Business Cases

“My mind is aglow with whirling, transient nodes of thought careening through a cosmic vapor of invention. My mind is a raging torrent, flooded with rivulets of thought, cascading into a waterfall of creative alternatives…”

(Hedley (not Hedy) Lamarr in Mel Brooks’ “Blazing Saddles”.)

Ditto.
Extra points if you knew who said that as well as who uttered the response.

I seem to have costs on my mind (as well as a lot of other things, apparently) these days. I didn’t know what I wanted to address in this posting: Cost Reduction, Business Cases, Business Predictability all seemed to have been foremost in my mind among the possible group of posting topics. It seemed like the best thing to do was get started and see where it went. It went to “Blazing Saddles”. I don’t know if it is recoverable from there, but I will try.

Since this is nominally a Business Blog, and I did at least tangentially address cost reduction as one of the primary growth industries in business in my last posting, I think that I will head over into business cases. However, do not lament the transition away from cost reduction entirely, as costs do play an important role in the creation of any good business case.

It appears that creating or generating a really good business case is becoming a lost art. Coming up with an idea, specifying the investment parameters, analyzing the markets and demands, and ultimately defining the returns and value to the company are some of the building blocks of a successful business. It is a rigorous process (and it should be) because it deals with the lifeblood of the business – money.

This is not going to be some sort of a “how to” do a business case primer. It’s more about what they are and why they’re needed. Simply put, a business case is the justification package that you put together when you want the company or organization to invest in something. This is a very high level definition. The “something” to be invested in can be almost anything: research and development for new products, production automation equipment to reduce the labor component associated with manufacturing, additional sales people in an effort to expand the addressable market and grow sales, are just a few of the fun ones that come to mind.

Business cases are all about what the company should invest in. Investing is all about money, specifically when you spend it, how much of it you spend, when you get it back and how much more of it you get back. Businesses are in business to make money. Like every good investor, when money is spent or invested, a return is expected on that money or investment. If that does not seem to be the case, then the business case process has probably broken down.

I do not claim to be a business case guru. I have put several of them together and have found a few topics that I look for in every good business case. If you want to find out all that should be included in a business case, just Google “Business Case Template”. I think you will get a little more than eight million results.

In my experience, every good business case should have the following three major components:

What is it that is wanted?
What are you asking for and how much is it going to cost? Every business case is about asking for money. In the examples I cited above you would be asking for a specific amount of money for either research and development (people, lab space, lab equipment, etc.), money for manufacturing equipment for automated production, or money for salaries for incremental sales people. This amount is known as the investment.

What is it that you get for the money?
Why would the organization or business want to give you this money? What are they going to get in return? If it is for research and development, what products are they going to get and how will they positively affect the growth of the company. If it is for an automated production line, how much are production costs going to be decreased. If it is for additional sales people, how much are sales going to increase.

When do they get their money back?
No, the organization is not “giving” you money. Think of it as a loan. Every loan needs to be paid back, with interest. This interest is usually in the form of increased profits for the company, either in the form of margins from increased sales or reduced costs. If you don’t believe me on this repayment with interest thing, just ask the bank or financing company the next time you want to invest in a car or house. I think they will be quite specific regarding the interest you will be paying on the loan and the expected repayment schedule that they will require you to comply with. This money that is given back to the company is known as the return on investment.

Business Case Tip #1.
One of the guiding principles of a good business case is that the return on investment should be greater than the investment itself was.

I don’t think there are many (any?) other business case tips that can be given that have the same importance as this one. A proper business case requests a specific amount of money. It defines what the money will be used for (spent on). It specifies what will be produced (new products, cost reductions, increased sales, etc.). It also forecasts when and how much the returns will be. It is all about the numbers.

It is this last part which is especially important. When are they going to get their money back. It is during this discussion when you may hear a term such as “pay-back”. Pay-back is when they get all of their original investment back. This is the break-even point. After this, everything that is returned to the company is a benefit or profit.

Business Case Tip #2
No matter how soon or how quickly the business case hits the “pay-back” point, it will not be soon enough.

Contrary to what some may believe, money in a company is not free. A company must pay for its money, one way or the other. A company can fund a business case investment via either debt or equity financing. In debt financing it is the interest and overheads that it must pay on the loan (debt) it takes out to get the money. In equity financing it is the relative risk and return it must pay in the form of stock appreciation or dividends to the equity investor in order to attract them. This is called “the cost of capital”. It is in effect the interest or discount rate that the company must use in the business case when it looks at the future returns on its investment.

The longer it takes to reach pay back to the company, the more the amount of discount that is applied to the return. The greater the discount, the more difficult it should be to make the business case work.

Remember that there is a limited amount of investment money that is available to any company. There is only so much that the company can borrow before the financial position of the company is adversely affected by its debt position and only so much stock that can be issued before the market adversely affects the equity price and expectation for the stock.

There are also other businesses and organizations within the company that would like to invest in their opportunities as well. That will create a competition for those investment funds. So how should the company decide where to invest?

There are usually two instances where a company will invest. One of the easiest is to invest only in those business cases that provide the greatest return on the investment. That would be those opportunities that have the best business cases. You have just seen above what should be expected at a high level for a good business case.

The second place that a company usually invests is in those strategic initiatives that may not provide the best return but are required for the long term health of the company. What are these strategic initiatives you may ask? That’s a good question. I have found business cases to try to define themselves as a strategic initiative when they contain a request for funding that does not show a reasonable return on the requested investment.

That’s probably not entirely true. There are investments for things such as core technologies that other products are built from that could be defined as strategic (among the many others of this type) as well as initiatives outside of the financially definable realm such as the reduction of carbon footprints or diversity that may not contribute directly to the financial well being of the company, but should be done none the less for the greater good of the company.

Companies expect and need to make money. Otherwise they normally do not get to remain companies for very long. I think a great deal of any company’s success can probably be attributed to how strong their business case process is, and how well they adhere to it. Having people who understand what a good business case is can go a long way to attaining that success.

Growth Industry

I think it is safe to say that most everyone is looking for their next career opportunity. What do they do next? Where do they go next? What is the next step in their career progression? When I have been asked in the past what someone’s next career step might ought to be I have invariably said that everyone should spend some time in sales, and that everyone should do whatever they can to be able to understand the business numbers.

I am not going to back away from that comment. Good leadership needs to understand what it takes (and just how difficult it is) to generate a top line. No matter what everyone who has not been in sales may think, I have found that it is just not that easy to get someone to give you their money, regardless of how good the product or service is that you are selling. (Apple products don’t count here. I truly believe that customer set has been brain washed.) Even so, I think we have all been in situations where management has predicated all of their well scripted strategies for sales growth, regardless of product, business or market conditions, only to miss those growth targets and then try to deal with the business consequences.

I also stand by the assertion that numbers, and derivation of such numbers (or in some cases the divination of said numbers) is required for business and organizational operation. I have cited several quotes on numbers in the past. Robert Heinlein said “If it can’t be expressed in numbers it is opinion not science.” Mark Twain said “There are lies, damn lies, and then there are statistics.” A leader’s long term (and short term) success will be based on their ability to understand and communicate what the business’ numbers are, and why they are what they are.

What I think I am now going to add to these two suggested experiential requirement sets is that leadership needs to spend some time in what my experience has proven to be the only consistent growth industry that I have seen across all industries, markets and businesses: Cost Reduction.

In business there are many things that can (hopefully) be influenced in business performance, but very few things that can truly be controlled. Businesses can try and influence the market to perceive them differently. They can employ various media and advertizing to try and create a progressive image in the market for their goods and services. They are in essence trying to convince the market of their particular product or service advantages and benefits.

Whether or not the market accepts, agrees or is influenced by this positioning is outside the direct control of the business. The business will always try and craft its market message in the most beneficial light possible, but it is the market which gets to decide which parts if any in the message and value proposition are accepted. Entire industries of analysts and consultants have grown up around this market value proposition analysis in efforts to try and actually decipher the facts associated with these messages.

Whether individual customers accept or agree with the proposed business value proposition is also somewhat outside the control of the business. The business can employ dedicated sales staffs and teams to tailor the message specifically to each customer as well as work to identify the value of the solution to that customer. This provides greater input and positioning for the business, but yet again it is the customer that ultimately controls the relative success of the business proposition. They get to say “yes” or “no” to the proposition.

The point here is that a business can do absolutely everything right in the dissemination of its message to the market and its pursuit of the ever elusive customer order, and still fail, sometimes for reasons that are entirely outside the control of the business. They can work and influence and sell in every way imaginable and still not get the order, or enjoy the top line growth they have planned for and need.

Herein lays the rub.

Senior management doesn’t really care about that. A plan has been made and the numbers have been committed. Those numbers have been combined with the overall organization’s other business’s numbers and an total organizational plan has been committed to the corporate leadership. You don’t get to easily miss your financial commitments to the organization.

Where do you think all those ideas for those colorful punishments on your favorite Game of Thrones or Walking Dead television shows came from? Exactly, people who missed their planned or forecasted targets.

While it may be generally frowned upon by senior management to miss the top line plans and forecasts for growth, it is wholly unacceptable and more than likely to be a punishable offense to miss the business profitability and earnings commitments. Herein lies the squeeze: While the top line may not be achieving the required heights, the profitability and earnings commitments to the organization cannot be reduced proportionately, if at all.

The only solution is to cost reduce.

I don’t want to make it sound as if cost reduction is only something to be taken on in times of business stress or top line under performance. It may have once been that way, although I cannot remember it. Suffice it to say in today’s day and age that for a healthy business cost reduction is both a growth business and a never ending process. If you are not doing it now, you had better get started because it will probably be necessary sooner rather than later.

It is well known that the sooner you can make adjustments of any kind in a business year, the less drastic the adjustments need to be. If you can recognize in month two that there is an issue, you have ten months to correct. If the issue is not recognized until month seven, you only have five months to correct, and now the correction must be twice as large.

What I mean here is that if there is a one million dollar short fall in the earnings commitment / forecast and it is recognized in February, you can correct spending (costs) to the tune of one hundred thousand dollars a month. If the same one million dollar issue is recognized in July, you will need to reduce costs by two hundred thousand dollars a month to recoup the same million dollar correction.

Remember that. The later you wait, the more drastic the cost reduction action will have to be. Plan early, act early. Hoping things that are not fully within your control (sales) will improve usually results in much more painful activities associated with those things that you can in fact control – costs.

There are all kinds of costs associated with a business, not just people costs. Here is where knowing the numbers thing comes into play. What are these costs? How do you control or reduce them? And, almost more importantly, how long will it take to implement the changes associated with reducing them?

We have probably all seen these knee-jerk cost reduction actions:

Travel bans – which basically just limited the people who should be traveling and not so much reducing the number of people who shouldn’t have been traveling in the first place. Travel is not a light switch with only the “On” and “Off” positions.

Hiring Freezes – that really aren’t freezes because there will always be the need for the flow of the life blood of new talent that every organization requires.

I have even seen the removal of coffee and other amenities from the corporate break rooms. I don’t know how much was saved, but it did succeed in generating a significant number of grumpy people.

There are any number of other “cost reductions” of these types, but they are for the most part superficial. They do not address the specific issue that the business’s basic cost structure does not match its revenue and hence earnings positions. True cost reduction comes from addressing the long term and fixed costs associated with a business. Can fixed assets be reduced? If so, how and how long till they are affected? Is there outsourcing or off shoring that may be needed? Not everyone can be the best at everything, so looking for external help may be a potential solution. Are there allocations or other programs that need to be reviewed? The list goes on, but the costs must be dug out, isolated and analyzed before action can or should be taken.

This activity will serve to teach the leader, or would be leader what the costs are, in human terms or otherwise, associated with cost reduction. Changing the course or the costs associated with a business is much more fundamental than just freezing travel or hiring. It is also much more invasive. It’s not easy. You have to challenge yourself, your team and your business to change, and that is never easy. No preconceptions regarding business costs should be exempt. All costs should be questioned. When addressing cost reduction, remember what Sun Tzu said about war (as in this case they will be somewhat similar):

“The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.”

So is the art of cost reduction.