Run the Numbers, Build a Case
A business case is specific to an action or change a company is considering in the near future whereas a business plan lays out a path forward for the company over the next few years. In large companies, developing a business case is a specialized role that doesn’t usually share responsibility for executing a successful business case. Even if your organization doesn’t have personnel dedicated to developing business cases, you still need to run the numbers and develop a strong business case before moving forward with a significant decision. When I lived in Houston, I volunteered for an organization that helped non-profit organizations improve business operations. My focus was on teaching non-profit executives how to develop a strong business case
One of many memorable experiences was with an organization hoping to start a homeless shelter. The vision was for a full time staff of counselors to provide direct one-on-one support to residents and provide a pathway out of the shelter. They had a building, funds and motivation to get started. Before they hired full time staff or made a long term commitment, they asked for help developing a business case. Before making a commitment - either to employees, a land owner or a construction contractor -a fully developed business case is a vital tool. A business case can do an excellent job encouraging a good decision, but even more importantly a business case can stop a bad decision. This organization was much more qualified than me to provide a path forward to their target demographic, but I was there to help them build a business case and position them for success.
The organization had not yet developed a monthly budget for their new shelter, but was hoping their funds would last least a year of operations. I reviewed all the key categories in their monthly costs and used benchmarking data from typical operations in the industry to ensure these figures were reasonable. I researched the cost for full time counselors, and how many counselors per resident would be necessary to provide the kind of one-on-one assistance envisioned. The organization had a figure for renovation costs and I had little experience with this type of work. Because this was a significant cost, I arranged discussions with a few contacts in construction management with the goal of a “funny look test” on the renovation estimate – if someone in that industry felt as though the costs were in the right ballpark, it would be close enough for the stage we were at.
The data collection to feed the business case takes most of the time in developing the case itself. Some estimates can be rough figures whereas others need to be firm. Knowing the difference is one element in creating successful business plans. I focus on ranges rather than exact numbers, working with three numbers – middle, lowest and highest. In analyzing the business case, I look for places where the extremes change the decision as these are areas where additional time should be spent to narrow the range. When choosing these ranges, remember that people are very overconfident about the accuracy of their knowledge.
Let’s try an activity. I want you to provide a range of elevations such that you are 90% sure the lowest point in the state of Colorado is included in the range. The range can be as wide as you want it to be, so long as the elevation of the lowest point is included. Write down your range.
When psychologists give tests with 20 questions like this, the correct answer should be within the given range 18 times. Generally, the correct answer is within the given range only about half the time.
The lowest point in Colorado is at the Arikaree River at 3,315 feet. How did you do? Expert assistance, like the kind I provide, can ensure the ranges are wide enough, but not so wide as to make it impossible to extract insight from the business case.
Unfortunately, the funds the aforementioned organization had acquired were only enough for a month or two of operations – clearly not enough to move forward with hiring employees and making long term commitments. The executive I was advising was disappointed, but relieved to have this answer up front instead of running out of cash six weeks later as desperation set in. The business case I developed suggested a course of action that can be difficult for many executives and owners: wait. I gave the executive confidence to know the funds he needed and where the bulk of his operating budget would go. He now knew areas to focus on to reduce his budget and specific actions that he could take to minimize how quickly his costs ramped up. Did you develop a business case before you made a significant decision in your company? Flawless execution with a poor business case usually has worse results than mediocre execution with a strong business case. I’ve developed business cases for a wide variety of decisions, from the above example to a $5 billion international investment.