Can government or non profit organizations write a "business" case?
Case builders in government and non-profit organizations cannot turn to increased sales, profits, or shareholder equity for business case benefits.
They sometimes assume that cost savings or avoided costs are the only legitimate financial benefits for their organizations. The problem is that cost savings may be nowhere in sight for proposed mission critical initiatives or actions.
- Can you build a business case if you are not in business?
- Are there financial benefits in the government or non-profit case besides cost savings?
- Do standard financial metrics such as NPV, IRR, or ROI have meaning in the not-for-profit world?
Questions like these come often these days from leaders in government, education, community service, and the rest of the non-profit world in our business case seminars. Many of these people feel they are being asked to do the impossible.
On one hand, more and more spending decisions have to be justified and documented with business case analysis. Starting with the Klinger-Cohen Act of 1996, for instance, US Government organizations have faced a steady stream of new laws, directives, and guidelines requiring responsible decision making and business case accountability.
On the other hand, government and non-profit organizations are not in business to grow sales, increase earnings or build shareholder equity. Those are primary sources of business case benefits and financial justification for the profit-making company. They are not an option for the government or non-profit organization trying to justify funding proposals, projects, or initiatives. When cost savings are nowhere in sight, however, case builders ask: Is there still a "business case" for going forward?
Sections below show how the process for building a successful government or non-profit business case—one that is truly a business case—begins by defining, understanding and articulating:
- The target population or constituency served by the organization. This answers the question "Whose benefits belong in the business case?"
- The organization's mission and strategic objectives, and how progress towards these objectives is measured. The government or non-profit business case depends on the case builder's ability to show that reaching these objectives has value for the organization.
- Can government or non-profit organizations write a "business" case?
- Whose benefits belong in the government or non-profit business case?
- The government and non-profit business cases asks: Whom do you serve?
- Do these benefits belong in your business case?
Ask: What is your mission?
- How do you measure the value of government or non profit business benefits?
Whose benefits belong in the government or non-profit business case?
A few years ago, I spoke with the director of a small non-profit community service organization whose governing board had made the "impossible" demand. She wanted to buy a specialized software application for the group's one computer. The board wanted a business case.
This group collects surplus food donations from restaurants and food stores and then distributes it to homeless and other people in need. Unpaid volunteers provide the labor. The use of a small office and expenses are covered by grants from local businesses. Financial action in this group is almost non-existent.
The director believed they could increase service volume by 30 to 40% or more with the help of the management software--through better coordination, better communication, and the creation of a service database. But the software vendor was not interested in donating the package. Purchasing would create the largest single line item in the annual budget. It was not going to save any money and there are no sales revenues or profits to look for.
How on earth," the director wanted to know, "can we justify this with a business case?
The answer is "no way" if the case looks only at the costs and benefits for the organization itself. I suggested she meet with her board members before developing the case and agree with them--up front--on an answer to the question: Whose benefits belong in the case? The right answer to that question can make the government or non-profit business case an entirely viable creature.
The government and non-profit business case asks: Whom do you serve?
Most government organizations are mandated by law to consider the populations they serve when measuring the value they deliver—although many in government are not fully aware of this principle or how to bring it into the business case. Fewer such laws apply for educational, charitable, and other non-profit groups, but the principle is equally valid there. In order to answer the question "Whose benefits belong in the case?" answer first two other questions: "What is your mission?" and "Whom do you serve?
In the case of the community service organization mentioned above, the director could articulate clearly the city government's estimate of the potential service population, as well as her organization's service capacities.
Do these benefits belong in your business case?
Ask: What is your mission?
In almost all settings—private industry, government, and non-profit organizations—the business case subject is a proposed action. Actions receiving business case support typically include proposed capital acquisitions, projects, programs, initiatives, product launches, and new services. For all such proposed actions, the case builder's primary objective is to show that one or mor of the action outcomes has positive value for the organization.
The case builder's objective, in other words, is to show credibly that the action results in business benefits. As the business case analysis proceeds, the case builder will begin taking inventory of specific outcomes expected from the action. Some expected outcomes will be viewed as candidates for measuring and valuing as business benefits, while others will be designated as "busines costs." A few of these outcomes may lead directly to positive financial value, measured as revenue inflows, cost savings, or avoided costs. Such outcomes are easily valued and they are readily accepted as legitimate business benefits.
Other action outcomes, however, may not be connected so easily with positive financial value, even though they clearly represent progress towards meeting organizational objectives. Such outcomes may include, for instance, "higher quality of service delivery," "increased readiness," or "improved employee morale." Outcomes such as these typically represent the major candidates for benefits in the government and non-profit business case.
When such candidates are identified, the case builder's next step is to ask whether or not they qualify as legitimate business benefits for the case. This means asking and answering questions such as these:
Will the expected outcomes from the proposed action you:
- Accomplish your mission?
- Meet other important objectives?
- Improve service delivery?
- Improve service quality?
- Deliver new services?
- Lower the risk of failure?
- Solve known problems?
If the answer is "Yes" to any of these, the benefit belongs in the business case,
How do you measure the value of government or non profit business benefits?
In order to develop business case benefits, ask, what is that worth to the population you serve? The director mentioned above had no trouble showing a very large return on investment for the software application, once she and the board agreed that benefit value should be measured in terms of value delivered to food recipients. Once cash flow estimates for costs and benefits are admitted to the government or non-profit case, they can be analyzed and evaluated with the same financial metrics that serve in private industry, including discounted cash flow (DCF)/net present value (NPV), internal rate of return (IRR) and payback period.
Note, however, that if the director had not secured the board's agreement before completing the case, there would have been no business case. Value is in the eye of the beholders, and the case builder may have to establish that value before delivering case results.
For more in-depth coverage and examples illustrating business benefit value, please see one of the Solution Matrix Limited Ebooks: