Business analyst use business case technique to justify investments based on estimated value compared to cost, formally or informally. One should spend resources on business cases proportional to the potential value. It’s good to remember that business cases are not meant to provide intricate details.
Steps to develop a Business case:
- Define needs.
- Determine desired outcomes.
- Assess constraints, assumptions, and risks.
- Recommend solutions.
Needs to drive business cases. Needs must be relevant to business goals or objectives. Check out the business analysis article
Define desired outcomes
Desired outcomes describe future state once needs are fulfilled. Should be measurable to determine success of a business case or solution.
Identify and assess various alternative solutions with respect to different technologies, processes, or business models.
Assess each alternative wrt
Scope: Defines what will be included and what will not be included. Can be defined using organizational Boundaries, system boundaries, business processes, product lines, or geographic regions.
Feasibility: Includes organizational Knowledge, skills, and capacity, technical maturity, and experiences in proposed technologies.
Assumptions, risks, and constraints.
Financial analysis and value assessments.
Describe the most desirable way to solve problems or leverage opportunity.
- Integrated view of facts, issues, and analysis.
- Financial analysis of costs and benefits.
- Guides decision making.
- Subject to biases of authors.
- Often not updated after funding.
- Assumptions with respect to costs and benefits may be invalid.
Worked out Example:
Through this example let us try to understand the business case for the project management system that ABC Technologies intends to develop.
About ABC Technologies
ABC Technologies (NASDAQ: ABTC) is a global provider of end-to-end IT services and solutions designed to help clients improve competitiveness and efficiency. Specializing in outsourcing and offshore, systems integration and application development, software and consulting, quality assurance and training, ABC serves a blue-chip client base of over 500 public and private-sector customers. With 17,500 employees, ABC maintains operations in 22 countries across North America, Europe, Africa and Asia, and numerous alliances and partnerships around the world. ABC Technologies aspires to be a global leader in outsourced software development segment providing best of breed solutions to its clients. ABCT was founded in 1990992 and during its quality journey, it has been certified for ISO 9001, ISO 27001 and CMMI Level 5.
Currently ABCT runs more than 120 active projects at any point in time. Due to lack of an integrated project governance system, management finds it hard to understand how each project is performing, thus management has to do a lot of firefighting to bring projects back on track. There is also a perception in the company that many projects are incorrectly estimated, thus leading to loss of company revenue.
ABCT, thus, decided to develop a project management system considering the following aspects:
- The number of projects is going up significantly
- Project managers salary is increasing significantly
- Clients are expecting better visibility into project execution
The company considered 2 options:
- Developing a system in-house
- Purchase a PM product
The criteria taken into account and the weightages assigned to each criteria can be seen below:
|Adaptability to our needs||5||5||3|
|Cost of solution||3||2||5|
|Ongoing maintenance cost||3||5||3|
|Time to implement||2||2||5|
Due to better fitment with organizational needs, it was decided that the system be developed in-house.
The following aspects were considered for evaluating the system.
It will cost USD 500K in the first year and USD 75K per year to maintain.
It is expected to save 10% of project management effort. Currently the organization has 50 project managers which are expected to grow in a linear manner to 200 in the next 6 years. Approximate project manager’s per hour cost is USD 25. Per hour project management cost is likely to increase by 12% year on year. The organization assumes 1500 productive hours per year for a Project Manager.
It’s management expects 20% annual return on any investment.
|Costs||500||75||84||94||105||118||132||Initial cost = 500K. Maintenance cost = 75K/Year|
|No. of PMS||50||75||100||125||150||175||200||Linear growth in 6 years|
|Per Hour PM Rate||25||28||31||35||39||44||49||Increases by 12% year on year|
|PM Hours saved per PM||150||150||150||150||150||150||10% of 1500 (productive hours/year)|
|PM Effort Saved||0||315||470||659||885||1157||1480||# of PM*Per hour PM rate*Hours saved/PM|
|Net savings||-500||240||386||564||780||1039||1348||Effort saved Costs|
|Discounting rate||1.00||1.20||1.44||1.73||2.07||2.49||2.99||(1+r)^n where r is the discount rate and n is the number of years|
|Discounted cash flow||-500||200||268||327||376||417||452||PV=FV/(1+r)^n where PV is present value and FV is future value|
|Estimated NPV||1540||NPV = – CF0 + CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3 where CF is the cashflow|
The estimated NPV for the system is 1540K.