Captain’s Log, Entry 7593.5—Make no mistake: Every business case is meant to prove something. Case authors may as well open with the line: I’m going to prove my project proposal is a good business decision. Or, I’m going to prove financial justification for my proposal. Or, we are acting responsibly when we take action!
Business case proof relies on the same reasoning that delivers decisive proof in the science lab.
Case builders intent on proving something often go on to produce the return on investment (ROI), internal rate of return (IRR), or net present value (NPV) they expect from their proposals. Their financial metrics may be attractive, but for some reason, they just don’t “make the case” with CFOs, review boards, or other senior managers. There may be doubts all around that anyone can proved anything with a business case.
The good news, however, is that business case analysis can indeed deliver a very strong form of proof—if everyone involved understands the nature of business case reasoning and business case evidence.
Many are surprised to learn that this has very little to do with finance and quite a lot to do with understanding the scientific method. Solid business case proof relies on the same reasoning that makes possible proof in physics and chemistry laboratories.
Proof in the Science Lab
In chemistry, physics, and other laboratory sciences, a researcher can test the idea that one factor causes another with a controlled experiment. For this, the researcher creates two or more experimental test conditions. During the experiment all are treated exactly the same, in all ways, except for one or more experimental manipulations. After all such trials, different outcomes may appear in the different test conditions. In that case, the only “reasonable explanation” for the difference is the experimental manipulation. The researcher can write:
Conclusion proven beyond a reasonable doubt! The experimental manipulation caused the different outcomes!
Of course, the laboratory research must provide statistical evidence that different outcomes were very, very likely not the result of simple random variability in various factors. Thus, proof from a controlled experiment is never quite absolute proof—but the chance of another cause for the difference is small enough to disregard.
How Do You Prove Your Proposal Is the Better Choice?
By the same kind of reasoning, the business case author “proves” that one proposal or another is the better choice for action by comparing two or more carefully designed scenarios. Generally speaking, a scenario is an account, or story, that describes what happens under one course of action.
Like the lab test conditions, business case scenarios are identical in all respects except for a few proposal actions. The business case author analyzes outcomes in each scenario in business terms, including:
- Financial metrics such as total cost, net cash flow, NPV, IRR, and IRR.
- Impacts on key performance indicators (KPIs) for non financial outcomes.
The author can assert proof if and only if all of the following apply:
- Firstly, business under a Proposal Action scenario must differ from outcomes in another scenario, such as a Business as Usual scenario.
- Secondly, the differences must be important and large enough to matter.
- Thirdly, it must be unlikely that differences result from random variability. This allows the author to claim “proof beyond a reasonable doubt.”
When these three conditions apply, the business case author may write:
Proven beyond a reasonable doubt!
Proposal scenario actions lead to better business results than outcomes under Business as Usual.
Will Anyone Trust the Proof?
The business case author—just like the laboratory scientist—provides statistical evidence that the different scenario outcomes are not due simply to random variability in assumptions underlying cost/benefit estimates.
Risk and sensitivity analyses serves this purpose: The author may produce confidence interval estimates such as these:
- A 95% confidence interval for net gains under the proposal scenario is $8.00 million to $12.00 million.
- The 80% confidence interval for the 5-Yr ROI under the proposal scenario, is 26% to 34%.
To make the proof believable, the author shows that different scenarios were part of a “controlled experiment,” that is:
- All scenarios follow the same design rules. That is, all scenarios use the same cost model, the same global assumptions, and the same benefits rationale.
- The author can measure the same business benefits and business costs in the same way for all scenarios.
Good business case design serves this purpose: The author’s case report has much in common with the chemistry lab report. Both have a Methods Section. In the business case, this includes the following:
- Major global assumptions. These are the same for all scenarios.
- Assumptions that define scenario differences.
- Case scope and boundaries. This describes whose costs and whose benefits belong in the case. And, it defines the time period for analysis.
- The cost model for all scenarios.
- The benefits rationale for all scenarios. This helps define business benefits in terms of business objectives.
Funding My Proposal is the Better Business Decision!
Like a good trial lawyer summing up a case, the business case author ends by addressing the jury directly. The purpose is to review the proof rationale one more time. The address will sound something like this:
In conclusion, my case shows the following:
- Firstly, Proposal scenario outcomes score higher than Business as Usual scenario outcomes on key financial metrics and KPI’s.
- Secondly, scenario comparisons are objective and fair.
- Finally, risk for assumptions and outcomes is small and acceptable.
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By Marty Schmidt. Copyright © 2004-2019.
Solution Matrix Limited, Publisher.