What is business case proof?
Business case authors are usually out to prove something when they deliver the case. Delivering proof is the motivation and intent behind many if not most case building efforts. The authors might as well write in the opening lines,
"I want to prove that ...
" ... my proposed acquisition is financially justified."
" ... funding my project is a good business decision."
" ... I acted wisely and responsibly in taking this course of action."
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) expected from their proposals. These financial metrics may be very attractive, but for some reason, they just don't "make the case" with CFOs, review boards, or other senior management. There may be doubts all around that anything can be "proved" with a business case.
Not everyone appreciates, however, how 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. In a brief, business case proof has much in common with a the laboratory controlled experiment.
This article explains the reasoning—the same reasoning that supports proof in the science laboratory and in the business case.
How does a controlled experiment deliver proof in the science laboratory?
In chemistry, physics, and other kinds of laboratory research, the scientist tests the idea that one factor causes another, or that one theory accounts for reality better than another, with a controlled experiment. Two or more experimental test conditions are created. Throughout the experiment all are treated exactly the same in all ways, except for one or more "experimental manipulations." At the end of experimental trials, when different outcomes are found in the different test conditions, the "only reasonable explanation" for the difference is the experimental manipulation. The lab researcher writes:
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 with a business case?
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.
Business case scenarios—just like test conditions in the lab—are identical in all respects except for one or a very few proposed 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.
If the business outcomes in a scenario called "Implement the Proposal" differ from outcomes in another scenario, "Business as Usual," and if the differences are important, large enough to matter, and likely, the business case author may write:
"Proposal scenario" actions lead to better business outcomes than continuing under "Business as Usual."
Will anyone trust your business case 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. For the business case author, risk and sensitivity analyses serve this purpose: For instance, the author may produce confidence interval estimates such as these:
- The 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 were created and analyzed objectively by the same cost benefit rules. The author's case report—just like the chem lab report—has a "Methods" section with the cost model, benefits rationale, scope and boundary statements, and major assumptions under each each scenario.
Like a good trail lawyer summing up a case, the business case author finishes by taking the business case "jury" once more through the proof rationale:
I believe you will decide that funding my proposal is the better business decision for this company!
- Better is a relative term.
I have shown that proposal outcomes are better, relative to "Business as Usual" outcomes, using our key financial metrics and KPI's.
- I have shown that scenarios were compared objectively and fairly.
- I have shown that the uncertainty in assumptions underlying projected outcomes is small and acceptable.
For a brief, complete coverage of business case "proof" and the role of case design, risk, and sensitivity analysis, see please see 4th Edition of "Business Case Essentials."