Projects with a solid business case return value to the business, to their sponsors, and to the stakeholders and customers. Meeting scope, staying within budget, and getting done on time are the tactical elements that deliver the value. This being so, it is self-evident that successful project managers are those that effectively make the connection between project accomplishment and business value. (Goodpasture 2001)
Business Case Basics
A winning business case is really no mystery. First, it provides the background and context for the project. Historical performance is often necessary to illustrate opportunity. As is operating results from functional and process metrics are part of context. Perhaps there are lessons learned and relevant history of other projects that got you to where you are.
Second, the business case identifies the functional, technical, or market opportunity that the project is to address. From opportunity, specific solutions can be developed.
Third, the project proposal is given, laying out a description of scope, required investment, expected results and project benefits, and key performance indicators (KPIs).
Next, understanding is conveyed about how the results of the project fit into the business operationally. For this, a "concept of operations" is needed.
Last, and perhaps most important, you ask for a decision on the project proposal. In this section, it is customary to ask for approval of the assignment of managers for performance responsibility.
Step 1. Establishing Context: Put History Together
Assembling history and setting the context for a new project may not be where project managers expect to first come into the picture. However, often times it is necessary to bring forward completed, cancelled, or deferred projects for analysis, or to analyse the operating metrics of ongoing functions and processes. Activities in this step are identifying the similarities, highlighting the differences, and making certain irrelevant aspects of past endeavors do not color the current situation.
Here's a helpful hint: start with the WBS of all prior engagements. The WBS contains all the scope and should link directly to the financial records and chart of accounts. Make adjustments for change orders or other scope differences. Examine the project charter; make adjustments for tools, facilities, constraints, assumptions, and policies that influence the project, but may no longer be operative. Look also at the OBS (organizational breakdown structure) and the RAM (resource assignment matrix) that maps organization to scope.
Step 2. Responding to Opportunity
We begin with this idea: Opportunity is "unmet need." Investing in projects to satisfy identified need leads to reward. Reward enriches all who participate.
Goal Setting and Strategy Development
To effectively and wisely choose among opportunities requires goal setting and strategy development. We make these definitions: Goals are ends to be achieved, a state of the business in a future time. Objectives do not differ materially from goals, though some prefer to think of objectives in more of a tactical time-frame and goals in more of a strategic framework.
Opportunity is most often found within the goal sets of the "balanced scorecard" [Kaplan and Norton, Chapter 1]. Typically, there are four such sets: Customer and Market, Operational Efficiencies and Improvement, Organizational Development and Learning, and Employees.
The value of opportunity is transferred into goal achievement. Not all of the opportunity may be available to the business. Thus, more practically, we speak of the "addressable" opportunity as being that part that can find its way into the business. To make good on the addressable opportunity, strategy is required.
Strategy is actionable, often requiring projects for execution. Projects are identified by flow-down from opportunity analysis; projects are an instrument of strategy.
Business Case Preparation
Action plans, the essence of strategy, are a natural for project managers. The strategy is a high level WBS for the overall business case, identifying those actions that are in scope, and perhaps identifying strategy elements considered but deferred or not accepted.
Step 3. Proposing the Project and Laying out the Investment and Benefits
Opportunity is in the future. There are no facts in the future, only estimates. As such, your project proposal must identify four elements:
- Scope of accomplishment in terms with which sponsors and approving authorities will identify;
- Major milestones that are meaningful to the business;
- An assessment of risk factors that affect both investment and benefits estimates; and finally,
- A specific proposal of risk-adjusted investment dollars, benefit dollars (benefits recover investment), and KPs.
Many projects have only intangible KPIs and indefinite benefits. Sometimes it is possible to "dollarise" these benefits using the "before and after" methodology: what does it cost to run the business before hand, and what will it cost to run it after? Even though any specific cost element may not be directly linked to the project, the business as a whole will be different.
Identifying and Assessing Risk
The traditional investment equation is: "total return is provided by principal at risk plus gain." Project methodology transforms this equation into the project equation: "project value is delivered from resources committed and risks taken." The project equation is the project's manager's math and the balance sheet for the project. [Goodpasture, 2001, Chapter 3]
One means of risk assessment is through statistical analysis of the major schedule elements. For purposes of the business case, only major project outcomes need be scheduled. The best estimator of the schedule outcome is the expected value of the overall duration, defined simply as the sum of possible outcomes, each weighted by their probability.
Financial estimates should also be adjusted for risk. After all, financial performance is one key performance indicator (KPI) for all new projects. Two financial measures that account for risk are Net Present Value (NPV) and Economic Value Add (EVA).
Financial Measures with Risk Assessments
NPV measures cash on a risk-adjusted basis. Cash is consumed by projects, but subsequently is generated by project deliverables. EVA measures profitability. Although it has been said "profit is an opinion, but cash is a fact" [Pike, 1999], reflecting the influence of accounting practices on calculating profit, project managers should know that NPV and EVA are equivalent when profit is restated in its cash components.
Net Present Value
How can projects managers affect the NPV or its equivalent, the EVA? Simply put, the main effects under project management control are timelines for cash flows, that is, the schedule for the development of project deliverables and subsequent operations, and assessments of the risks associated with cash flows. After project completion, the responsibility for cash flows is transferred to a benefits manager through the KPI's. Project management participation in risk-adjusted financials has many parallels with risk-adjusted scheduling of critical path using such techniques as Monte Carlo, PERT, or critical chain scheduling.
Economic Value Add
EVA is a financial measure of how project performance, especially after the deliverables become operational, affects earnings. [Higgins, 1998 Chapter 8]. Projects with positive EVA earn back more than their cost of capital funding; that is, they return to the business sufficient earnings from reduced costs or increased revenues and margins to more than cover the cost of the capital required to fund the projects.
The bottom line on financial analysis: NPV (Cash flow) = present value EVA (After-tax cash-equivalent earnings).
Estimating Cash Flow
Estimating the cash flow for the business case is a project manager's task. Estimating cash flows is tantamount to estimating the resource requirements for the project, and then estimating the benefits that will accrue from a successful project. The PMBOK identifies several estimating techniques that can be applied. The key is not only to estimate the resources for the project, but also the benefit stream from operations.
Step 4. Outlining the Concept of Operations
A concept of operations need not be rocket science. The idea is this: Once the project ends, and by definition, as given in the PMBOK, all projects end, we must address the question, "how will the project deliverables be made operational in the business?"
Deliverables in the Concept of Operations
If project deliverables are to be inserted into, or change, or bring into being new processes, then there are process actors, inputs, methods, and outputs to consider. If there are new products, the fit to marketing and sales must be considered, as well as support after sale. And if there are new plant, systems, and equipment deliverables then the concept of operations will address the on-going operations that would be touched by these new assets, new or changed workforce, their training and relocation, and retirement of legacy assets.
To convey the concept of operations (ConOPs) in the business case, identify effected organizations, jobs, roles within jobs, tasks within roles, skills, tools and facilities necessary to do the tasks, operating budgets, and other relevant components. By narrative or diagram, explain the operating concept.
For purposes of the business case, it is most useful to reduce even complex processes to a handful of boxes, and back-up this abstraction with whatever detail is needed to satisfy participating managers that their needs are covered.
Step 5. Asking for a Decision and Assigning Responsibility
Hopefully, business cases in your organization are subject to a rational decision policy. Rational means: "outcome is a predictable consequence of information applied to methodology." With a rational decision policy, the business case should make a direct appeal for a decision to approve the project.
On the presumption of a favorable decision, the managers responsible for executing the decision should be identified. It's easy for the project sponsor to identify and assign responsibility for the investment: it's the project manager. The project manager controls the consumption of resources invested, scope accomplished, and the timeliness of it all.
Assigning responsibility for benefits and KPIs is more problematic. We use these definitions: Benefits are the mechanisms for recovering project investment. KPI's are different yet: they are the "balanced scorecard" of the project. KPIs measure business success as a consequence of project success, and are many times intangible.
The manager(s) for benefits and KPIs becomes loosely defined as the "benefit managers." They must make commitments in the business case to make good on the ConOPs and the changes envisioned. Benefit managers must accept this responsibility in a transfer from the project manager at the conclusion of the project. A slip-up here will materially affect the investment recovery.
A good business case lays out the response to opportunity. Such a response is made contextually relevant with history setting the background. From opportunity, all else flows. Risk adjusted financial measures, the project ConOPs, and the strategy response to goals rounds out the completed business case. In short, good business cases define good projects. Good projects return value, provide benefits, and have measurable KPIs.
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John C. Goodpasture, PMP and Managing Principal at Square Peg Consulting, is a program manager, coach, author, and project consultant specializing in technology projects, strategic planning, project office operations. He is the author of several books, articles, and web blogs in the field of project management. He blogs at johngoodpasture.com, and his work products are found in the library at www. sqpegconsulting.com, and at www.slideshare.net/jgoodpas. His full profile is at www.linkedin.com/in/johngoodpasture. Mr. Goodpasture's most recent book is "Project Management the Agile Way: making it work in the enterprise", published in January, 2010.
Goodpasture, John C., "Managing Projects for Value," Management Concepts, Vienna, Virginia, 2001, cover piece Ibid, pg 40.
Pike, Tom, "Rethink, Retool, Results," Simon and Schuster Custom Publishing, Needham Heights, MA, 1999, pg 177.
Higgins, Robert C., "Analysis for Financial Management," Irwin/McGraw Hill, Boston, MA, 1998.
Kaplan, Robert S. and Norton, David P., "The Balanced Scorecard," HBS Press, Boston, MA, 1996.
John Goodpasture shares his views on contemporary topics in project management, methodologies, and the value propositions of programmes and projects on his blog A Project Management Opinion.
© John Goodpasture. All rights reserved. Used with permission