Effective business cases require the logic and persuasiveness of a lawyer. A top-quality business case offers big advantages to everybody involved in the IT due diligence process:
- For the business case writer, a persuasive well-written business case increases the chances of funding.
- For the business case reviewer, having all the key information collected in a business case makes IT due diligence and the investment decision easier and quicker.
- For critical stakeholders, a quality business case increases the probability of success and serves as a plan for turning the forecast ROI model into reality.
How do you grade your business case and determine that it is the best possible, even great?
A top-quality business case has four critical components: clarity, accuracy, logic, and a sound ROI model.
Clarity means the business case is clearly and concisely presented. This standard applies whether the business case is written in long form (typically, in Microsoft Word) or in short form (typically, in Microsoft PowerPoint).
The key questions to ask on clarity are:
- Is information boiled down to encourage clear thinking and crisp communication?
- Does the case have an effective summary? Ask:
- Is there an attention-worthy headline?
- Is there a focus on what's new?
- Is the "so what" question handled well?
- Are the conclusion and recommended action precise and clear?
When reviewing for accuracy, look for:
- Will the solution solve the problem?
- What is the evidence for this claim?
- Have the stakeholders approved and committed to the expected benefits of the project?
- Are data sources identified and documented? What is their quality and diversity?
- Are distinctions between facts, vendor opinions, and judgments by the business case writer clear?
- Are assumptions articulated precisely?
- Are load-bearing (critical) assumptions highlighted?
- What is the source of the assumptions? Was there a business discovery to define them? Are the sources credible?
- Are the assumptions realistic and expressed as a range?
Is the case concise and logically argued? Look for logical linkage among:
- The statement of the problem or need addressed.
- An explanation of the causes of the problem.
- A complication: why the current situation is unsustainable.
- The recommended solution to the problem.
- The benefits of the recommendation.
A reliable ROI model
Discounted cash flows or net present value (NPV) is the correct way to evaluate any investment and calculate ROI. Payback and internal rate of return (IRR) provide useful, supplementary information.
You are making an economic decision, so, you don't need to forecast financial statements (though this will upset your Big 4 accounting partner) and ignore techniques such as monte carlo simulation. Academically oriented business case courses adore this technique, but it has no practical relevance for most IT due diligence decisions.
Is the investment recommendation based on a rigorous and objective assessment of net present value (NPV)?
- Estimates of incremental cash flows from the project.
- A risk assessment of project cash flows and a determination of the required rate of return (cost of capital).
- A calculation of the present value of the expected future cash flows.
- A comparison of the cost of the project to what the project is worth. If the project is worth more than it costs (positive NPV), then, undertake the project.
- IRR (internal rate of return calculation).
A payback calculation is useful because it shows how long the principal invested is outstanding (similar to a bond). Check for a payback calcualtion showing where and when the investment produces positive cash flows.
Finally, the ROI model must be complete, including:
- All benefits. Primarily quantitative, but also qualitative.
- Full costs, including upfront, ongoing and direct.
Business case quality grade
To ensure consistent IT due diligence and encourage better business cases, consider implementing a formal business case grading process. The Business Case Checklist has a grading framework that provides a compact summary of the overall quality of a business case. Please see the final summary grade table below.
Read The Business Case Checklist. If you are a business case writer, it will help ensure you write a top-grade business case and win funding. If you are a business case reviewer, it will help you perform IT due diligence efficiently and effectively.