Business Case and Business Case Analysis Explained
Definition, Structure, Content, and Meaning
Business Encyclopedia ISBN 978-1-929500-10-9. Revised 2014-03-10.
A business case is a decision support and planning tool that projects the financial
results and other business consequences of an action or decision. Cases
are created, for instance, to address questions about capital
acquisitions, product launches, project funding, vendor choice, or
investments in marketing programs.
Most cases address questions like these: "What happens if we take this action? What happens if we take another action, or do nothing?" The case answers in business terms—business costs, business benefits, and business risks.
Business case results support decision making and business planning, but they also provide valuable guidance for managing and controlling projects, programs, or the life cycle of assets. Good case analysis, for instance, shows which critical success factors and contingencies are most important in controlling business results, measures risks and uncertainties, and provides early warning indicators when the risks of schedule slip, cost overruns, or delayed benefits threaten to rise (see, for instance Project Schedule Monitoring).
Finally, good case analysis provides a strong form of accountability for decision makers and leaders who must show, either now or in the future, that the business decisions made today are good business decisions, based on currently available information and currently reasonable assumptions.
A serious case for a complex business environment requires assumptions, arbitrary judgments, and the development of new data–new information that goes beyond existing budgets and business plans. This means that two people working independently can evaluate the same proposed scenarios, use correct financial math, and still produce quite different case results. For that reason, the business case should also communicate the methods and assumptions underlying projected results.
The following sections present an overview of business case structure, content, and usage (excerpted from Business Case Essentials, 4th Ed ISBN 978-1-929500-12-3)
• What is a business case? Essential structure and content
• The business case begins with a well defined case subject and case purpose
– Case subject: Business objectives and proposed actions
– Case purpose statement describes what the case will be used for
• How is business case success defined?
– Case credibility
– Case practical value
– Case accuracy
• Business case proof: Scenarios make the case
• Comparison and contrast: Business case vs. business plan
• Business case building resources
• ROI, NPV, IRR, Payback and other financial metrics in the case.
• Business case cash flow statement structure, analysis, and use,
• The case for information technology (IT): Keys to accuracy and credibility.
• Measuring value and ROI for professional training.
• Measuring risk, reducing risk, and sensitivity analysis for the case.
• Case building competency for the organization.
What is a business case? Essential structure and content
When is a business case complete? What makes it compelling and credible? Are there standards or rules for case structure and content? If you are asking questions like these, you are not alone. Business people today are rapidly losing tolerance for management error and, at the same time, demanding real accountability for decisions and plans. Throughout the business world, moreover, the competition for scarce funds is becoming more intense. As a result, everyone talks about the “business case” these days. Nevertheless, surprisingly few people in business really know what that means.
A business case is similar in some ways to a legal case presented in court. The trial lawyer and the business case author are both free to structure arguments, select or ignore evidence, and package the formal presentation. Whether or not the result is effective depends on their ability to tell a convincing story with compelling logic and facts. This can usually be done in many different ways. There is no single correct outline, format, or content list.
Looking beneath the surface, however, all good cases clearly have many characteristics in common. Good business cases, for instance, always present (in one way or another) rules for deciding which data belong in the case and which do not. They stipulate, that is, the boundaries of the analysis. Readers need this information in order to know confidently that the case reflects all costs and benefits that are relevant and only those that are relevant. When fundamental information of that sort is missing or unclear, intelligent readers sense the lack instinctively and credibility suffers.
We cannot prescribe a single outline or template for all cases, but we can identify “building blocks” of this kind that are essential to building a logical structure and supporting it with evidence that will stand up to critical scrutiny, serve as a useful guide to management, and predict what actually happens. The case model presented here identifies business case building blocks in five categories:
- Case Introduction and Overview
- Case Assumptions and Methods
- Projected Business Results
- Sensitivity and Risk Analysis
- Conclusions and Recommendations
This list shows a very natural order for presenting important information categories in the case. Each category, moreover, includes a number of building blocks that should be approached in a certain order. Order is important because later blocks depend on earlier blocks. In the case building project, the author develops these blocks in about the same order they appear in the business case report.
a sense, the case author takes readers through the same
reasoning—down the same path—that he or she has just traveled in
building the case.
The business case begins with a clearly stated subject and purpose
entire case follows from a clearly described subject and
purpose. In the Case Introduction Section, the subject statement describes what the case is about while the purpose statement explains what the case will be used for.
Case subject: Business objectives and proposed actions define what the case is about
There are many kinds of business cases on many subjects, but most have this in common: Each case is “about” two kinds of things:
- A proposed action or decision.
- Meeting business objectives addressed by the action.
The case asks “What happens if we take this or that action?” The case answers in business terms focused on financial results, business objectives, and measures of progress toward those objectives. The case is “about” meeting business objectives through a proposed decision or action.
Case building begins when the case builder knows the business objectives to be addressed. These might include, for instance, reducing costs, improving employee productivity, or increasing sales revenues. Case building continues when the case builder explains how these objectives will be addressed, through specific actions such as funding a project, making a capital acquisition, or bringing a product or service to market.
of these potential actions presents management with choices, such as :
Should we undertake employee training? Should we fund the project?
Bring the product to market? Make the acquisition? Which vendor should
we choose? Should we start now or start a year from now? For such
questions, the author recommends some answers over others and then
“makes the case” by showing why the recommended answers are preferred.
Case purpose statement describes what the case will be used for
Why is the case being built? Who will use it? For what purpose? What information do they need in order to meet that purpose? The author needs to answer these questions before building the case because they are crucial to knowing what to put in the case.
Business people turn to the business case for several kinds of reasons:
- To address decision support questions, such as “Should we fund the proposed project?”
- To address business planning questions, such as “How much funding will we need if we approve the project?”
- For management and control questions, such as “How do we maximize returns and minimize risks?”
- For accountability questions, such as “How do we show that we complied with vendor selection requirements?”
A single case may in fact address several or all of these kinds of questions. In the current business climate such questions are coming more and more often, with increasing urgency, in business, non profit, and government organizations of all kinds.
How is business case success defined?
From the start of the case building effort, the author needs to have in mind a clear definition for success with the case. To the project manager seeking project approval with case support, getting a “Yes” from the Project Management Office might seem like success. To the sales person supporting a customer proposal case analysis, getting closure on the sale might seem like success. However, a better definition of success—one that provides practical guidance to case builder and reviewer alike—takes the position of the organization and decision makers responsible for using case results. From this viewpoint, a successful business case meets these criteria:
The case is believed.
- Practical Value:
It enables decision makers and planners to act with confidence.
It enables them to manage the action for optimum results.
It discriminates clearly between proposals that should be implemented and those that should not.
It predicts what actually happens.
Notice that these criteria are tested in the order given. If the case is not believed, the other criteria do not matter. If it does not bring decision makers to a confidence level where they will take action, no one will ever know if the predictions are accurate. Whether or not the project managers or sales people actually get approval or closure depends on their ability to design and build a case that meets these criteria.
Case reviewers may know a lot or they may know very little about what to look for in a case presentation. They may or may not know what makes the difference between a strong case and weak case. In all cases, however, you can be sure they know this much: The business case looks into the future. Everyone knows that predictions about the future come with uncertainty.
Reviewers will have questions that must be addressed–questions like these:
- How do we know we will actually see these results?
- How likely are other results?
- How do we know that all important costs and benefits are included?
- Are there any hidden costs or other unpleasant surprises coming?
- How do we know that different action proposals were compared fairly?
builders cannot hope to eliminate all uncertainty from predicted
results. They are predicting the future, after all. However, they can
minimize uncertainty and measure what remains. Almost all of the
“building blocks” in the listed in Exhibit 1, below, contribute to case
credibility by providing concrete answers to the questions above. The
cost model, for instance, helps show that all relevant costs and only
the relevant costs are included. Risk analysis shows the likelihood of
other results instead of the primary predicted results (For more on
these and other case building blocks, see Business Case Essentials).
Case practical value
Reviewers may believe every word and number in the case, but still find the case does not meet their needs. When this happens, they may send it back to the author for re-work or more research in areas they are interested in. Or they may ask for stronger arguments in favor of projected results. Or, they may simply table the case and take no action on it. When this happens, the case clearly has not given reviewers enough confidence to act upon the results. For them, the case fails the practical value criterion.
Case builders can build in practical value by determining at the start of the case building project specifically:
- Which decision criteria are important to reviewers—which criteria will turn their decision one way or another.
- Which financial outcomes and which non financial outcomes reviewers are looking for.
- Other important factors that may influence reviewer decisions (e.g., mandatory legal requirements or a cash flow shortage).
- Specific information that planners need (e.g., total capital costs, or payback period for an investment).
- How competing proposals will be prioritized (the criteria by which competitors will be ranked).
- How much uncertainty reviewers are willing to accept in projected results.
First-time case builders are sometimes surprised to learn that these points are not necessarily determined or obvious when a proposed action is simply named. What it takes to “make the case” for any proposal typically depends on such things as the current business situation, the values and priorities of individual reviewers, organizational policy and history, and—most importantly—the business objectives addressed by the action.
In the structure outlined here, the information that gives practical value to the case is identified when case building starts and is presented in the case report as part of the purpose statement building block .
Failure on the first two success criteria (credibility and practical value) may disappoint the case builder. Failure on the third criterion—accuracy—can hurt the entire organization, especially if reality turns out much worse than predicted. When products fail in the market, when projects are grossly over budget, or when expensive assets do not justify their existence, the problem very likely started with an inaccurate analysis.
Some people may object at this point: “It takes time to test accuracy. We are projecting business results three years into the future, after all (or five years, or twenty years). We won’t know how the case scores on accuracy until the end of that period.” And, putting the spotlight on business case accuracy makes some people uncomfortable. They ask if they should be held accountable in three years for delivering on predictions made today. “Things change,” they say, “and assumptions underlying the case today will certainly be different in three years.” The knowledgeable case builder has two good responses to that line of reasoning.
First, some of the case building blocks in the following chapters enable the case builder and analyst to minimize, limit, measure, and communicate uncertainty in projected business results before a proposal is implemented. The only absolute certainty in predicting business results is that no one can predict with absolute certainty the consequences of a complex action. If you project five-year cash flow benefits of, say, $10.5 million, you can be very sure that over time it will not be exactly that.
Nevertheless, the case builder can use building blocks such as the scope and boundaries statement, cost model, benefits rationale, sensitivity analysis and risk analysis, to make compelling support for claims like these: “The 90% confidence interval for five-year net cash flow is $8.0 ‑ $13.2 million.” Or, “The probability that next year’s training costs exceed $120 thousand is less than 0.05.”
is also an important second point about building in and communicating
accuracy as well. The business case user can in fact begin testing,
maintaining, and improving accuracy of case results immediately after
the proposed action begins. Used this way, the business case provides a
very powerful kind of statistical quality control for projects,
programs, asset management, and other business investments. The key to
understanding how this works is understanding the role of assumptions in
projected business costs and benefits (See Chapter 5 of Business Case Essentials).
Business case proof: Scenarios make the case
Where in the case, exactly, is the proof that one proposed action represents the best available business decision?
"Proof" is built on reasoning very similar to the rationale behind scientific proof in the laboratory. In chemistry or physics research, for instance, the scientist tests the idea that one factor causes another, or that one theory accounts for reality better than another, with a controlled experiment. The researcher demonstrates “proof” by comparing experimental results from different, carefully controlled test conditions.
Similarly, the business case author
proves that one proposal or another is the best choice by comparing
carefully designed scenarios. Generally speaking, a scenario is an
account, or story, that describes what happens under one course of
action. In the business case, the “what happens” is presented in
business terms that are important to decision makers and planners (See Practical Value, above).
Consider briefly, an example case for a company that designs and manufactures mechanical parts for aerospace industry companies. In the current economic climate, and in a highly competitive market, management decides that several business objectives are especially important:
- Reducing design and manufacturing costs.
- Improving their ability to design and produce more complex products.
- Increasing the number of products developed and sold each year.
- Increasing average gross margin per product and overall gross profits.
- Reducing new product design time.
- Reducing manufacturing setup time.
They may consider ways to address this set of objectives with specific proposed actions, such as:
- Specialized training for engineering and manufacturing professionals.
- Reorganizing design teams.
- Upgrading the engineering design system software.
Which of these is the best course of action? Should they try one solution or a combination of these? A business case can address these questions by projecting and comparing business results under several action scenarios, for example:
- Scenario 1: Proposed upgrade of design system software.
- Scenario 2: Combination proposal: Train, reorganize, and upgrade software.
- Scenario 3: Business as usual. (none of the proposed actions taken).
Exhibit 1 (below) summarizes the structure and contents of the business case. The entire case is a logical structure, an assembly of building blocks, each designed to help establish the credibility, practical value, and accuracy of the scenarios at its heart.
- Each scenario projects business results under a specific set of assumptions and actions.
- Each scenario measures projected financial results for a period of time into the future, in terms of projected cash flow from financial costs and progress towards business objectives (benefits).
- Financial cash flow projections in each scenario are analyzed with financial metrics such as net present value (NPV), return on investment (ROI), payback period, and internal rate of return.
- Important contributions to non financial business objectives under each scenario are included. These may or may not be valued ultimately in financial terms but if not, these contributions are still made tangible, measured in objective terms, and their importance is explained in business terms.
Based on the scenario comparison and risk and sensitivity analyses, the author will recommend one scenario for action (which may even be the “Business as Usual” scenario).
Comparison and contrast: Business case vs. business plan
The business case is organized around an action or decision, to address business case questions like those given above. Those questions contrast with the focus for the business plan, which addresses similar questions about the organization (or about the business). The business plan address questions like these:
- What will the business look like in one year? (I.e., what will its financial position and business performance look like?) What will it look like in three years?
- How does the business get to those results?
- What sales, margins, and revenues can we expect next year?
- How many years will it take this start up company to become profitable?
Confusion sometimes arises about the differences between the business case and the business plan and the ways the complement each other.
In brief, a business plan (as described above) is organized around the business (or the organization, or a part of the business). The business case is organized to address questions about a single action or decision.
The plan asks: What will the business look like? The case asks: What will be the consequences (in business terms) if we take this or that action? In contrast to the plan questions above, the cases are generally deisigned to answer questions like these about the consequences of an action or decision:
- What will be the financial consequences if we choose X or do Y?
- What important non financial outcomes can we expect in either case?
- What will we need as a capital budget next year if we decide to buy the service vehicles instead of leasing them?
- Is the investment in new phone technology justified? Is there a positive ROI?
The table below summarizes and contrasts key differences between case and plan.
|A Business Case....||A Business Plan...|
|Is organized around...||A single action or single decision and its alternatives.||An organization or the whole enterprise. The plan may cover a single product or product line or the whole organization.|
|Predicts...||Cash flow results and important non-financial impacts that follow from the action.||Business performance of the organization, especially in the main categories of the income statement. May include projected pro-forma income statements or balance sheets for future years.|
|Focuses on...||Business objectives for the action (what the action is meant to accomplish).||Business objectives for the organization.|
|Is based on ...||A cost model and a benefits rationale, designed for the case, and applied to one or more action scenarios.||The business model for the organization (showing where and how the company makes money, similar to income statement), as well as expected trends, competitor actions, etc.|
|Measures...||Financial metrics such as NPV, IRR, ROI, payback period, and TCO, based on projected cash flow. Also includes important non-financial impacts.||Business performance in terms such as sales, margins, profits, and business "health" by contributions to important balance sheet categories|
|In a non-profit or government organization...||The scope of the case may include benefits and costs to the population served as well as the organization itself.||May focus on funding needs, budgetary requirements, and ability to operate within budget.|
A business case can support a business plan by helping answer questions like this: "How will the proposed marketing program (the action) impact our (the organization's) business performance?
A business plan can support a business case by helping case developers estimate costs and expenses, revenues, and expected changes in these areas.
Business case building resources
For a more complete introduction to business case analysis, case building, and the use of business case information, see one of the Solution Matrix Ltd. business case books:
For guidance in using financial metrics in the business case and building the business case financial model, see one of our spreadsheet-based tools:
For professional development training in business case building, join the premier business case seminar "Building the Business Case" (2 Days) or "Business Case Master Class," These public versions of these seminars are offered four times a year in three cities, New York City, London, and Frankfurt. Customized, onsite offerings are given by special arrangement throughout the year. For more information on the world's leading business case seminars, see:
By Marty Schmidt. Copyright © 2004-.