5 Steps to Creating a Business Case for IT Investments
Although a robust and clear business case is a mandatory tool for most businesses, especially when justifying IT investments or IT project initiations, very few organizations are truly satisfied with their ability to produce viable and useful cases.
Granted, IT related business cases are especially tricky. This is in part due to the fact that they most often impact multiple business units, thus potentially entail alignment with numerous stakeholders, budgets and perspectives. Unfortunately, the consequence often is that the core value of developing a business case is not harvested. Expected benefits are often vague, intangible or overstated. And what is perhaps more alarming is that evidence to support harvested benefits are often severely lacking, if identified at all.
Building a good business case for IT investments includes recognition of the fact that there are likely several different types of benefits to be derived from such investments. Each type of benefit should be considered carefully and measured appropriate to its nature, and evidence should be sought for the size or magnitude of each benefit. Furthermore, benefits should be prioritized and selected carefully for study and followup. Although it is vital to be able to demonstrate evidence for the most important benefits, is often an unrealistic ambition to highlight evidence for every harvested benefit.
Finally it is important to remember that benefits in a business case should be clearly linked to both the IT initiatives and business changes that are required to deliver them. This is to ensure that every stakeholder knows how and by who the business case will be realized. It is through this process that the business case becomes an efficient cornerstone of any IT project.
So what are the steps that help create a good business case for IT investments? The answer is obviously access to an easy template, but rather a guideline consisting of important principles that should be explored in a sequence of actions. It is of lesser importance to which degree these steps are simplified or elaborated when conducted. The magic is in understanding the principles.
Let's dig in.
Step 1 - Agree on the role and purpose of the Business Case
Without question, the traditional role of an IT business case is to secure funding for an IT related investment or spending. However, it is important to align the more detailed function of the business case with relevant stakeholders (i.e. SBU managers, Project Sponsors, etc.). It is important to agree on which additional roles the business case is to play, besides existing as a financial argument by nature. A robust business case is necessary:
to enable priorities to be set among different investments for funds and resources.
to identify how IT initiatives along with specific business changes delivers the identified benefits (benefit realization).
to ensure commitment from business managers in both achieving the benefits, support the entailed initiatives and possibly take part ownership in measuring the results.
to establish a basis for review of the realization of benefits upon completing the project or investment.
It should also be noted that although it is seems easy to maintain alignment around a strong focus on the financial returns of business cases relating to IT investments, it does come with some inherent risks. These include the temptation to introduce 'creative' calculations of somewhat intangible benefits based on inadequate evidence and building upon unrealistic assumptions. In other words, when the financial focus becomes a singular argument for the entire investment, objectivity has a tendency to sneak out the backdoor. When that happens, the room for innovation diminishes and we are left with a balance between cost savings, minimal functionality and pure efficiency gains.
Step 2 - Define and align the Business Drivers and Objectives
A convincing business case is build upon an alignment of the current challenges and issues that needs to be addressed. These are the business drivers that makes up the need for reaching a set of objectives. In turn, the objectives define the overall goals and aims, hence the requirement for an investment.
Give stakeholders ample opportunity to chip in and help identify all the challenges relevant to your case. Identifying issues that are impacting multiple SBU's and issues that are created by the interplay between different SBU's, is especially important. Needless to say, this requires competent facilitation between stakeholders, and requires good communication. Completing this process through surveys or Q&A forms should not be considered sufficient.
As the creator of the business case, it is your privilege to sort and categorize these business drivers and objectives. The process of prioritizing and 'de-crypting' these is also the process of finding and highlighting opportunities for a successful investment.
Be mindful that there can be different kinds of objectives, and that these do not necessarily focus exclusively on financials. For instance, going through the issues and challenges that make up the business driver might reveal that mitigation of a number of critical risks is the actual focus. Or that gaining a market advantage through customer integration capabilities and thus increase the amount of recurring sales is the primary objective. Although such objectives could potentially be boiled down to financial gain, it might not be the best way to measure the investment realization.
For your inspiration, here are different types of objectives (and ultimately, benefits) that you could consider a basis for a business case:
Saving or gaining efficient work time
Mitigation of risks
Increasing customer portfolio
Increasing quality in a product (fx. better test results in a production)
Higher market exposure
Higher internal service level (fx. better incident response time)
Better work environment
Step 3 - Identify Benefits, Measures and Owners
The benefits are advantages provided to groups or individuals in the organization as a result of meeting the overall Objectives. Note that these do not necessarily need to be aligned among groups or stakeholders, since each individual might harvest different benefits from the conclusion of the same Objectives. In other words, there is a potential for multiple types of benefits in different contexts based on the same Objectives. One might save time, while another might enjoy a higher quality in data. If you focus too narrowly on the most obvious benefit in one area, you might loose the opportunity to prove and highlight other important realizations.
When benefits are identified and prioritized, it is important to determine how these are to be measured and who will maintain the responsibility of this, in essence becoming the designated 'owner' of the benefit. For instance, if a benefit is identified as 'time saved' in one SBU, a stakeholder should be appointed as the owner of that benefit, and the means of measuring the 'time saved' should be established during this step.
Why is this important? Primarily because the chances of getting an accurate measurement of the benefit realization is increased significantly when an expert in the specific area honors the responsibility of owning said benefit. Furthermore, the precision of the benefit is also increased. For instance, if the objective is to increase work efficiency and save time, then the appointed owner, or expert in said benefit, will have a much better chance of determining exactly how much time is saved and by what means in a specific area of the organization.
Step 4 - Determine Explicit Value of Benefits
This step is all about the art of determining explicit value to a benefit, both with the knowledge already known or facts that can be determined before an investment is made. To make things easier, consider categorizing the measured value of benefits into four categories of explicitness:
Observable benefits. Subjective or intangible benefits that can really only be measured by opinion or human judgement. Such benefits are usable, but the outcome depends on your ability to establish an agreed baseline and method for measurement. If for instance you decide to measure by evaluations made by individuals, make sure the method and model for the evaluation is sufficiently thorough.
Quantifiable benefits. These are benefits where the means of measure is already determined, and the baseline is likely easily established, thus the baseline is easily established. This means that the size of the expected benefit (i.e. increased performance) can be established before the investment is made.
Financial benefits. Finally, these are benefits that can be described, measured and determined in pure financial terms. Benefits should only be placed in this category if the financial gain can be proven by applying explicit financial value or a tangible financial formula. Notice that the real value of financial benefits are only valid if the underlying data is reliable and can be verified.
Step 5 - Test your Business Case
Finally, a good practice is to test the validity of your Business Case before approval. One approach is to conduct a pilot implementation to evaluate the assumed benefits to be achieved. Another is to conduct a simulation. For instance in the case of benefits derived from changing or stopping current activities or procedures, existing data is likely usable for such a simulation. However you choose to approach a validity-test of your Business Case, it is important to apply such principle in corporation with the same stakeholders that are expecting a harvest of benefits upon completion of the actual investment.
It might seem like a cumbersome task to develop a proper business case for IT investments. However, as mentioned in the beginning, the importance is on making sure that the principles for developing a thorough business case is followed - not the level of detail in itself. And the payoff of demonstrating that proven and expected benefits are actually harvested, in alignment with relevant stakeholders, makes a tremendous difference to any organization and business.
References and further study:
"Building Better Business Cases for IT Investments" by Prof. John Ward, Prof. Elizabeth Daniel and Prof. Joe Peppard of Cranford University.
"How to Make the Case for IT Investments" by Lauren Gibbons Paul for CIO by IDG