RAPID ECONOMIC JUSTIFICATION. Building a Business Case

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1 RAPID ECONOMIC JUSTIFICATION Building a Business Case

2 Rapid Economic Development A proven business case framework and process guide that has a complete set of step-by-step instructions including associated worksheets, templates, and deliverables. A formal process to Identify relevant business-critical success factors Discover opportunities for improving business activities and processes Estimate the benefits and costs that your organization would incur by implementing the solution Provide analysis and a financial business case for how and when a solution will impact the business

3 Why Use the REJ Process 1. Is a systematic approach for identifying processes, activities and operations that can be improved 2. Identifies multiple areas across the organization that can benefit from the implementation of an initiative or solution 3. It is a natural prioritization process that will identify the business activities and the solutions that will most impact the key stakeholders and decision makers 4. Builds a structured roadmap for implementation of the initiative 5. Ties benefits of the initiative to organizational objectives, strategies and KPIs 6. Drives the financial business case

4 The REJ Process

5 REJ - The Requirements Identify CSFs, KPIs and business strategies for key stakeholders Forces the process to become aligned with business not IT initiatives Personalizing the process This is the basis for the benefits analysis to occur later Interview all possible business areas For simplicity sake, we usually interview each functional unit separately A demo is usually a good place to start the interview process Look for potential activities, processes, tools and people that the solution can impact. Where is the PAIN (or GAP) Identify a Process Owner or Expert for each identified area Create an Hypothesis table (think of it as your worksheet) See REJ worksheet for hypothesis table As part of this task, you will identify potential stakeholders and map the hypotheses to their specific needs It is important to identify the Key Stakeholders that have the influence to approve or impact acceptance of the solution

6 REJ Mapping the Solution Identify potential opportunities for improvement Four good questions to ask: What is the financial impact if we change a KPI one unit? What strategies will have the most impact on the KPI? What activity, process or tool will impact the strategy? How will the solution impact the process, strategy or KPI? Go back to process owners and provide detailed analysis using flow charts, cause and effect diagrams, affinity diagrams, fishbone graphics, and process analysis to identify ways to apply the proposed solution. Prioritize the Opportunities - we recommend the Cartesian Prioritization charting method (Expected Impact Vs. Probability of Occurrence) Create an Opportunity Table (See REJ Worksheet)

7 REJ Prioritization Best Practices Focus on KPIs that are not at desired levels Business is less likely to be concerned with KPI that they will hit, even though it may have a large positive impact Identify activities that your stakeholders are not already driving initiatives for: If they already have a plan of action in place, it is doubtful they will be care that your initiative will increase the KPI (unless there is still a gap) Focus on KPIs and activities that impact the top players Identify large opportunities that impact a single KPI significantly, but may also impact multiple KPIs Identify single opportunities that may provide justification and may also have impact to other parts of the organization. However, if it does not impact one opportunity significantly, it will be hard to get approval

8 REJ - Estimated Benefits The two main steps in the estimating phase are: 1. Analyze and Maximize Benefits 2. Quantify Benefits If you cannot define a benefit in measurable terms, your value proposition is weakened significantly, and your chance for funding is diminished. The benefit-cost calculation conducted in the REJ process goes beyond a simple itemized list of benefits for the budget owners, and for savings generally highlighted under the TCO umbrella. To get sponsorship for your initiative, benefits must be expressed in the language consistent the business decision makers the language of business, money, and finance not features and benefits of a specific solutions.

9 REJ Estimate Benefits Phase Maximizing Benefits Focus on direct and indirect impacts Direct impacts are the easiest to prove. They have a direct impact correlation to the P&L or a KPI Indirect impacts have a cause and effect relationship on a strategy that impacts a KPI or an activity that impacts a strategy that impacts a KP Maximizing benefits should be evaluated from two points of view. For example, take the prioritized list of single opportunities and: Find new business improvements in different areas with the set of solutions already identified. Explore larger benefits that can be achieved with little marginal effort. This approach will help to obtain more stakeholders to support the initiative rather than resisting the initiative.

10 REJ Estimate Benefits Quantifying Benefits: In this task, you estimate the economic benefits of the initiative. If you are using the REJ workbook use the Solution Benefit Analysis worksheet. Benefits should be expressed in either Business or IT benefits generated by one of the following categories: Revenue Generation Revenue Protection Cost Savings Cost Avoidance There are several ways to define quantitative value, but the following approaches are usually very effective: The value of one Expected monetary value Real options Goal seeking Projecting data from external benchmarks for your scenarios Process cycles

11 REJ Estimate Costs The two main steps in the estimating phase are: 1. Identify Costs 2. Quantify Costs The general workflow for this step is to identify all types of costs relevant to the initiative, calculate the economic value of each cost, and then identify potential obstacles to an accurate cost analysis. Within the context of an REJ value proposition, cost analysis involves quantifying the expenditures associated with specific aligned benefits. The completed list of quantified costs will be used in the cash flow analysis.

12 REJ - Estimate Costs There is no industry standard definition for total cost of ownership (TCO). However, the three most commonly accepted definitions are: Single TCO metric. TCO = TCA + (annual ongoing support costs * years in lifecycle) Annual TCO metric. TCO = (TCA + (annual ongoing support costs * years in lifecycle)/years in lifecycle Steady-state annual TCO metric. TCO = ((Hardware + Software)/years in lifecycle) + annual ongoing costs TCA = Total Cost of Acquisition See REJ workbook for sample chart of accounts

13 REJ Estimate Risks Tasks in the risk phase are: Identify the risks relevant to the IT initiative. Group risks into categories. Apply economic costs to risk categories. Include risks that exceed the customer s risk threshold. Create risk mitigation plans for scenarios that exceed the customer s risk threshold. Apply an Adjusted Risk Cost Prioritize Risks In this step, you identify and attach economic values to the effects of unexpected or negative events. You can have a great ROI, but if the decision maker perceives risk, he or she will not approve your initiative.

14 REJ - Estimate Risks Create an Adjusted Risk Table with Economic Costing Description of Risk Failure to assign owners to each cost Benchmark or other thirdparty data is used inappropriately Business sponsors have low confidence in the cost estimates Operator error while using TCO tool (data entry mistake or field on form left blank) One or more cost category is omitted from the analysis One or more costs may be omitted from a specific category Costs may be difficult to quantify Costs might be real but cannot be measured until a future date Probability 10% Economic Impact Cost $25,000 $2,500 Risk Mitigation and Risk Avoidance Map ownership of each cost to a stakeholder before the cost analysis begins 8% $100,000 $8,000 Try to use company-specific data instead of third-party data Validate third-party data with stakeholder 12% 15% 20% 16% $50,000 $6,000 $25,000 $3,7500 $50,000 $10,000 $50,0000 $8,000 Choose stakeholder carefully Validate costs early and often Get familiar with tool before the cost analysis begins Run calculations more than once Use procedure on page 4 systematically to avoid omissions Use procedure on page 4 systematically to avoid omissions 17% Look for unconventional sources of cost $50,000 $8,500 data Use proxies appropriate for your organization 10% $50,000 $5,000 Use proxies appropriate for your organization Adjusted Probability Adjusted Cost 5% $1,250 3% $3,000 5% $2,500 12% $3,000 8% $4,000 10% $5,000 15% $7,500 3% $1,500

15 REJ Financial Case Common Financial Models Net present value (NPV) Internal rate of return (IRR) Return on investment (ROI) Payback period Hurdle rate Balance Sheet method Return on assets (ROA) Earnings per share (EPS) While all measurements are valid, each should be used in the decision making process in the manner to which they are best suited. All models should also be normalized to the present value of money so they can be compared more accurately. Using multiple models can often validate an accurate estimate of return

16 The REJ Financial Case The purpose of this activity is to concisely and effectively articulate the potential value that your initiative offers to your organization. Task 1: Provide a cash flow projection Task 2: Conduct financial analysis using standard models Task 3: Write the value proposition Task 4: Create the detailed written report Task 3: Create the presentation you will deliver to the decision makers There are 4 key questions that a value proposition must address: 1. What change with What solution are we proposing? 2. Where are the aligned benefits we envision? 3. How Much for Who (stakeholder)? 4. When will we receive the benefits?

17 Work Items for REJ Executive Summary Presentation Gap Analysis Proposed Solution Benefits Analysis Cash Flow Projection Risk Assessment Financials Decision Point Appendices: Methodology Stakeholder Analysis Process Analysis Benefit Estimates Cost Analysis Risk Assessment Payback calculations Value proposition, financial ratio summary, and part of Business Assessment Roadmap A 6-to 8-slide Microsoft PowerPoint presentation Business Assessment Roadmap and fishbone chart Opportunity Table, demo screen shot, and solution description (such as process flows, screens, and demonstrations) Benefits Matrix Table: cash flow spreadsheet Risk Worksheet Line items and charts (such as a payback analysis) Text: 1 slide 1-page REJ banner with notes 1-or-2 page alignment table Quotes Diagrams as required Assumptions and calculation techniques Value statements as required Spreadsheet: 1-page detailed cost Spreadsheet: 1-page assumptions and calculations Spreadsheet: 1-page calculations and source data

18 A Business Assessment Roadmap Stake holder CSF KPI Strategy KPI Current State KPI Desired State Activity, Process, Tool Fu nct io n Financial Impact COO Business operation value Quote-to-cash Percent of perfect orders COGS Productivity increase through automation activities 38 days 73% $ days 90% $499 Order management Returns and complaints management CIO Maximize IT value, Minimize IT Cost Number of milestones missed Lower IT costs Governance Create SLAs Improve project management 85% delivery 99% uptime 3% cut 95% delivery 99.5% uptime 5% cost Business process design and reengineering VP of APP Dev Increase application value X% application availability Interoperability Faster and cheaper applications Plan for reusable components with SOA to manage Web services 98% application availability 3% budget reduction 99.9% application availability 8% budget reduction year-to-year Managing code for Workflows. Implement QA for data IT Architect SOA & Process value Number of steps in the that can be automated Reduce the amount of code to write workflows 90% manual based workflow 10% manual and paper based workflow Software for process automation

19 REJ Team Composition Role Description Responsibilities Average Time Project Manager Key Stakeholder Financial Analyst Subject Matter Expert Business Architect Responsible for overall project management. Overall QA of Deliverables (10 hrs/wk) 1 wk for deliverables The business sponsor ensures that the REJ meets the specific needs of the organization that sponsors the study. Conducts the financial analysis required to identify key performance indicators and the cash flow projections. Reviews the current activities of the organization by using a variety of process modeling techniques Reviews output of process models to determine the most appropriate solution to improve business activities. Ensures team has access to appropriate resources and data Provides data such as balance scorecards Collaborates in assembling cash flow projections Analyzes critical activities Provides suggestions for improving activities Develops solution Defines value of solution in business terms 1 day + 2 hours per stakeholder group 5 days 2 days per stakeholder group.5 days per stakeholder group Auditing authority (optional) Controls accuracy of calculation, verifies integrity of assumptions, and verifies that final results are in line with industry trends. Eliminates errors and increase quality 2-3 days overall

20 Summary of the REJ Process 1. Identify and Interview all stakeholders that can benefit from the solution 2. List the CSFs and KPIs for all stakeholders 3. Estimate and Prioritize the activities that will have the largest impact on the KPIs most critical to key executives 4. Create Value Statements and a hypothesis table 5. Provide detailed process analysis to confirm or disprove the value statements 6. Locate the individual benefit(s) that will justify the initiative on its own 7. Maximize the ROI potential by combining the individual benefit(s) with any other benefits that will occur if you implement the solution 8. Quantify benefits, cost and risks 9. Provide cash flow analysis and financial models 10. Present findings

21 Benefits of the REJ Process At the end of the process you will have: Identified what activities will provide the biggest business impact Discovered ways to increase the overall ROI of your initiative Strengthened the correlation with specific business KPIs; aligning the business and customer benefits Demonstrated both the economic benefits and value of the solution Created a cost justification for the solution Identified the risk of implementing the solution Set the ground work for an implementation plan Most importantly, you will create buy in from executives and business owners.