You know that true business growth comes from projects that successfully combine feasibility, profitability, and innovation. But how do you determine which projects will deliver that?
It’s not enough to choose something that sounds positive, glance over the numbers, and hope for the best. Successful business case evaluation is about knowing what to look for, accurately assessing the costs and benefits, and understanding how potential projects will fit into your business. There are a number of ERP and business management software options that can help you do that, however, a thorough understanding will mean you’ll pick up any issues that arise.
Here are the major factors to consider when looking at a business case for a potential project.
The big picture
Does it fit your business? That’s the first – and usually the most important – question when it comes to evaluating a business case. To be considered, the project must fit with the mission of your business, complement other ongoing projects rather than compete with them, and solve a real problem within the business.
Many business cases fail to meet the latter criterion. Rather than finding and offering solutions for an issue in the business, they present superficial remedies for the symptoms of the problem. For example, buying new computers is often presented as a way to improve productivity and speed up processes – but if the underlying problem lies with staff motivation, new machines will make little difference.
It’s also essential that a business case presents more than one course of action. Almost every issue has multiple potential solutions, so a business case that fails to analyse alternatives implies that the authors haven’t looked at the issue in enough depth.
“If the case presents only one alternative, and especially if it positions it as the only way to do it, it is prudent for the reviewer to reflect very carefully whether other viable alternatives may exist. If they appear to exist, while the objective has a merit, send the case back to the authors, encourage them to take a broader view and suggest that it may be appropriate to involve others.” Ilya Bogorad – TechRepublic
Feasibility and originality
Whether a project is dull and practical or breathtakingly innovative, it’s essential to analyse feasibility. New ideas are great, but they need to be doable as well. Does your company have the technical knowledge and capacity to do it? Do you have the staff and management team needed to implement it?
You also need to look at whether it’s something that people actually want and need. Depending on the scope of the project, you may want to survey staff, customers, or potential clients to find out whether they’re interested in a new product or service, and how much they are prepared to pay for it.
Finally, originality can also be a key factor. Of course, some internal projects and ideas can be based on what other companies have done successfully. But if you’re looking at introducing a new product or service to the market, originality counts. Many businesses have made the mistake of assuming their idea is new and original, only to find that others have something similar in the works – or worse, have tried and abandoned a similar project. This is where thorough research pays off – it’s much better to find out at the business case stage, rather than after the project launches.
“That is why innovation and growth are so challenging. A lot of the projects you don’t see happen are the ones that are infeasible: we don’t have the technology, the inputs are too costly, or the customer doesn’t like it. But if you take the defeatist attitude that, ‘If it was profitable, it would already be done,’ we wouldn’t have any growth.” Mitchell Petersen – Kellogg Insight
"That is why innovation and growth are so challenging. A lot of the projects you don’t see happen are the ones that are infeasible: we don’t have the technology, the inputs are too costly, or the customer doesn’t like it."
The numbers game
Every business case is based on assumptions and projections – some more accurate than others. It’s essential to examine these assumptions and question them – not because you necessarily want to turn down the business case, but because you need to make sure it’s robust. Look at the numbers, look at where the data comes from, and go over anything that looks like it doesn’t add up.
Ask yourself: Is the average price realistic, relative to the volume and market share? Are projected costs consistent with past experience and the wider industry? Is the cash outlay manageable? Are you covered for contingencies?
You’ll also need to look at the methodology used to analyse profitability. Many business cases use Return on Investment (ROI) as a way to measure potential profits. This method looks at the various costs associated with implementing a particular project, versus the potential profits. Although ROI has the benefit of clarity, it can be overly simplistic. If the potential profitability is overstated or based on faulty assumptions, it can also be very misleading.
The second most common analytical tool is Net Present Value (NPV). This method looks at the cost of implementation now, compared with future profits adjusted to their current value. The assumption is that current profits are more valuable than potential future profits, thanks to the process of inflation. NPV is a more sophisticated analytical tool, but it can be difficult to understand for non-finance people.
However your business case looks at profitability, it’s essential to look at the numbers critically.
HBR’s Joe Knight explains why: “From our point of view…most people use ROI analysis as a way to justify something they really want to do anyway. If you understand this, you will understand why experienced finance people are skeptical about proposals submitted by others.”
More than just money
Spending isn’t just about money, it’s also about the wider impact on your business. Choosing to fund a particular project now means those funds are not available for other projects that come up. It’s also about risk – what happens if the project fails? Do you just lose money, or is there a wider impact?
There’s also the fact that projects cost the business in time, expertise, staff, and management. Many mid-sized businesses simply don’t have the capacity needed to take on every potential project, no matter how profitable. Of course, there is always the option of hiring more people to work on a project, but this adds significant – and ongoing – expense.
Some projects may be more expensive in terms of cash outlay, but less costly in terms of human resources. Other projects may be time-consuming but require less of a cash investment. Choosing the right project means comparing these costs with your business resources. Do you have little ready cash but plenty of staff? Lots of money but no time? It’s about balancing your assets with your opportunities.
“Why are firms opting out of so many profitable investments? In a word: bandwidth. New investments require more than just dollars—they require managerial oversight, as well as onboarding additional employees and training new parts of the organization to work together” - Kellogg Insight
Tools of the trade
There’s no way to be completely certain of a project before it begins, but there are ways to analyse the data and manage implementation to make success more likely.
Accuracy and speed – forecasting and profitability data are only useful if they are accurate and up-to-date. ERP software systems can help in this area, providing accurate data from across the business in seconds, rather than in a clunky monthly report. Having this type of data at your fingertips gives you the insight you need to make better project decisions.
Break down the silos – Often, the people who make project decisions and the people who are most affected by them work in separate parts of the business and rarely communicate. By breaking down the silos, sharing information, and getting input into project decisions from all departments, you access knowledge and insights from a range of people in different roles, leading to better decisions for the wider business. Again, this is where the right ERP and business management software can help, by giving staff throughout the business access to data and process knowledge from other departments.
Keep track of your projects – Tracking profitability and ROI throughout a project’s life cycle helps identify projects that are not going to plan, and those which are successful enough to be expanded. It’s also critical when it comes to reviewing projects and forecasting future results. The accurate data and up-to-date reporting provided by an ERP system make this much easier and less time consuming.
Think long-term growth, not short-term gains – Making project decisions based on this year’s profits isn’t always the best idea. A recent study showed that companies who prioritised long-term value creation consistently outperform their industry peers in almost every significant financial measure. Among the businesses identified as having a long-term focus, average revenue and growth were 47% and 36% higher, and positive impacts on society and the economy were also significant.
This means it’s not always best to choose the project promising quick profits. In the long run, the project that meshes with your business mission and offers qualitative results may have more of a positive impact.
Insights and Innovation
Effective, efficient business case evaluation relies on human insight, but software solutions can help make the process run more smoothly. A well-designed ERP software system can help your business evaluate and select new projects by providing up-to-date data, analytical tools, and accurate tracking.
The right ERP system can also help break down silos in your business and serve as a central source of knowledge for your company – which is important when it comes to evaluating a business case. It’s about giving people the information, insight, and analysis they need, when they need it. The rest is up to you.
If your business is looking for a new ERP or business management solution, talk to the MYOB team today.