Jun 3, 2013

What’s it worth in real money?

Benefits of the Business Case?

Business people launch programs, projects, and other actions in business all the time specifically to bring the kind of results that most people see as “soft benefits” for the business case. We take action, for instance, in order to improve

  • Customer satisfaction
  • Employee morale/job satisfaction
  • Company image
  • Product quality
  • Branding
  • Internal/external communication
  • Collaboration
  • Communication
  • Productivity

Objectives defined in such terms can be important strategic objectivesmaybe even the things the company or organization must do in order to survive and grow. Improvements in these areas should ultimately translate into sales revenues, profits, and shareholder value, of course, but how much? What are they worth in financial terms–in real money cash flow–for the business case? Should we label them “Soft benefits” so that no one takes the cash flow projections seriously?

Standing on solid ground.
Such benefits deserve first class status and cash flow values that are taken seriously, but that requires understanding a few elementary principles of business case benefit analysis. We call this understanding the “benefits rationale.” It is the logic that puts the validity and value of benefits on rock solid ground–even benefits that are hard to measure in financial terms.

Getting first-class respectability for all your benefits depends requires an understanding of two very important points about the benefits rationale:

The benefits rationale needs to be understood and agreed by case recipients and stakeholders in the action, and management, not just the business case builder.

Recipients, stakeholders, and management understanding should be developed during the case-building process, not when the final report is delivered.

Here in a nutshell is the essence of the rationale

Business case benefits come from (and only from) contributions to business objectives.

Some important business objectives are defined in financial terms, others are not

Progress toward the objective must be measurable in some tangible terms, even if the terms are not financial.

Not all objectives are created equal. The important, high priority objectives are usually targeted by management, and really drive decision making and planning. If your business case benefit does not represent a contribution to an important objective, the benefit will be a weak addition to the business case. If it contributes to an important objective, however…

Reaching important objectives has value to the company or organization.

What is the value of reaching the overall business objective?

and

How much of that value should go to the specific business case benefit?

Asking the final two questions does not invalidate the rationale that goes before (solid bullets). By taking recipients, stakeholders, and perhaps your management, through the rationale you remind them that your benefit is on very solid ground up to this point. It’s important they appreciate the solid ground beneath their feet during the case building process, before addressing the final two questions. Then it is perfectly reasonable to discuss the value of the reaching your important objectives. (It would be strange if management has no idea what it’s worth to reach important objectives and doesn’t think the subject can be discussed.)

Tactics for determining difficult benefits.
There is no “one size fits all” approach for answering the final two value questions. Different benefits and different objectives call for different tactics. You may even include judgments that are subjective and arbitrary–so long as they are acceptable and agreed to by those who use your business case. For instance, you may

1. Look for impacts of the benefit that do have financial consequences.
improved employee morale and job satisfaction should translate into lower employee turnover, fewer “sick days,” and improved productivity, for instance, all of which should have directly measurable financial value. Improved collaboration on, say an engineering team, should lead to shorter design times, fewer mistakes, and other improvements that have clear value.

2. Ask: What is the cost of not taking action?
If the company image is not improved, for example, will the company continue to lose market share or lose more sales to the competition? If product quality is not improved, what is the impact on the cost of servicing warranties? Of a lower repeat business? The cost of a known problem can often be calculated directly. That cost is also the value of fixing the problem.

3. Ask What is the next least expensive way to reach the same end?
The company may invest in customer service improvements as part of a plan to improve customer satisfaction (the business objective). If this is seen as an important objective there will be a measurable target: e.g., raising customer satisfaction survey scores by 50%. What is the value of that in cash flow terms? You can look for direct financial impacts (1, above) such as increased repeat business, or you can ask how the same objective could be reached by some other means. Could you expect the same increase in customer “sat” scores from, say, improved product quality, easier ordering, shorter delivery times, lower prices, better user manuals, or any other means? What would those measures cost?

4. Simply ask management the most they would pay “out of pocket” to achieve the objective.
This approach works surprisingly well with some kinds of benefits that are very difficult to quantify in financial terms, such as “a more professional work environment” from investments in office renovations. Management knows what the actual renovations cost, but might very well agree that it would be worth even more to achieve the same level of improvement. If they are comfortable estimating the most they’d pay for the same end, they should also see they’ve just assigned a tangible financial value of the benefit.

Winning with the business case..
Not every potential benefit for your business case will make it through the above process, ending up with cash value agreed between case builder on the one hand, and case recipients, stakeholders, and management on the other.

If work through the benefits rationale with your stakeholders, you will greatly increase your level of business success.

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