Developing a Business Case

1

• Developing a Business Case

2
Business are wary of IT investment due to many
project failures
Value Creation

• Project management does not understand the user
  need
• Scope is ill-defined
• Project changes are managed poorly
• Chosen technology changes
• Business needs change
• Deadlines are unrealistic
• Sponsorship is lost
• Project lacks people with appropriate skills
  and,
• Best practices and lessons are ignored.

3
The business case provides managers with an
approach and a tool to financially appraise a
value creating opportunity.
Business Case Objectives

• Values the option or opportunity by providing
  insights into fundamental economics and business
  drivers
• Provides comfort and trust when evaluating and
  prioritising strategic options and decision
  making
• Quantifies the effect on the business through
  benefits and staff impact
• Translates quantitative data into standard
  financial criteria (eg, ROI, NPV, IRR)

4
The business case situates the IT investment in
the business context
1. Business Context
2. Value Impact Analysis

• What assumptions have been made about future
  benefits, costs and baseline and future
  performance?
• What value can the business expect to receive
  from the opportunity?
• What are the different scenarios or alternatives
  and how sensitive are the variables?
• What are the significant risks associated with
  the option?

• What is the current environment in which the
  business is operating?
• How and why must the business respond
  strategically to the competition and the
  marketplace?
• What are the key opportunities for creating value
  and how must the business change to take
  advantage of these?

5
Companies are faced with any number of
opportunities to create value.
Component 1. Business Context
Illustrative Retailing Value Levers
6
NPV Discounted Cash Flow
Component 2. Value Impact Analysis

• Based on two concepts
• An investment adds value if it generates a return
  above the return that can be earned on an
  investment of similar risk
• The value of an asset is the present value of the
  expected future cash flows it will generate

• Discounted at a rate which reflects
• The time value of money (what you could earn
  risk-free)
• Inflation (what you need to earn just to stay
  even)
• Risk (what you need to earn to compensate for the
  risk of losing your investment)

7
The value of an opportunity, as of today, is the
sum of all future cash-flows discounted to their
present value.
Component 2. Value Impact Analysis
Value of today CF1 CF2 CF3
..... (1d)1 (1d)2 (1d)3

• Which cost of debt?
• Which cost of equity?
• Which capital structure?

• If value is negative, means that future
  cash-flows do not cover the cost of capital and
  destroy value
• Is all value reflected?

8
However, it is more than compiling a spreadsheet
of numbers. Insight is derived through analysing
the variables and options.
Component 2. Value Impact Analysis
9

• Elements of a Business Case

10
Business Analysis of a Retailing Firm
Example Business Context

• Strong retail presence was important to the
  companys overall position and profitability
• directly, through profit earned from the retail
  market
• indirectly, through benefits to upstream
  businesses
• The company had quality retail assets in the
  Australian market
• access to national distribution with broking and
  large and quality retail funds management
  business
• well regarded products
• Recent investments in retail capabilities had
  been made
• creation of a retail investment unit (bringing
  together broking and funds management)
• development of new channels
• In parallel, the external market was developing
  rapidly
• target customers are demanding more personalised
  customised solutions to meet their wealth
  creation needs
• competitors getting better at offering this in an
  integrated way across products and channels,
  assisted by technology

11
Example Business Context
However, the company felt there was a better way
of running the retail businesses to contribute
greater value to the Group.

• The company was not strongly positioned in the
  Retail market
• small market share
• costly operations compared with competitors
• Their past approach had given strong product
  focus, but a fragmented approach to the market
• several business units distributing to common
  customers
• insufficient coordination on systems decisions
• Continuing with the approach was likely to
  constrain performance in retail
• the best systems decisions may not be made
• investments may be duplicated across the Group
• cross-sell and retention opportunities missed
• The prize for doing well in this market could be
  substantial
• potential for substantial increase in the Groups
  share of the industry profit pool

12
Stage One of the Business case situate the
problem withinbroader BPR
Example The Proposed Solution
Personal Financial Services
Product
Distribution
Operations Support

• Strategy
• Segments
• Marketing
• Sourcing
• Alliances

• Sales and relationship management
• Sales support

• IVR call centres
• Net service centre
• Customer admin
• Technology strategy delivery
• Support services (HR, Legal, Finance etc)

13
The Business Case must present a credible
architecture
Example The Proposed Solution
Integrated Technology Requirements

• Front end systems sales and service support,
  customer information and customer relationship
  management
• Integration systems cross-channel and
  cross-product pricing, commissions and reporting
  systems
• Product systems new product administration
  systems, and interfaces to legacy systems

14
A credible financial model should be presented
Example Value Impact Analysis
15
The financial model provided a robust analysis of
the expected investment and retail profit.
Example Value Impact Analysis
Base Case Retail Profit Required Investment
1.7
1.3
1.0
0.9
Incremental business case
2.2
NPV 2.7 Payback 2.6 yrs
-0.3
-0.3
-0.5
1.0
FY00
FY01
FY02
FY03
Future Scenario Retail Profit Required
Investment
0.1
0
Retail Profit
3.8
Investment
-0.3
2.3
-0.8
-0.9
1.0
1.0
-0.6
-1.2
-1.3
FY00
FY01
FY02
FY03