Business Case Fundamentals

By Jim White April, 2002 A proper business case for an information system makes a clear statement of what is going to be done, why it is worth doing it, how it will be accomplished, and what resources will be required. Done in a proper way, it communicates to all of the stakeholders and helps gain their buy-in. Many elements may be required to prepare a complete business case. Categories of topics to consider are: Vision for the new environment Assessment of the current situation An identification of the gaps between the current situation and the desired vision Definition of a project to address the gaps Financial ramifications In practice, only some elements out of the total list are prepared, depending on the needs of the project being proposed. The order in which the elements are presented may also be adapted to the needs of the specific project and organization.

Vision
Description of the new environment A description of the proposed system and how it will operate is the foundation for the work that follows. It should be at a level of detail necessary to communicate what is proposed, but does not have to go into more details than necessary for that communication. Value of getting to the new environment The vision should also include a qualitative description of why the project is being proposed. Such considerations frequently include staff reduction, product quality improvements, reduction in the consumption of materials in making a product, product life-cycle and time-to-market improvements, and capacity increases.

2002 by International Information Technology, Inc.

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Current situation
An assessment of the current situation provides the background necessary to understand how thins will change with the proposed system. Functionality of current systems A primary concern in assessing the current system is a description of the functions provided by existing business processes and information systems. It can be helpful to provide examples of industry best practices to help establish whether the current system is leading edge, or whether other people are already doing better. Technology An assessment of current situation should also include an appropriate level of description of software and hardware currently deployed, and its capabilities and limitations. Aspects to consider include: type and number of elements deployed, capacity to handle data and transaction loads, flexibility to handle changes, security and general level of cost to operate. People and organizational readiness The current situation should also consider organization structures, how processes inter-operate and the general training level of the people who will be affected by the proposed system.

Gap analysis
The gap analysis identifies and highlights the differences between the current system and the vision of the proposed system. If forms the basis of the project description, in a context that helps to demonstrate the need to change, and the value of the proposal.

Project definition
The first thing to consider in defining the project is the overall strategy. Components of overall strategy include: What type of software and hardware are anticipated to bridge the gap between the current situation and the proposed vision. The phasing, if any, of the results of the project

2002 by International Information Technology, Inc.

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 To what extent the features of the proposed system will be implemented internally, and to what extent they may be rented or operated externally. Additionally, the description must address the project investment, the organizational readiness and the plan for implementation. Investment required The primary investments are generally in hardware and software. Some projects may require additional investments, such as the acquisition of key data. Some projects may also require a feasibility analysis for some components that are proposed. Staff required to implement the project should also be identified. Key considerations are expertise required, number of people required and where they should be found. People may come from the business units, an IT organization or from outside the enterprise. Organizational readiness The project also needs to define what is to be done to address organizational readiness needs. End-user and administrator training is the most obvious element for this point. But some projects might also require business process changes or even organizational changes. Procedure manuals may have to be prepared. Some indication of the type of communications that will be carried out over the life of the project is also valuable in addressing organizational readiness. Implementation plan The implementation plan should outline the major tasks, the resources required for those tasks, and the timing for the tasks and the deliverable elements of the project. Of particular importance is identification of project phases, if any.

Financials
The project financials summarizes the proposal in financial terms. Every item needs to be quantified as best as it is known at the time of preparing the business case. Quantified benefits The kinds of benefits and how they were derived were covered in the vision statement. At this point, they must be quantified. It is frequently the case that the benefits must also be categorized, such as increased revenue, cost savings, future cost avoidance, etc. In some cases, ranges may be employed to express uncertainty around the specific quantities. Benefits that can not be quantified may still be listed as intangibles, but they do not enter into the financial calculations.

2002 by International Information Technology, Inc.

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Investment dollars Investment dollars represent the costs of things that are done one time to implement the project, as opposed to ongoing operating costs. Investment costs are usually easier to evaluate than are benefits. They generally come from the investment items in the project description. Ongoing operating costs Once the proposed system is implemented and in production, there are usually operating costs of the new system. These may include: depreciation of purchased equipment rental of equipment not purchased staff to administer the new system and its data Financial measures Finally, all of the quantified information is presented in the form of financial measures. The most common unit of financial measure is Return on Investment (ROI); this is simply [the total annual benefits - the total annual costs] / the one-time investment. If there is substantial variability in the timing of either costs or benefits (they are not the same every year), or if the project is of an unusually long duration, discounted cash flow measures, such as Present Value, may be required. Value Models In cases where there is considerable uncertainty about the evaluation of some of the numbers used in the calculation of financial measures, a business case may need to include a value model. This can be thought of as a spreadsheet that calculates the financial measures, where the assumptions are made clear, and data can be input in the form of ranges (or even probability distributions). The model can be calculated multiple times, with varying values for the assumptions and uncertain data; the resulting distribution of outcomes is a much more valid predictor of the financial measures than would be the case if only one calculation is made using the midpoints of the uncertain range. Value models can also be very valuable for projects having a set of options for how to implement or what functionality to include. Financial measures can then be calculated for each of the options, to help compare and contrast the options.

2002 by International Information Technology, Inc.

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Conclusion
There are many things to consider in building a business case. Factors critical to the successful launch of a project include: selecting the key elements to present a compelling case, engaging the stakeholders and business units to assure their understanding and buy-in; and presenting the resulting material in a way that makes sense to the decision makers.

2002 by International Information Technology, Inc.

www.iitx.com