Chapter 5

Preparing the Business Case and
Decision Package

In This Chapter:

• Assemble a Core Team

• Decide on a Recommended Option

• Think Strategically

• Identify and Confirm a Project Sponsor

• Determine the Project Scope

• Conduct a Cost-Benefit Analysis

• Conduct the Initial Risk Assessment

• Draft the Business Case

• Prepare the Final Decision Package

• Challenges

• Best Practices

A business case is a structured proposal for business improvement that describes a proposed new change initiative in enough detail that the portfolio management team can determine whether to invest in the effort. If a feasibility study has been conducted, the business case includes or references information from the study. Whether or not a feasibility study has been conducted, the business case includes a description of the business problem or opportunity, a list of the solution options, the costs and benefits associated with each solution option, and a recommended solution option with rationale. It’s also important to stress the strategic alignment of the solution option, including how the solution supports the organization’s strategies; if the solution sets priorities inconsistent with the organization’s strategies, include the rationale for considering the investment and any contingency plans to address those risks.¹

Although not all companies require a business case for major project investments, the practice is becoming more prevalent among organizations attempting to implement strategic portfolio management techniques for project selection and prioritization. The business case, supporting information from feasibility studies, the business architecture, and other business planning and analysis documents are combined into a decision package and presented to the portfolio management team for a decision.

The following sections discuss the activities that are typically used to create a business case. Many organizations do not conduct formal feasibility studies and so incorporate some feasibility activities and analysis into the business case. Therefore, some of the feasibility activities discussed in the previous chapter are reiterated here as necessary components of the business case.

Assemble a Core Team

The business analyst assembles and collaborates with a core team of highly skilled and experienced subject matter experts (SMEs) to provide expert judgment in analyzing the solution options and assembling the decision package for the portfolio management team. This is necessary because of the wide range of knowledge, skills, and techniques needed to prepare the complete decision package. Table 5-1 presents a list of the qualities needed to be successful.

Table 5–1—Knowledge, Skills, and Techniques Used to Prepare the Decision Package

Core team members typically include:

•    Project manager—Even though a project manager isn’t assigned until after a project is officially commissioned, it’s important to consult an experienced project manager to help develop the project scope and to prepare time and cost estimates.

•    Business visionary—Involve a business SME who is a creative thinker and futurist, one who represents the business area under consideration. This SME will help identify and evaluate the solution options and determine the best approach among feasible alternatives, determine business boundaries for the change initiative, and forecast the business benefits expected from the project outcome.

•    Chief technologist—Involve a technology SME who is a visionary and advocate of advanced technology to achieve a competitive advantage. This SME will help craft technically feasible alternative solution options, determine the best option, and estimate the cost of acquiring or building the solution.

•    Financial Analyst—Involve a senior financial analyst to help prepare a cost/benefit analysis to demonstrate the economic viability of the proposed project.

Decide on a Recommended Option

After assembling the core team, decide on the recommended solution option—the proposed project. As discussed in Chapter 4, for major changes it is prudent to undertake a formal feasibility study. This process involves thoroughly assessing the current business problem or opportunity, identifying the various solution options available, determining the likelihood of successful implementation for each solution option, and selecting the recommended solution option. If a formal feasibility study has not been conducted, the business case development team will need to conduct a similar analysis (refer to Chapter 4 for details).

Think Strategically

Once the team assembles and confirms a recommended solution option, consider that solution option—now becoming a proposed project—in its wider context. How will the proposed new business solution offer value through the organization to its customers more effectively and efficiently? How does the proposed project solution fit into the greater strategy of the organization; how does it support an existing competitive advantage or create a new one?²

Thinking strategically involves the following steps:

•    Describe the big picture. Identify the type of business strategy the proposed project supports. Be aware of how other projects contribute to the organizational business strategies, and how this proposed project will fit into the project portfolio.

•    Determine how the proposed project will promote this strategy.

•    Determine how the proposed project will sustain the organization’s competitive advantage.

•    Define how fulfilling the plans and objectives outlined in the business case for this project will implement the strategy.

•    Determine ways to link the numbers (in terms of reduced cost and/or increased revenue) in the business case to the strategy and to the strategic scorecard, if one exists.

Identify and Confirm a Project Business Sponsor

The business sponsor usually asks a senior business analyst or a member of senior management to prepare the business case. If the proposed project is approved it is the business sponsor who provides the financial resources for the project, dedicates business representatives to participate in the project, and is accountable for the business benefits expected from project outcomes.

Determine the Project Scope

Begin to draft the business case by summarizing information collected to date, including the competitive assessment results, the current-state and industry environment analyses, the business problem or opportunity, the solution options considered, the recommended solution, and the rationale for its selection.

After drafting this summary, define the project scope, which includes describing the project objectives, determining expected high-level deliverables (e.g., products, services), documenting business and project assumptions and constraints, and building a high-level statement of the anticipated work effort. First draft the preliminary scope statement, including:

•    In-scope and out-of-scope essentials

•    Preliminary product scope statement, including a high-level description of the desired product, service, or outcome

•    High-level work breakdown structure (WBS), used to estimate cost and schedule (decomposed to level 2 or 3)

•    Project boundaries in terms of business processes and process owners

•    IT systems depicted in context or business domain models, or other diagrams to define the boundaries of the proposed project

•    The initial list of stakeholders

•    The impact of the proposed project on the business operations, as well as on the technology infrastructure

•    The initial cost, time, and resource requirement estimates based on the WBS

•    The most likely solution development approach, (e.g., partitioning the proposed project into sequential releases, developing in-house, purchasing the solution)

After drafting the relevant project scope information, a cost-benefit analysis is elaborated further, ideally with the assistance of a professional financial analyst to help prepare economic models and forecasts.

Conduct a Cost-Benefit Analysis

After defining the scope of the proposed project, the core team works to determine its economic viability. Previous feasibility analyses should have provided initial information about the economic, operational, and technical feasibility of the recommended option. The core team now builds on that information, drafting the case to justify the proposed project solution in terms of the value it will add to the business, and compares that value to the estimated costs to develop, purchase, and/or operate the solution.

It is important to support the cost and benefit estimates with information on the methods, assumptions, and rationale used to quantify them. It is also important to predict costs and business benefits in terms that will be measurable after the solution is delivered. Only then can the enterprise determine the return on its project investments.

Defining Costs

Calculating the total cost of ownership (TCO) helps the portfolio management team understand the budgeted (direct) and unbudgeted (indirect) costs associated with the proposed project and solution. This cost represents the total cost to both purchase or develop the solution, and to own and operate the solution throughout its useful life, which includes related business and technical operations, training, upgrades, and administration. The TCO may also include any opportunity costs associated with not choosing to invest in other solution options, and any costs related to changes to organizational work practices.

Defining Benefits

Describe expected qualitative and quantitative business benefits to demonstrate how the project solution is intended to achieve business objectives and promote strategic advantages (e.g., by reducing costs, increasing revenue, improving market share). Benefits may be projected in terms of:

•    Expected market penetration

•    Estimates of cost and time to break even

•    Profit expectations

•    Follow-on opportunities

•    Expected cash flow consequences of the action over time

Challenges Associated with Cost-Benefit Analyses

Preparing cost estimates during this enterprise analysis, pre-project phase is often problematic for large projects with a significant IT component. IT projects have historically had a high level of uncertainty, and they require greater efforts to define the solution before it is possible to estimate costs and benefits with a high degree of confidence. It is simply not possible to accurately predict the cost of large projects at this stage, before more detailed planning and analysis activities have taken place.

Preliminary cost estimates can and should be used to help distinguish between alternative solution options. But a common problem occurs when senior managers—who must make a decision to invest at this stage—tend to insist the figures presented in these early forecasts remain fixed throughout the project life cycle. It is essential to emphasize the uncertain nature of these early forecasts in all discussions with the project sponsor.

Underlying many of the problems associated with developing and realizing business case projections is the immature measurement culture within many organizations today. The business case should present not just projected benefits, for example, but also benefit assessment and evaluation methodologies. This may include information about needed developments of internal measures or systems to ensure that the benefits predicted in the business case can be observed, measured, and evaluated.

Conduct the Initial Risk Assessment

The analysis activities to prepare the business case are not complete until an initial risk assessment is performed. Although this initial risk assessment is performed as a component of enterprise analysis activities, most of the risk management processes are repeated throughout the project. Project risk is defined as an uncertain event or condition that, if it occurs, has a positive or negative effect on at least one project objective, such as time, cost, scope, or quality. Project risk management includes conducting risk management planning, identification, analysis, response, and monitoring and control on a project.³

The purpose of the initial risk assessment is twofold: (1) to determine whether the proposed project carries more risk than the organization is willing to bear, and (2) to adjust the cost and benefit projections on the basis of the risks identified at this point. The business analyst facilitates members of the core team to conduct the risk assessment, including the following process steps:

•    Risk identification

•    Risk assessment

•    Risk response planning

•    Organizational readiness assessment

•    Risk avoidance

•    Risk rating

•    Benefit adjustments

Risk Identification

This process yields the best results when conducted as a creative brainstorming session. The goal is to identify business, financial, technical, and operational risks. This process answers the following questions:

•    What are the risks that the project will exceed cost and schedule estimates significantly?

•    What are the risks that the solution will not completely resolve the business problem?

•    What are the risks that the solution will not realize the estimated benefits?

•    What are the risks that the solution will exceed estimated costs to operate it in the business environment? In the technical environment?

•    What are the technical risks that might impact cost or performance?

Risk Assessment

For each identified risk, assess the probability that it will occur, and the impact if it does occur (usually assessed using high, medium, and low indicators). To do this, the business analyst or project manager facilitates a discussion of each risk item to arrive at a consensus on the probability and impact ratings. Once ratings are established for probability and impact, the team determines an overall rating for the risk item.

Risk Response Planning

For high-probability and/or high-impact risks, the business analyst or project manager facilitates a discussion to identify risk response plans, assess the cost of these plans, and add these costs to the overall project cost forecast. Reassess the probability and impact of each risk to ensure the responses reduce the probability or impact.

Organizational Readiness Assessment

Assess the organizational readiness and capacity for the changes that will be brought about by the proposed project. If the change is significant, the costs—in terms of training, retooling, new-staff acquisition, and overcoming the cultural resistance to change—could be considerable. Be sure to include these costs into the economic forecasts.

Risk Avoidance

Describe the risk of doing nothing—taking no action to solve the business problem or to take advantage of the new business opportunity. Be sure to include the cost of doing nothing (not solving the business problem or not taking advantage of the new opportunity) in the business case.

Risk Rating

Calculate an overall risk rating for the proposed project in terms of the costs, time, and solution quality. This answers the question, “What are the risks associated with actually realizing the projected business benefits described in the business case?” The business analyst facilitates a discussion to determine just how risky the proposed project is considered to be, and includes this information in the business case. The portfolio management team may be willing to take the risk if the reward is great, or the proposed project may pose more risk than the organization is willing to take.

Benefit Adjustments

If the risk assessment activities uncover high-priority risks to achieving the business benefits, it may be appropriate to adjust the benefit forecasts and take another look at the risk-adjusted cost/benefit ratio.

Draft the Business Case

The business case is the key document used by the portfolio management team to approve and prioritize projects. See Appendix A for a business case document template. Typical elements of the business case document and supporting information include:

•    Executive summary

•    Business problem and/or opportunity description

•    A summary of the internal and environmental assessment

•    Identified solution options

  •    Option 1: description, benefits, costs, feasibility, risks, issues, assumptions, and constraints

  •    Option 2: description, benefits, costs, feasibility, risks, issues, assumptions, and constraints

  •    Option n…and so on for each option

•    Recommended option and rationale

•    Most likely implementation approach (e.g., build or buy)

•    Appendix: supporting information provided as an appendix or referenced as relating documents

  •    Strategic plans, goals, themes, measures

  •    Current and future-state business architecture, if available

  •    The complete benchmark studies, competitive analyses, and feasibility studies, if available

After completing the business case, the business analyst meets with the sponsor and presents the key points in an informal meeting. The sponsor decides whether the proposed project proceeds forward to the portfolio management team for consideration. If the sponsor agrees to propose the project, the business analyst prepares the final decision package for the portfolio management team.

Prepare the Final Decision Package

The business analyst prepares an executive briefing for the project sponsor, and then compiles all relevant project information into a formal collection that functions as a decision package for the portfolio management team.

Challenges

The challenges the business analyst faces when preparing the decision package for the project sponsor to present to the portfolio management team include the following:

•    Business architecture components for the business area under consideration do not exist; thus, extra time is required to develop the architecture to some degree to complete the current-state assessment.

•    There is insufficient time and/or funding allotted to conduct an appropriate level of pre-project enterprise analysis.

•    The business analyst is unable to bring together a core group of SMEs with adequate knowledge and skills to complete the required activities.

•    The portfolio management team is not yet mature enough to use the decision package optimally to make project selection decisions (e.g., they lack the process, tools, and discipline to make decisions; they lack a strategic perspective about investments).

•    The project sponsor is not available to participate in developing, reviewing, and approving the decision package.

•    The level of detail presented to the portfolio management team is inappropriate, providing too little or too much information to enable the team to make the best decisions.

•    Information in the decision package doesn’t clearly present the value a proposed project is expected to bring to the organization.

Best Practices

As with most key business analysis activities, the use of standards, rigor, and a disciplined process will consistently yield a quality outcome. Best practices for preparing the decision package for new project proposals include the following:

•    Use standard project management practices to scope the proposed project

•    Assemble a small core group of SMEs to conduct the analysis

•    Estimate costs using a WBS decomposed to level 3

•    Estimate schedules using historical information

•    Use standard cost/benefit and break-even economic models

•    Prepare the feasibility study and business case documents using a standard template

•    Use a business case template that requires expected project outcomes to align with organizational vision and strategic goals.

Endnotes

1. Dennis J. Cohen and Robert J. Graham. The Project Manager’s MBA, 2001. San Francisco, CA: Jossey-Bass.

2. Ibid.

3. The Project Management Institute. A Guide to the Project Management Body of Knowledge, 3^rd ed., 2004. Newtown Square, PA: The Project Management Institute, Inc.