business case - bfa.docx
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Business Case In this module I'd like to talk to you about the four elements of a business case, or how do you get an investor to fund your project? The four elements that are outlined in this module are based on research. We spoke with private equity firms we spoke with venture capital firms we spo...
Business Case In this module I'd like to talk to you about the four elements of a business case, or how do you get an investor to fund your project? The four elements that are outlined in this module are based on research. We spoke with private equity firms we spoke with venture capital firms we spoke with CFO's and VP's of planning and we tried to get an understanding of what was common in the way that they made investments. Universally these four themes came out as important to approval. The first criteria is called the market opportunity. We know that approximately half the performance of any business is the market or industry. Therefore from an investor standpoint I want to invest in a large attractive opportunity. I'm interested in a blue ocean not a red ocean. A red ocean says that I'm fishing in an ocean filled with blood and with sharks swimming around. It's going to be very difficult to fish. A blue ocean is Forrest Gump after the hurricane. He was the only boat out there and it was easier to catch the shrimp. I want a market that's growing. I don't want a market that's shrinking. I also want to have a market that's going to be relevant and growing overtime. There's a saying on Wall Street that you don't want to catch a falling knife. I don't want to invest in a market that's going away -nI want to invest in a market that's going to be enduring and preferably growing. This manifests itself in a few different ways. If you have a project that could help one department and I'm comparing that with a project that can help the whole company I'm going to be more interested in the project that's scalable across the organization. It's just a bigger opportunity. I'll give you an example when I was a chief financial officer of a company. One of our lines of business was in structural decline. Every year we were managing fewer patients and revenue was shrinking. In the budget process this team was asking to increase its headcount and increase its budget. This additional funding was not going to change the fact that the business was going to have less revenue and volume next year. They had terrific justifications for how they were going to use the money but realistically if I gave them the resources the only thing that I would guarantee is that we as an organization would make less money. Instead I told them that they were going to have their budgets reduced and they would have to make do. Those funds were better suited elsewhere where we had growing profitable businesses. When speaking with venture capital firms they will often say that if you don't have a billion dollar opportunity then we're not going to fund you. Now that doesn't mean that you have to be a billion dollar business but it does mean that the market that you are trying to solve has to be a large and attractive market. Under market opportunity investors then go micro. The word is pain. Pain drives change. If you're not in pain you don't change. Investors fund pain points. It's the difference between a nice to have and a need to have. You might have a tremendous opportunity but if customers are not going to adopt your product or service because they're not in pain then it's going to be much more difficult to get your idea funded. The best projects fund the pain points. Investors like funding the person with an abscessed tooth. That person is in so much pain that they don't even want novocaine and they're willing to do anything to get that tooth removed from their mouth. When investors evaluate pain it's also important to understand that the pain point that's being solved needs to empathize with the customer. It's not the organization's problem we're trying to solve it's the pain of the eventual user. I'll give you an example. I was working with an airline and one of the projects that they were considering was how to increase the utilization of their best customers who lived in secondary cities. For example your top flyer moves to a city where you have little presence but still want them to fly your airline. For example if that person moved to Atlanta the vast majority of flights out of Atlanta would be on Delta airlines. It would be hard to fly any other airline if you lived in that city as a frequent flier. So the premise of the business case that they were trying to create was how do I take that person living in Atlanta and get them to continue flying more with me. Now this sounds like a very reasonable business case on its surface. But if you think about it there's a flaw with that case as described. The point of the business case is they were defining their pain – not solving a problem for their customer. A Better Business case would say how do I make the life of the person living in Atlanta better so that they're more willing to fly my airline. We have to be careful when we define the pain to make sure that we're solving the customer's pain point and not our own. A number of years ago I was working with an aluminum company called Novelis who is one of the largest makers of aluminum cans in the world. Their biggest customer was a company called Coca-Cola. If you drink a can of Coke or Diet Coke you are drinking Novelis aluminum. As they were innovating to try and drive additional growth they came up with a process that would allow them to be the only 100% recycled aluminum can in the world. This was something that no other aluminum company could do. Other companies could have recycled content in their cans but they could never guarantee 100% recycled aluminum. Novelis called this the Evercan. And they thought it would actually help them grow sales and profits overtime. Their biggest customer Coca-Cola was in pain. Coke has had challenges with sales over the last few years because people have decided that sugar is not healthy and people have been drinking less soda and looking for more healthy alternatives. One of which is water. So coke has had some challenges with growth and is itself looking for alternative ways to continue to grow. So here's where novellis saw a win win. By developing the ever can they could help coke with its sales challenges by appealing to a younger generation that was much more interested in the sustainability of the environment. After making a large investment they went to coke and said we will sell you this product so that you can advertise this 100% recycled aluminum can and help you get some additional sales. Surprisingly coke was not all that interested in the ever can. This was a shock to novellis. But if you think about it the evercan did not solve coke's pain point. Their real problem was sugar – not selling a recycled can. Adding a recycled can was not going to change the fact that people viewed sugar as unhealthy. Novelis did not get the sales boost they expected. The second element of a business case is called the competitive advantage. Does what you're investing in help the company get better at what it does and improve its ability to compete in the marketplace. if you have any success, you're going to attract competition and when the competition shows up, how well are you going to hold up? So what is your secret sauce? Is it helping us lower our cost? is it helping us improve our quality? Is it helping us become unique or different relative to the competition. Is it aligned with helping the organization succeed and achieve its overall goals and objectives. Because if it's not what's the point of making the investment. When I was a CFO we had a very important process that our organization needed to accomplish that was broken. And because it was a critical process we had to get it fixed. So an internal team put together a business case so that we could invest to fix this very important process. When this business case was presented to our capital committee the end result of all of the spending was that we would go from below average in our process to about average in the process. I looked at the case and I said why would I want to spend all of that money just to be average. What would be the point? One of the first things that I discussed with the CEO was whether or not we should outsource this process rather than try to do it internally. Companies do not like to invest in activities that don't differentiate themselves and really improve their performance. Companies will also invest in marginal business cases if they are critical to what the organization is trying to accomplish. That can be a deciding factor in the case. The third element of a business case is called the business model. You have to articulate a business model that will allow the organization to get a return on investment and ultimately to be able to pay back the original amount that you have requested and break even. You have to define a business model or what is often called a profit formula that starts with an understanding of the market, the competition, who you're going sell to and how many you're going to sell. You're going to have to articulate a price, you're going to have to articulate a cost which means you're going to have to articulate a level of profit or cost savings. In addition to the overall revenue for your case or cost savings for the case you're also going to have to talk about the break even point of when you turn cash positive. You will need to articulate the internal rate of return that you're going to earn overtime, how much money you need, what you're going to do with that investment. I often tell people that the simplest way to think about a business case is to ask yourself if I were to put my own personal money that I'm requesting for this business case on a personal credit card that charged an annual interest rate of 9 to 12% per year how would I pay it off. I can make minimum payments overtime but the interest is accumulating and I'll eventually have to make even more money in the future to make those payments. If in the course of your business case you can't articulate how you're going to pay that investment off why would the company want to give you the resources? And if you wouldn't be willing to invest your money in this project why would the company. You also have to identify the risks of the project. People often think that the risks should be buried and not discussed because that might lead to a No. These are the projects we don't like to fund. We're not naïve. We know as investors that not everything will go right. And if you're going to manage this project that you're asking for resources - we want to make sure that you know what those risks are and that you have addressed them transparently in the case. One way to help you identify the risks is to do what Huggy Rao of Stanford University in his book Scaling Up calls a pre action review. Write the story of success of your project that might appear in a business newspaper like the Wall Street Journal. Write the story of failure of your project that might also appear in this paper if things went horribly awry. Compare those two stories. Because that's going to help you identify the Critical Success Factors that will differentiate between success and failure. That will help you articulate the critical risks that are going to be important to the success of your project. All of this represents the business model of your project and will be important to getting it approved. The 4th element of a business case is called the team. There's a saying in Silicon Valley that I would fund An A team with a B plan before I fund an A plan with a B team. It's all about your ability to execute. Your business case is a fairy tale. It's a spreadsheet, a PowerPoint or a write up that explains what you want to do that will achieve a financial target that you know you have to hit. But what investors are going to be just as interested in is can you make that a reality. Can you do what you say you're going to do. Ultimately we are going to bet on you. Angelo Mavronis who runs Financial Planning and Analysis for Lockheed Martin likes to say that a good business case is a blueprint for execution. You have to describe whether or not you're going to be able to execute on what you are asking for. A few years ago I moderated a panel in Silicon Valley that included some Sand Hill Road venture capital firms. One of the questions that was posed to the panel involved how they would make investment decisions. All of them said that without the right entrepreneur they would not invest in a startup company. Didn't matter how good the patent was - it didn't matter how good the technology was - the people were the differentiating factor. The same is true in the corporate world. I was working with an organization who had a leader who is in charge of over 30 projects personally. They were completely overwhelmed and many of the projects that they were supervising were behind schedule and not achieving promised milestones. This person presented another project for approval. It was an excellent business case. But it wasn’t approved because the leadership knew that giving this overwhelmed person more resources would not likely lead to a successful outcome. As we evalute business cases these four criteria are important in the approval process. Having all 4 does not guarantee an investment but lacking any of the four makes investment far less likely. The other thing that is important to the business case process is the ability to demonstrate business impact. Here is a simple way to think about business impact. Understand the world as it is today. Then imagine in a very clear and concise way the world as you would like it to be. What is the difference between those two states? That represents the potential business impact of any initiative. If you cannot clearly articulate and quantify the difference between the two you shouldn't do the project. If you cannot articulate what success looks like with the level of clarity, you should not do the project. And if you can't understand in a clear and concise way the current state of the business so that the impact can be created and measured, then you shouldn't do the project either. There are five questions that need to be addressed when you start to evaluate business impact. The first question is what is the business problem that needs to be solved? Albert Einstein once said that if the world were going to end in an hour I would spend the first 55 minutes defining the problem. That is one of the most critical elements of any business case. Without a well defined problem a business case will often fail to achieve the results that it is forecasting. Question 2: Why is this a problem? Question 3: How do you know it is a problem? This question is critical for measurement. If you can't measure the problem how will you know that you have solved it. At the end of the business case you should be able to go back and say whatever metric that we use to define that there really is a problem changed. That's the benefit of the business case. Question 4: Will this initiative solve the problem? So often leaders hear a problem pitched to them and then hear a solution that does not solve the problem. But the other challenge here is whether the solution will achieve measurable results. The final question: How will you know? Here we will want to focus on metrics that we can measure that will change. In this video we have described the five steps to achieving business impact. But at the heart of this there are two simple questions. The more you ask these questions the more you will peel back the layers of the onion and get closer to understand the impact and the challenges that you're trying to solve. The first question is why? Why are we doing this again? Why is it a problem? Why is it a problem we're solving? And the second question to continuously ask is how do you know? How do you know it is a problem? How do you know your solution will solve the problem? How do you know that you will make an impact on the performance of the business? The more you ask and answer the why and the how do you know, the closer you will get to understanding the true business need. Then you're able to be able to better create a solution to solve that problem.
