Business Justification: Why everyone should understand Business Case Basics

Understanding how to construct a compelling business case for a project proposal, whether big or small, is often treated as one of those arcane arts that only a few people understand. There are at least a couple of possible reasons that this may be true in a given organization: first, the rules for a successful project proposal can shift around from year to year, depending on the company’s priorities and available cash for investing in projects. Keeping everyone in the organization up to date on what parameters are likely to be successful would be a lot of work. Secondly, even solidly profitable companies don’t have unlimited money to spend on projects, so it is natural for a relatively small number of people to serve as gatekeepers for initiatives.

But that doesn’t mean that most people – practically every employee, in fact – shouldn’t understand the basics of how an idea for improvement gets reviewed, justified, and approved. Even someone who works in an hourly role is likely to come up with ideas for improvement from time to time, and it is useful to understand the basics of how companies evaluate and approve those ideas. Additionally, if you happen to be part of a project, it’s almost essential to understand at least the broad outline of how that project was approved. When your project runs up against a implementation question, or encounters a project impediment or delay, the impact on the business case should be part of the decision process.

Of course, not every good idea requires a full business case. There’s usually a budget for low-cost initiatives. But even then, these principles will help you put together a convincing explanation of why your recommendation should be considered.

A useful introduction to the basics of building a business case will center on the four main ways that projects are justified (Compliance, Cost, Profit, and Performance), together with one key concept – considering alternatives.

Those four primary ways to justify a project are:

·?????Compliance. These are “gotta do” projects that are required to continue operating. Not complying with a particular requirement would endanger your entire business, or at least a sizable piece of your business. These projects may involve a new government regulation, a customer or an industry requirement, or even a new union agreement. A “compliance” justification may also apply to moving into a new market. It’s important to understand the true requirement, however. There are usually more alternatives than “not complying” or “complying by implementing an expensive new process.”

·?????Cost (reduction). Cost-reduction opportunities are certainly among the most frequently used methods used to justify a project. As a rule of thumb, a cost-based justification usually looks for:

1)???blocks of repetitive labor that can be automated, streamlined, standardized and moved to a lower cost labor pool, etc.;?

2)???processes that can be made more efficient or completely eliminated;

3)???inventory that can be reduced; and

4)???purchased materials and/or services that can be negotiated to a lower cost by consolidating them across facilities, business units, etc.

A cost-based justification may be held to different standards depending on other aspects of an organization’s performance – such as whether business revenue is growing, shrinking or holding steady. A smart reviewer of such a justification is likely to ask for more than just a calculation of potential benefits – they should also expect to understand the mechanism by which the benefit will be generated. For instance, let’s say that a $10B company, with $2B of inventory on their books, wants to implement a new planning system. The software provider may indicate that other customers have improved their inventory turns by 20% or more. A 20% improvement in that company’s inventory turns would drive them from 5 to 6 turns, and drive inventory down by $333M. A typical Inventory Carrying Cost of 12% would mean that $333M cash flow would generate about $40M in annual savings. But a smart analyst should ask the question: how will this new planning system cause inventory to drop? ?

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Understanding those answers will help the project team make appropriate decisions if there is a delay or other obstacle. Will each potential action still support that inventory reduction? Some possible decisions – descoping some facilities, for instance – might impact the cost benefits of the project to the point where it no longer is justified.

Similar thoughts apply to other kinds of cost justification. If a key element of a cost reduction justification is higher labor efficiency, some companies may insist on actual, scheduled lay-offs. But in a company with growing revenue, it may be sufficient to show that there will be a reduced need for labor – with the expectation that any employees can be re-assigned to other tasks if their positions were to become redundant.

·??????Profit (Improvement): although cost reduction will increase profits if other factors don’t change, profit improvement has a different intent. To increase profits requires increasing revenues or margins, or both. This sort of justification looks at options to (for instance):

o??Enter a new country or region to sell the same product

o??Enter a new market, often by extending an existing product in some way

o??Create (or buy) a new product line

o??Engineer an existing product to make it easier to manufacture, or increase flexibility of responding to demand, so that margins increase

o??Increase the feature set of a product or service to make it more attractive, sell at a higher price, or gain market share

Alternatives in these business cases often are based on a number of what-if scenarios and can be hard to assess. Consequently, it isn’t unusual for a company to discount the sometimes overly optimistic projections of higher revenues. (For example: the original business case may have projected $1M of sales and $400K of profits in Country X, if we spend $200K to enter this new market. An executive might discount those numbers to $500K of revenue and $100K of profit – and either reject the business case, or demand that the cost to enter the market be driven down below $100K.)

·??????Performance (based): in a lot of ways, this is the trickiest sort of justification to work with. It focuses on a particular performance metric (or perhaps a set of related metrics) that have a relationship to overall business success. An easy example would be OEE (Overall Equipment Effectiveness): many companies struggle to reach even 50% OEE; but a company that can work out how to move from 40% to 60% has achieved the equivalent of getting an extra half-factory for free. That in turn avoids the need for new investment, and often can make the whole operation more agile (and profitable). All that presumes, of course, that there are customers that will consume the new capacity!

Another example would be a project to improve customer satisfaction, via increased shipping performance. This will help reduce customer attrition, which may be a concern for some organizations. Still another would be efforts to improve quality or yield, which would likely have a positive impact on costs and might also contribute to improved customer satisfaction.

It often isn’t too hard to identify alternatives in such a business case, but putting a relative value on them can be difficult, since it depends on multiple variables. So these business cases will often be discounted as well.

Understanding these basic models for justifying a project can make you a better project team member, as well as help you determine whether that great idea you’ve had is likely to be accepted and implemented by the management at your company.