Written by: Richard Frykberg

Crafting a strong and compelling business case is fundamental in ensuring your project’s approval and success — particularly given the high demand for capital project funding and resources. They work to demonstrate a project’s potential value, feasibility and strategic alignment, providing stakeholders with a holistic view. Thus, it is critical to build a high level business case.

We have created a comprehensive guide to assist your project team in this process, outlining fourteen best practices to build a better business case that addresses the major constraints faced by executives: budget funding capacity, resource availability, risk, and return. By following these strategies, you can secure the support needed for your capital project’s approval and expedite the achievement of your strategic objectives.

Build your Business Case with Constraints in Mind

The essence of providing a successful business case is to understand the challenges faced by executive decision makers. When executives are presented with more authorization for expenditure requests than available time or money to deliver them all successfully, they must make tough prioritization decisions.

To help executives make better informed, more confident decisions, resource constraints need to be explicitly acknowledged, and the impact of your project on these constraints clearly expressed. Only when decision makers can compare alternative projects against these constraints are they able to optimize budget distribution and resource allocation in alignment with organizational priorities and risk tolerances.

A constraint-based approach fosters strategic alignment, improves risk assessment, and garners stakeholder endorsement by addressing key challenges with compelling solutions. This improves decision-making confidence, bolsters approval prospects and underpins successful project execution.

Let’s explore the four major constraints faced by executive decision makers today: capital budget funding, human resource capacity, risk mitigation and financial return.

Show Business Benefits to Overcome Funding Constraints

Every organization is subject to some degree of capital constraint. These limits will depend on the stage of the business cycle, but even in expansionary conditions, constraints are applied by the financiers.

These financiers are firstly management, who may be forgoing their own bonus entitlements. Other financiers of capital investments are a mix of shareholders, bondholders, financial institutions, governments and communities. What is certain is that all these key stakeholders will demand an appropriate return on the investment provided.

That return may be existential (i.e., mandatory compliance and sustenance expenditure) or discretionary, which will typically be risk and return-based savings or growth. Business cases that fail to effectively identify the benefits to the financiers will not proceed.

Identify Resourcing Requirements for your Capital Project

In addition to funding constraints, all material capital investments require the involvement and supervision of key internal resources. Unfortunately, key talent within any organization is not an infinitely scalable resource.

Projects that fail to identify the demand on key resources, that fail to obtain their endorsement, or that fail to confirm their capacity to support the asset will be unlikely to succeed and should not be approved.

Outline Project Risk for Management

All new investments are subject to a degree of risk regarding both the investment required and the outcomes to be achieved. It’s not required that organizations eliminate their capital project risk, as stakeholders are themselves able to diversify their investment strategies.

What is important is that the selected project portfolio lies on the efficient frontier, in that the expected return of the portfolio is commensurate with the degree of risk accepted, and that no alternative option could deliver the equivalent return at lower risk.

Based on their industry sector, an organization will be expected to achieve a return in excess of their weighted average cost of capital. In high-growth industries, it will be essential for an organization to place some higher-risk bets on new and emerging technologies to remain competitive.

What is essential in business case assessment is to ensure that management is aware of the inherent risk of each project and the portfolio to mitigate against worst-case outcomes..

This is most effectively achieved through a balanced and diversified portfolio of capital project investments, including high value, high risk, and high return investments alongside those of a more secure, certain nature.

Present Clear Timing and Payback Periods

Organizations are in a hurry because people are in a hurry. Time is money; competition is acute; stakeholders are impatient. All business cases must therefore present a clear picture of timing: what is the cash flow profile of the investment, and what is the payback period?

A Good Business Case Must Represent Value: 14 Best Practices

A good business case goes beyond the surface by recognizing the integral connection between constraints and value. Delving deeper than simply financial metrics, the following best practices encompass strategic alignment, risk assessment, and long-term impact, culminating in a comprehensive and compelling process to write a business case.

1. Demonstrate the Urgency of your Capital Project

The first question a decision maker should ask is “what are the consequences of inaction?”

In relation to sustenance ‘business as usual’ investments, the yardstick is risk. What is the likelihood of the ‘to-be-replaced’ component failing, and what would be the consequences?

This risk/impact assessment is typically represented as a heatmap matrix that ranges from low to catastrophic. Once the replacement urgency is established, the key assessment becomes evaluating the lowest cost solution that most effectively mitigates this risk.

For strategic, growth and savings initiatives, the urgency assessment is more subtle, and typically relates to opportunity cost or competitiveness: what unnecessary costs are we incurring, what competitive risks will we be exposed to and what opportunities are we failing to realize?

Effectively articulating the urgency of the investment in relation to proposed timing is thus an essential component of any business case.

2. Present the Business Benefits

Certain investments are non-discretionary and require little further justification for their potential benefits. The benefit of regulatory compliance, for example, may be operational continuity or avoidance of criminal sanction; both compelling reasons without much further justification required.

Discretionary investments warrant a benefit assessment related to the nature of the project. Replacement or significant refurbishment of operating assets will typically be assessed on degree of risk mitigation.

Cost saving and revenue generating initiatives will be evaluated based on a financial analysis. The key measure is the Net Present Value (NPV) of the investment: the discounted net amount of all future cash flows or savings. In theory, all positive NPV projects should be pursued. However, due to the constraints above, a further prioritization of positive NPV projects is often required.

In order to factor in timing considerations, payback period is a frequently considered measure. The sooner the payback, the more attractive the project is to an impatient management team and stakeholder group. Internal Rate of Return (IRR) is another popular benefit metric, as it indicates the proportionate return on the sum invested — two projects may have a similar NPV, but the project with the higher IRR achieves the same outcome at a lower cost. IRR’s are readily compared to an organization’s weighted average cost of capital, which sets the minimum benchmark for any project to progress.

A similar proportionate metric is the Profitability Index (PI). The PI indicates the NPV in relation to the sum invested: PI’s of greater than 1 indicate a positive return; the higher the PI, the greater the relative benefit of the project.

Strategic project investments are undertaken to ensure the ongoing competitiveness and growth — or even winding-up — of an organization. Strategies are typically pre-approved by the stakeholders; once a project’s associated costs and risks are understood, they usually require sign-off  to ensure they align with strategic objectives. Therefore, any business-case predicated on the delivery of an important organizational strategy should clearly indicate the strategic objective and performance outcomes to be achieved. Typically, strategic projects have a viable financial justification, however, due to the inherent uncertainty of entering uncharted waters, the calculated measures may understate their importance.

3. State the Confidence of Delivery

Other than the straight-forward repeat purchases of similar capital equipment, most capital investments carry a degree of risk. The converse of risk is confidence of delivery. The greater the confidence of delivery, the more attractive your business case.

Confidence is typically assessed on a number of qualitative dimensions and may encompass aspects such as commercial certainty, technical certainty, organization change management, co-dependency on other projects and delivery complexity.

4. Ensure your Business Case is Strategically Aligned

Most organizations have a set of enterprise strategies that are cascaded down the organization to a departmental level. Every investment decision — whether of a non-discretionary sustenance nature or for discretionary growth and savings — should be aligned to the strategic goals of the benefiting area.

Even putatively profitable initiatives that are misaligned to organizational strategy will become unsustainable and may ultimately become costly.  For example, whilst it may operationally make sense to replace aging production line equipment, if the organizational strategy is to move to out-source manufacturing in the short-term, this capital investment may not be appropriate. Good project portfolio decision making should therefore consider and significantly weigh the strategic alignment of all initiatives.

An example of a simple strategic alignment matrix is presented below:

5. A Detailed Work Breakdown Structure and Timing is Essential

Understanding the timing of investment cash flows and derived benefits is fundamental for evaluating NPV benefits and the demand on cash and resources. These cash flows are determined by the work breakdown structure elements of the project delivery and return components and the interdependence of activities.

These underlying activities can be capital (capex) or operational (opex) expenditures or benefits. Activities may be internal involving utilization of organizational resources, equipment or materials. Or, activities may be external, related to suppliers, customers, or partners. The cashflow related to activities may be periodic (license fees, for example), upfront or on completion of the activity.

Effective business cases cannot therefore be presented in a single column of numbers. The most effective representation of the timing of periodic inflows and outflows of cash is best defined in a project plan structure and rendered as GANTT or cash flow spreadsheet.

An example of an effective financial analysis illustrating the dependence of activities and related returns is presented below as both a Gantt and cash flow spreadsheet:

6. Provide an Honest Sense of Project Sensitivity

Seasoned executives know that every business case is based on assumptions and projections. Typically, sponsors are optimistic about both the costs and benefits to be derived. To fairly assess a business case does require honesty about the most likely — as well as best- and worst-case — outcomes.

Where the investment is based on fixed-cost supply quotations, and the benefits are based on empirical evidence, the range of outcomes may be narrow. However, the more ambitious, the more transformative the business case, the wider this range of outcomes is likely to be. Indeed, it’s appropriate for early-stage estimates to be broad-ranged as the analysis and engineering effort to tighten these estimates should only be invested once preliminary prioritization has been obtained.

In order to provide decision makers with a degree of confidence in their choices, it’s essential for your business case to provide an honest assessment of sensitivity, and in particular the quantum of maximum risk-exposure.

7. Present Alternative Options to Demonstrate Value for your Business Case

Look hard enough, and there are always options to address any identified problems or opportunities. Too often, unsuccessful business case submissions are rejected when executives are presented with a binary “yes or no” choice.

Alternatives are required to be presented for the decision makers to be assured that the options have been thoroughly considered, and the investment fairly valued. At the very minimum, most organizations will require competitive quotations for significant investments. However, alternative quotations are not always readily obtained, and to some degree undermine a procurement strategy of maintaining preferential supplier relationships.

To be effective, options should be assessed more deeply than simply an alternative quotation for the same thing, but rather as alternative approaches to deliver similar outcomes. Alternative technologies. Alternative ownership (buy vs lease). Alternative value propositions from “cheap and nasty”, to all the “bells and whistles”. A business case with well-defined alternative options is more likely to have one of its options approved, than be rejected outright.

8. Identify Preferred Vendors

Partner selection is a key success factor in delivering successful capital projects. Lowest-cost should not be the ultimate criteria for selection, as effective prior engagement with suppliers can significantly reduce the risk of failure and maximize productivity through effective team-cohesion. So, whilst the ultimate negotiation and selection of suppliers may be the responsibility of Procurement, identifying the preferred partner in the business case submission can help assuage the concerns and risk perceptions of management.

9. Consistent Structure Across all Business Cases

A solid business case is motivated by both numbers and words. Structuring the text elements consistently will help ensure that reviewers are able to effectively compare project proposals. The following sections are recommended:

• Current Situation: What is the problem or opportunity identified? Why is the investment being proposed?
• Expected Outcome: What do we seek to achieve from the proposed capital investment?
• Preferred Option Description: What is the proposed solution?
• Preferred Option Benefits: What specific outcomes does this option deliver to the organization?
• Preferred Option Risks: What implementation challenges does this solution face?
• Preferred Option Strategic Alignment: How is this Initiative aligned to strategy?
• Preferred Option Strategic Assessment: Why has this option been selected as compared to alternatives?

10. Include the Budget Reference

Investment proposals that have already been budgeted into a capital project portfolio are more likely to be approved when the actual Authorization for Expenditure request is raised. Incorporating early project planning and the provision of an indicative budget into the initial stages of annual business planning is therefore an important step to your later business case submission. If your organization formally assigns budget ID’s to pre-approved initiatives, this budget reference should naturally be included in the business case document to identify that the project has been pre-selected for inclusion.

11. Provide Evidence of Previous Success

Executives are naturally risk-averse. Evidence of previous successful projects will greatly reduce the perception of inherent project risk and favor a successful funding application. For this reason, it’s important to conduct post-implementation reviews on significant capital projects so that outcome evidence is retained in support of future initiatives.

12. Highlight any Taxation Policies

Whilst a project should not be justified through tax incentives or considerations only, taxation policies can play a significant role in the evaluation of project financial viability. Where accelerated tax write-offs or incentives are available, they should be incorporated in the project proposal financial analysis.

13. State the Potential External Risks

In addition to project-specific risks, non-controllable external factors should also be contemplated when submitting a business case; factors such as the economic cycle, political upheaval, legislative change, competitive forces and changing community attitudes. These constituents can help determine the exposure of the project to factors outside the project managers’ degree of influence.

14. Endorsement Builds Confidence of your Business Case

Major investments are multi-faceted, and the endorsement of specialist areas will assist ultimate decision makers.

If the project includes an IT component, seek the endorsement of the applications and infrastructure managers. If the project involves a new supplier, include procurement. If the investment is in foreign currency, include treasury. If the initiative involves plant and equipment, include engineering. If the solution includes significant changes to operating practices, include human resources and change management.

The key point is that the more widely socialized and endorsed the project, the greater the confidence decision makers will have in providing their approval.

Build a Better Business Case with Stratex Online

Manual spreadsheet-based business cases can be prone to errors and inconsistencies, impeding the decision-making process. Adopting the techniques described in this guide will undoubtedly expedite the approval of your key initiatives, enabling quicker progress towards your organization’s goals.

For the ultimate success of your organization, ensure that all business cases are represented with a similar level of analysis and depth: Enter Stratex Online, a ready to run SaaS solution that provides a flexible framework for preparing high-quality business cases.

With its intuitive project schedule-like interface, cost components and activities are easily described, related, and evaluated, ensuring clarity and precision. Benefits are presented in a clear and concise manner, and crucial financial analysis indicators are automatically generated, providing in–depth insights into potential returns.

Stratex Online offers robust support to executive management in making the right project portfolio decisions. By digitizing and standardizing the  business case development process, Stratex Online empowers decision-makers to evaluate projects with confidence and to optimize project portfolio selection to maximize return on investment and expedite strategic success.

Embrace the digital transformation offered by Stratex Online, move from manual to digital efficiency and elevate your business case preparation to a new level. Through this transition, you’ll gain the ability to make informed, data-driven decisions, accelerating your organization’s growth and prosperity in the dynamic business landscape.

Contact us for a demo to see how you will be able to develop consistent, high-quality, and winning business cases with Stratex Online.