Making the business case
What is a business case and why is it important?
The business case is the financial justification of the whole project, giving the costs and benefits of spending the initial investment in the project. This model has to take account of the ‘capital cost’ of the project, the operating costs of running the project outputs (deliverables) and the benefits (income/savings) from the project.
These cash flows can be compared using various financial models, from ‘break even’, through ‘return on investment’, to ‘discounted cash flow’ techniques (see below under ‘Investment appraisal’). In more social or public sector projects, one might have to resort to a ‘cost/benefit analysis’, in which every cost and benefit (financial or not) is notionally priced. Economists have developed a range of techniques to enable this to happen.
The business case is used to explain why the effort and time that will go into the project is worth the expenditure. Created by the project sponsor (or delegated to the project manager, but always with the accountability remaining with the project owner/sponsor), it should contain
- The reasons for undertaking the project (knowing and understanding the objective). As stated above, there will have been an earlier document – the project mandate – which is senior management’s confirmation that the project is needed and that it will therefore be funded. This is expanded and proven in the business case
- A consideration of the options (or approaches) that there may be to achieve the project’s objective(s), including the recommended option
- Specification of the expected benefits (and how they will be measured) – the sponsor has a significant role in this
- A summary of the key risks the project may face
- The cost of the project
- The timescale
- An investment appraisal.
If, for whatever reason, you are a project manager joining a project that is already under way, always check the business case carefully to make sure it is still valid. In a project of any length, the business case should, in any case, be re-visited periodically and, as a minimum, before each new phase of the project starts (sometimes called project gateways), for the same purpose.
Calculating or defining the benefits
Benefits are the measured final beneficial outcomes. They are used, as part of the business case, to justify the ‘investment’ in the project at its outset. The intended benefits should outweigh the project’s capital costs and operating costs over the whole life of the project. There may be exceptions to this rule, such as in the case of ‘regulatory projects’ (mandatory changes). The project typically produces outputs that the organisation then puts to work to derive the benefits, in other words, the required outcome(s).
Benefits may be financially measurable or not. Where they are not – for example, environmental impacts or time saved – you will have to derive an equivalent financial value for each benefit. There are a number of different approaches to doing this and the Green Book ((link)), published by HM Treasury, includes a number of helpful suggestions.
In the case of well-run projects, a list of Key Performance Indicators (KPI’s) for the project is produced at the outset. These would typically include a list of indicators to answer the question – ‘what will project success look like?’ These will often link to the project benefits and each can help in generating the other.
How do I work out what resources I need?
This is where it becomes necessary to break down the content of the project into the tasks and sub-tasks that will be necessary to deliver it. This work breakdown structure (or Product Breakdown Structure, in PRINCE2) is a key element in planning the project. It involves starting at a high level and identifying everything that needs to be done; each of these main tasks is then broken down into more detailed tasks.
Thus, in a project to renovate a house, you might start with a list of contractors:
- Heating engineer
- Carpet layer...
Or, you could break the project down by room:
- Bedroom 1
- Bedroom 2
Whichever way you choose to break down the work, some form of chart or list will be necessary to take each main heading and break it down into its constituent parts. When complete, the work breakdown structure will provide you with a clear idea of the tasks to be done and thereby the resources – human and physical – that you will need.
How do I calculate a budget?
Producing a budget is an essential part of obtaining approval for a project and at least an outline budget is required for the business case. In the early stages, it may be possible to look at similar projects and make an assessment of the likely budget and benefits, but before the project is approved, a more detailed budget will be needed.
Approval may end up being sought in more than one stage, especially in larger projects. These larger projects should always have an experienced project manager at the helm, and a robust project methodology, such as PRINCE2, should be used, so we just give an outline of the process here. Use whichever bits of the following suit your own project requirements.
The first stage is to produce a sufficiently robust business case to get to a point where there is the required consent to proceed to invest in a more detailed and accurate budget, which will then be subject to final approval.
The level of detail and the effort put into creating an accurate budget will vary, depending on the project and the consequences of getting it wrong. The most comprehensive way to do this is to build the budget from the work breakdown structure.
Start off by arranging the tasks identified in the work breakdown structure into a logical sequence of activities to deliver the completed product. Remember to identify the dependencies between tasks and between sequences of tasks as these could impact on the timing (in other words, when something can’t start until something else is finished). For example you cannot fit the spare wheel to your car until the sequence of activities to remove the punctured wheel is complete. The longest sequence of activities is the critical path and defines the timeframe for project delivery. (see Some tools and techniques)
You can then estimate the likely effort and therefore the resources needed for each task. This will probably need some reiteration, because the availability of resources – particularly people – may well have an impact on the duration of each task. Once this is complete, a critical path analysis can be undertaken to determine the overall duration of the project. Again, this may lead to further reiterations if the estimated duration strays outside the project’s deadline.
The next step is to create a proper calendar-based schedule for the project – usually in the form of a bar chart – a Gantt chart.
Now, at this stage, you should be able to create a budget by
- Calculating ‘people’ resource costs (also known as ‘direct’ costs), remembering that on plenty of projects some will be internal costs and others will be external
- Calculating overhead costs – such as office, power, communication costs and so on
- Calculating project-specific costs, such as travel, materials, equipment and outside consultants, that will be incurred only because of the project itself
- Allowing for contingency funds, because the unexpected often happens!
Most budgets need reiterating and refining and you may want someone else to look over your budget figures before submitting them to a quality review.
It is integral to the business case that the investment in the project is worthwhile. It is therefore usual to do an investment appraisal. Apart from their use in the business case, investment appraisal techniques allow you to make comparisons between projects (which one is most worthwhile), which is valuable when the organisation cannot afford to undertake every project that has been identified. When considering different solutions to the same problem or issue, it is also useful to compare other options or approaches.
Different organisations not only have different ways of appraising investment, but also different hurdles, or rates of return. The possibilities include ‘Payback Period’, ‘Net Present Value’, and ‘Internal Rate of Return’. Find out which your organisation uses and get someone in the finance department to help you do the analysis.
- There are several things you will need to calculate:
- How much will the project cost to complete and deliver?
- What will be the useful life of its output(s)?
- How much will it cost to run those outputs for each year of their useful life?
- What financial benefits are expected and for how many years will those benefits flow?