Posted in Launch Your Business by Jo North
Your guide to creating a business case that helps you to make your decision with confidence.
The purpose of this article is to help you think more commercially about your ideas and innovations.
The top takeaways are that:
- Every innovation or new initiative brings with it a degree of risk and potential reward.
- You can mitigate (or reduce) risk and expand reward, and protect your business, by working through your business case in a structured and informed way.
- Having a written business case – it doesn’t have to be long or fancy – also helps you to communicate your initiative, and to get helpful input from others. It gets onto paper what is in people’s heads (including what’s in your own – which is a very good thing!).
Business cases and me
I have created literally scores business cases, both as a corporate director and on behalf of my clients, large and small. Here are just a small handful of very different examples:
- I’ve created many business cases on behalf of my client, Northumbrian Water Group, in my role as Programme Director for the successful set up and implementation of a brand new business in response to the deregulation of the water industry in the UK and Wales for business customers in 2017. These business cases involved six and seven-figure investments in people, new technology, premises, marketing and so on. They were used to inform board decisions on investment, revenue projections, budgeting and prioritisation.
- A coaching client running a successful, high-growth business was unsure about a potential decision to move his business to a new bigger, more visible and prestigious location. I coached him through the business cases for remaining, moving to the proposed new premises and exploring alternative options. At the end of the process, which only took a couple of hours, he became very clear on what he wanted to do and why, and was much more confident about his decision.
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I have led international teams as Bid Director to compete successfully for multi-million transport contracts (example value of €150 million). The tender submissions have to be very detailed, and need to include plans for how the contract – including staffing, engineering, customer experience, IT development – will be run for real in the coming 5-10 years. Winning contracts are awarded on a scoring ratio that includes price and quality. Business cases are needed for every significant item of proposed expenditure within the tender submission.
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A smaller food producer I have worked with wanted to know if investing in a new piece of machinery would generate sufficient cost and time savings in production to make the investment
worthwhile, so we sat together and created a high-level business case to inform his decision.
I could include many, many more…
The bottom line is that business cases are a fundamental skill of any entrepreneurial leader who has an ambition to grow their business
Innovations and initiatives
Earlier on I mentioned innovations and initiatives.
Innovations or initiatives can be decisions to:
- Hire an extra person to expand your workforce
- Invest in new machinery, IT, systems or equipment
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Consider a new product or service
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Invest in changing, removing, introducing significant elements of your business.
Business cases and decision-making is a very important skill-set. It’s where a lot of entrepreneurs fall down. They have loads of great ideas but may wonder why people don’t always see things the same
way as they do. It’s usually due to how effectively we, as entrepreneurs, communicate our ideas and share our thinking. We know and understand what we have in mind and can see our vision, but others have not been on the same thinking journey as us, so we need to make our thought processes very explicit and clear. Good, clear business cases help us to get our ideas across in a really structured and logical way, countering potential objections and showing that we have really thought through what we are proposing.
To help you shape your business case for any significant new initiative that you might be planning, I’m now going to cover:
- What is mean by the term ‘business case’.
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The challenges of building one.
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Reducing uncertainty – innovation by definition means that we are doing something that hasn’t been done before, so we cannot know for sure exactly how things will play out.
- My suggested approach – step by step – that will work for any innovation business case, big or small, and that you can use for internal decision making or as the basis for your pitch if you’re seeking external investment.
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Essential ingredients that every business case needs to contain.
If you’d like an overview of my recommendation, you might like to take a few minutes to watch the video below. It’s from my Idea Time® Perform programme for high performing entrepreneurial
leaders.
https://youtu.be/WaCFqIuusJY
You can also download a free pdf of the slides used in the video here.
Also, before we get into the detail, you might like to download my free How to do a Market Analysis playbook here.
What is a business case?
A business case captures why you want to action your innovation or initiative.
- It’s usually a short, written document.
- It includes:
o The tangible (things that you can touch and measure) and non-tangible (softer, less visible and harder to measure) risks and benefits of the innovation
o Costs, efficiencies, increased revenues, along with key financials associated with the innovation
- It helps you to organise your thinking and information, so that you can make the best decision you can for your business, based on the data that you have available.
- It justifies (if all factors stack up on balance) the investment decision in the innovation, taking known factors and ‘known unknowns’ into account.
What’s included in a business case?
The headings that I usually use for most of my innovation business cases are:
1. Understanding the Need / Opportunity
- Purpose of the Innovation Business Case
- Summary of the opportunity
- Customer need
- Competitor review
- Market attractiveness
- Strategic fit – how the innovation sits alongside the wider business and portfolio context
- Definition of success
- Overview of the different options explored
2. Exploration of the Potential Options
For each option (2 or more options are presented, including a ‘do nothing’ option), I use these headings:
- Key risks and mitigations (mitigations are the actions that you plan to take to reduce the risk)
- Non-tangible costs and benefits
- Impact on the value chain
- Proposed implementation approach
- Proposed timings
- Key assumptions
- Financials – best, likely and worst case scenarios (costs, savings and revenues)
- Cashflow implications (including NPV and payback period)
- Opportunity costs
Then, flowing from the analysis and arguments that you have presented on each of the options, be very clear to include your:
- Conclusion
- Recommendation
- Next steps
What’s the difference between the Conclusion and the Recommendation sections?
The Conclusion is a summary interpretation of the findings of the business case analysis.
The Recommendation is a summary of the action that you propose the business takes as result of your Conclusion.
Isn’t this time consuming?
It looks like there is a quite a lot to do, but if you’re going to invest a significant amount of time, money and resource then it’s a really good framework to work through, and it doesn’t need to take long. I’ve used this for investments of just a few thousand pounds, a significant sum for many small businesses, through to proposals to spend tens of millions of pounds for large organisations. The process and the headings are the same, it is really just the scale and level of detail that changes. Obviously, the more detail that is required, the longer it will take.
The challenges of decision-making
Sometimes it can be challenging to confidently make an informed decision about a significant new initiative. This is often because there is:
- No clear definition of success.
- A lack of accurate or incomplete information, or decision-paralysis because the initiative takes the business into unknown areas.
- Uncertainty with regard to forecasting how your innovation will perform, because you’ve not done it before and it’s difficult to predict. This is true even if you’ve done something similar in the past, because the time and people are different. Whilst we can learn from it, the past does not necessarily predict the future.
- The dimension of working with others. Their attitudes can sometimes be challenging, depending where they are on the risk aversion / gung-ho thinking continuum. Individuals may display a lack of or too much emotion and intuition.
- Competition on priorities – especially if you have an existing portfolio of products or services. Whenever you spend time and money on one thing, it means saying no to something else. There is only so much resource to go round.
- The need to influence multiple stakeholders with different points of view, experiences and agendas. If you’d like more help with this, see my previous article and free download here.
- Not much time. I appreciate as much as anyone how challenging it is to work on innovations and new initiatives as well as keeping the day-to-day business working well.
- Lack of a clear process.
Creating a business case helps you to overcome all of these challenges, because it combines all the thinking and information into one place, and benefits communication, debate and influencing.
How to reduce uncertainty
No-one has a crystal ball. You can’t know for sure how well your innovation or initiative will work in practice. Ultimately it’s a judgement call, hopefully informed by as much reasonable data, insight and evidence as you are able to collate. Here are some really important tips for dealing with uncertainty:
- Make sure that you discuss the unknowns clearly and try to address them. Don’t just brush them aside.
- Know the issues. Gain as much clarity as can amongst the many minor distractions in your business case, and focus only on the things that make a material difference.
- Look at both risks and opportunities. Use something like the ‘bullet proofing technique’ to think about the probability and potential impact of each item. For each significant risk, define actions that could reduce (or ‘mitigate’) it. Write each key risk onto a post it note, then use this grid to position each post it in the most appropriate place. For the most likely and potentially most problematic risks, identify any actions that you could realistically take to reduce the probability or impact and write them down. Do the same for opportunities, this time thinking about how you can expand rather than mitigate them. Then write up your summary into the business document itself.
Suggested approach – step by step
Write down your answers to these bullets, using the headings I provided above:
- Define the opportunity, such as a process efficiency, or an unmet customer need. Make clear assessments, based on the information you have / can get.
- Review the competition. What else is available? What does your innovation bring that others don’t offer, or that you need to compete?
- How attractive is the market? Why? What market analysis have you done? If you’d like to download my free playbook on how to carry out a market analysis, click here to download your free step-by-step resource.
- How well does your innovation fit with your wider business plan and portfolio?
- What capability (people, skill and operational capacity) do you have to implement your innovation?
- How will you stage your innovation, e.g. through pilots, trials, big bang?
- What are the risks and opportunities?
- What are your key stakeholder requirements?
How would you implement your innovation, and what are the key milestones / timings? Work through the impact on the full value chain for your business.
Impact on the value chain
The graphic below is based on Porter’s Value Chain. I use it in business cases because it’s a good way of summarising the activities that take place in many businesses. Along the top is the transformation process that takes place to create a product and deliver it to the market. Below the transformation process are support activities – such as HR, Procurement, Technology and Infrastructure and so on that allow the transformation activities to take place.
Where many people struggle with getting business-wide buy-in to an innovation case is by not considering the broader impact of their initiative on the company’s value chain, and not consulting with people in those different teams or departments to get their viewpoints into the business case.
The numbers
Think about all the costs, efficiencies (savings) and revenue, using the notes you’ve made.
Create a spreadsheet that shows the timing and amounts as follows:
- Each item of capital expenditure needed
- Employee costs
- Ongoing operational costs
- All the other costs that you can think of
- Legal, admin, accountancy, insurance, intellectual property protection…
- Projected sales from the innovation; and / or projected cost efficiencies / savings from the innovation. Show when they will start, and how they will build.
I recommend you create at least 3 scenarios: best case, most likely case, worst case (so you have 3 different sets of numbers and assumptions).
On balance, when you look at your notes and numbers in the round, ask yourself these questions, because these are the ones that you will need to answer when you are justifying your investment recommendation to others:
- Do the potential benefits justify the effort, risk and investment?
- When is the investment likely to pay back?
- How will the investment impact your cashflow?
Now collate all your work and write it up, using the headings that I gave you earlier in this article, adapting the structure to meet your own specific needs.
I really hope that this article and the accompanying resources help you. If you’d like any help at all with a business case that you’re working on, or would like some business case training designed specifically for you and your business, please do contact me at jo@ideatime.co.uk.
