineres ogeher wih an appropriae premium or

the risk in the project. IRR is the discounting rateha would give an NPV o £0. There is a ormulae inExcel o calculae his.

Ne Presen Value (NPV) The represens he view,oday, o he uure lieime value o a produc. Iuses discouned cash fow o esablish he valueo uure income and coss. There is a ormulae inExcel ha you can use o calculae his.

Ne Prof Calculaed as revenue minus all xed,variable and apporioned coss.

Opex Operational Expenditure is the on-going costo running a produc or business and includes hingslike maerials or wages.

Payback Period The ime unil a projec achieves isbreak even poin.

Peak Negaive Cash Flow The fow o money in andou o he business on a monhly basis is knownas cash fow. The Peak Negaive Cash Flow is hemaximum cash ha he company will need o invesin a produc and usually occurs jus beore launch.

Prof Margin This is calculaed as gross prodivided by revenue – Gross or Ne Pro can be usedo give Gross or Ne Pro Margin.

Reurn on Invesmen (RoI) This is calculaed aspre-ax pro divided by invesmen and shown as apercenage.

Variable Coss The cos o labour, maerial oroverheads ha change according o he change inproducion volume.

Financial Terms



Do you work in a compeiive marke? Would you consider ha supply

exceeds demand? Are you consanly scrapping wih he samecompeiors or a bigger piece o pie?

There are many books on creaing diereniaed oers o improveyour competitive position. One of our favourites, which combines the

authors Harvard Business Review articles together with earlierconcepts, is ‘Blue Ocean Strategy’. The book demonstrates a systematicramework and oolse o ideniy and evaluae opions ordiereniaion ha help companies sand ou o heir cusomers. Doingso moves companies o a ‘blue ocean’ where hey have no direccompeiors unlike he ‘red ocean’ where inense compeiion bloodiesall paricipans.

Whils i does no ocus on business cases i does ocus on he areaha is oen mos dicul and imporan o any business case: heidenicaion o opporuniy and creaion o a credible proposiion oaddress ha opporuniy.

As radiional markeing hinking goes, here are wo primarysraegic approaches open o companies: become he cos leader anduse lower prices o win business, or ocus on diereniaion and carveou a lucraive niche marke. There can only be one cos leader o aparicular produc caegory in a specic marke so mos companiesclaim a diereniaion ocus.

Blue Ocean Strategy presents a method for companies todierentiate by creating ‘uncontested market space’. One example isCirque du Soleil. Tradiional circuses ended o ocus on sarperormers, headline acs and aisle concessions. Cirque du Soleilsuccessully changed he game, dropping expensive sar perormersand inrusive aisle concessions, ocusing insead on a unique venue wihshow hemes and arisic music and dance.

We hink his is a book worh reading.


The JournalReviews and eedback or product managers

Blue OceanSraegy, byW.Chan Kim andRenée Mauborgne

Wise Words “I never hink o heuure. I comes

soon enough.” Alber Einsein

Book Review



SURVEY

21

Have your viewEvery year Produc Focus runs a survey o measure he

sae o produc managemen in he UK Telecoms and IT

indusries. This gives us insighs ino indusry norms,rends and bes pracice. We’ve lised some o hecommens rom his year’s survey. These answer hequesion: ‘Wha do you see as he bigges issues wih

Produc Managemen in your curren role ?’

“Produc managemen should be he General Manager o heir produc wih P&Lresponsible and have he las say in maters, bu oen Engineering has he real power.”

“No enough resource - company is downsizing.”

“Lack o direcion. No maser roadmap. No sraegy.”

“We have an exremely diverse porolio wih a high number o prioriy produc issues,lack o ormal raining and litle execuive suppor.”

“Our biggest issue is access to high quality data, whether it’s relevant Market Intelligencerepors, or geting ino ou o our sysems.”

“Fireghing day-o-day quesions rom he eld akes up an inordinae amoun o imewhich could be spen providing pro-acive suppor.”

I’s clear ha produc managers we wan o se business direcion, akebusiness responsibiliy and drive change bu eel consrained by lack oresources, ime, raining or ormal accounabiliy. I will be ineresingo compare his year’s survey.

Annual SurveyWe use our surveyo benchmarkproducmanagemen inhe UK. I you’dlike o ake parand in reurn ge apersonalised reporplease conac us.



Business cases are a wase o ime. You know ha he numbers will be

wrong or made o say whaever he auhor wans hem o say. Whenagiliy and being rs-o-marke really coun – business cases jus slowyou down.

Whils we don’ believe his we can cerainly undersand i! When

you’ve been living and breahing your produc or monhs, you’re enirelybough ino he value o is coninued developmen. Bu while all babiesare beauiul o heir parens no all babies are beauiul.

The real value o a business case is ha i enorces a discipline andsrucure around making invesmen decisions. The grea opporuniyor a produc manager is ha i allows ime or a horough andobjecive analysis o heir produc wih he ull suppor o he res ohe business.

Benefs o analysisThe value o his analysis is oen a odds wih oher drivers. Theproduc manager’s key moivaion is o make sure heir produc passeshrough he business case sage as smoohly as possible. The businessrewards produc managers ha ell hem abou good invesmen ideas.

However, i’s equally imporan or he business o know ha aparicular idea is no a good invesmen.

Creaing he righ culure o produce an objecive assessmen is

vial. This is oen achieved hrough a healhy ension beween anevangelising produc manager and scepical nance represenaive. Bucompanies ough o be able o rus produc managemen o provide anun-biased view o opporuniies.

Does your business oser a culure in produc managemen wherean objecive view is really rewarded? How many produc managers havebeen recognised posiively aer producing a business case o say heirproduc should be canned?


The InsighLies, damn lies and business cases

Wise Words “In order osucceed, you musrs be willing oail.” Mark Twain



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