Challenge
Assessing the business case for a project must consider both the tangible and intangible potential benefits. The assessment should also validate the benefits and ensure they are realistic to the Project Sponsor and Key Stakeholders to ensure project funding.
Description
A Business Case should include both qualitative and quantitative measures of potential benefits.
The Qualitative Assessment portion of the Business Case is based on the Statement of Problem/Need and the Statement of Project Goals and Objectives and focuses on discussions with the project beneficiaries regarding the expected benefits in terms of problem alleviation, cost savings or controls, and increased efficiencies and opportunities.
Many qualitative items are intangible, but you may be able to cite examples of the potential costs or risks if the system is not implemented. An example may be the cost of bad data quality resulting in the loss of a key customer or an invalid analysis resulting in bad business decisions. Risk factors may be classified as business, technical, or execution in nature. Examples of these risks are uncertainty of value or the unreliability of collected information, new technology employed, or a major change in business thinking for personnel executing change.
It is important to identify an estimated value added or cost eliminated to strengthen the business case. The better definition of the factors, the better the value to the business case.
The Quantitative Assessment portion of the Business Case provides specific measurable details of the proposed project, such as the estimated ROI. This may involve the following calculations:
- Cash flow analysis- Projects positive and negative cash flows for the anticipated life of the project. Typically, ROI measurements use the cash flow formula to depict results.
- Net present value - Evaluates cash flow according to the long-term value of current investment. Net present value shows how much capital needs to be invested currently, at an assumed interest rate, in order to create a stream of payments over time. For instance, to generate an income stream of $500 per month over six months at an interest rate of eight percent would require an investment (i.e., a net present value) of $2,311.44.
- Return on investment - Calculates net present value of total incremental cost savings and revenue divided by the net present value of total costs multiplied by 100. This type of ROI calculation is frequently referred to as return-on-equity or return-on-capital.
- Payback Period - Determines how much time must pass before an initial capital investment is recovered.
The following are steps to calculate the quantitative business case or ROI:
Step 1 Develop Enterprise Deployment Map. This is a model of the project phases over a timeline, estimating as specifically as possible participants, requirements, and systems involved. A data integration or migration initiative or amendment may require estimating customer participation (e.g., by department and location), subject area and type of information/analysis, numbers of users, numbers and complexity of target data systems (data marts or operational databases, for example) and data sources, types of sources, and size of data set. A data migration project may require customer participation, legacy system migrations, and retirement procedures. The types of estimations vary by project types and goals. It is important to note that the more details you have for estimations, the more precise your phased solutions are likely to be. The scope of the project should also be made known in the deployment map.
Step 2 Analyze Potential Benefits. Discussions with representative managers and users or the Project Sponsor should reveal the tangible and intangible benefits of the project. The most effective format for presenting this analysis is often a "before" and "after" format that compares the current situation to the project expectations, Include in this step, costs that can be avoided by the deployment of this project.
Step 3 Calculate Net Present Value for all Benefits. Information gathered in this step should help the customer representatives to understand how the expected benefits are going to be allocated throughout the organization over time, using the enterprise deployment map as a guide.
Step 4 Define Overall Costs. Customers need specific cost information in order to assess the dollar impact of the project. Cost estimates should address the following fundamental cost components:
- Hardware
- Networks
- RDBMS software
- Back-end tools
- Query/reporting tools
- Internal labor
- External labor
- Ongoing support
- Training
Step 5 Calculate Net Present Value for all Costs. Use either actual cost estimates or percentage-of-cost values (based on cost allocation assumptions) to calculate costs for each cost component, projected over the timeline of the enterprise deployment map. Actual cost estimates are more accurate than percentage-of-cost allocations, but much more time-consuming. The percentage-of-cost allocation process may be valuable for initial ROI snapshots until costs can be more clearly predicted.
Step 6 Assess Risk, Adjust Costs and Benefits Accordingly. Review potential risks to the project and make corresponding adjustments to the costs and/or benefits. Some of the major risks to consider are:
- Scope creep, which can be mitigated by thorough planning and tight project scope.
- Integration complexity, which may be reduced by standardizing on vendors with integrated product sets or open architectures.
- Architectural strategy that is inappropriate.
- Current support infrastructure may not meet the needs of the project.
- Conflicting priorities may impact resource availability.
- Other miscellaneous risks from management or end users who may withhold project support; from the entanglements of internal politics; and from technologies that don't function as promised.
- Unexpected data quality, complexity, or definition issues often are discovered late in the course of the project and can adversely affect effort, cost, and schedule. This can be somewhat mitigated by early source analysis.
Step 7 Determine Overall ROI. When all other portions of the business case are complete, calculate the project's "bottom line". Determining the overall ROI is simply a matter of subtracting net present value of total costs from net present value of (total incremental revenue plus cost savings).
Final Deliverable
The final deliverable of this phase of development is a complete business case that documents both tangible (quantified) and in-tangible (non-quantified, but estimate of benefits and risks) to be presented to the Project Sponsor and Key Stakeholders. This allows them to review the Business Case in order to justify the development effort.
If your organization has the concept of a Project Office which provides the governance for project and priorities, many times this is part of the original Project Charter which states items like scope, initial high level requirements, and key project stakeholders. However, developing a full Business Case can validate any initial analysis and provide additional justification. Additionally, the Project Office should provide guidance in building and communicating the Business Case.
Once completed, the Project Manager is responsible for scheduling the review and socialization of the Business Case.