– This article was published on Training Journal (April 2015)
How do you make decisions in business? Are you intuitive or analytical? Are you swayed by logic and reason or vision and passion? When do you throw caution to the wind and use your instinct and when do you ensure a full business case is produced?
These are all poignant questions but as we emerge from a difficult few years and see the signs of economic recovery, we also find that we have a list of ideas that we could now pursue and invest in. The question becomes which ones do we choose? How do we prioritise them and how do we ensure that we are taking the best decision that is likely to bring the greatest return?
Of course, not all decisions are created equal. Most businesses will have some form of approval route often with different levels of rigour depending upon the size of the investment. Aligned to this will generally be some form of written justification or business case which drives consistency ensuring that all of the options and potential projects are presented in the same way and allowing them to be compared and contrasted accurately.
When creating business cases we tend to immediately think about the time value of money considering discounted cash flows and net present values. The size of the investment is usually high on the agenda and will invariably determine the degree of detail needed and the level of executive needed to approve this.
Similarly, the size of the financial outcome is a critical factor in decision-making and while we talk about non-financial benefits, we generally favour the benefits that generate greater profits or reduced costs.
Together these are often referred to as the golden rule, i.e. the timing both of cash investment and of the financial return will typically be close to the top of the list of approval criteria.
Aside from the financials, there are, of course, many other factors involved in making good investment decisions in business and these can range from risk aversion to your own level of project maturity. A balanced business case should look at an opportunity from every angle and present a sound case for investment that inspires confidence.
The five case model
The UK Government uses the five case model of justification which leads to precisely this and provides a framework for building sound business cases. In summary, this explores the opportunity from five angles:
- Make the strategic case: How does this opportunity align with our vision, values, and strategic business goals, and how likely is it to be supported by the stakeholders? We need to ensure that we fully understand the opportunity and consequently the range of options available to deliver it.
- Make the economic case: How beneficial is this opportunity to the business both financially and otherwise. Here, we also consider the timing of those benefits and the sensitivity to environmental factors such as interest rates or future sales.
- Consider the commercial case: What is possible and what proposals does the market place have to help? It is important to have a sound knowledge of the supplier community in order to ensure that we are not restricted by our own internal awareness and some sort of supplier engagement programme (or event) is needed to develop this.
- Make the financial case: Here we consider the affordability of the available options and the time value of our investment and return. In addition to looking at the cash flow, we will also be looking at the available funding options.
- Make the management case: Assuming that we want to approve this project or programme do we have the expertise to lead and manage it? This will include identifying the project management team and the governance arrangements that will be applied to maintain control and any external reporting arrangements.
Turning this model into a practical process can be more difficult than it might seem. Almost every business case makes sense until you ask the right questions and challenge the estimates and sensitivities.
If you set a financial threshold for approval and governance then many business cases can be estimated to fall just below this or can be broken down into smaller pieces to avoid the perceived bureaucracy of governance. Similarly, supplier engagement can be seen as lacking in transparency and somehow inappropriate. This is a process of improvement and by introducing the building blocks what is then needed is a community of practice to own the continual improvement and gradually enhance capability.
Translating the theory into practice, as with any process, takes time but can be extremely rewarding and confidently choosing the right projects can have the most dramatic impact on your business performance.