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Business Case September 1, 2005

Posted by Coolguy in PRINCE2.
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Introduction

  • The driving force behind every PRINCE2 controlled project is its Business Case.
  • Its critical in securing the continuing commitment of senior managers and the Project Board.
  • If at any time the Business Case indicates that the Business Benefits will no longer be achieved, the project should be considered for premature close.
  • If little or no Business Benefit can be identified at the outset of the project the project should not be started.


Scope of the Business Case

  • The Business Case addresses any
  • Pre-project work
  • Development or modification work
  • Handover to operations
  • Operational costs
  • Benefits for the end product
  • The basic content of the Business Case is
  • A Statement of Benefits– to explain why the project’s outcome is needed. The source of the reasons for the project should be available from the Project Mandate.
  • The Options Available – describing the options that were considered in order to achieve the required end product,
  • The Benefits – Each Business Benefit that the end product is expected to deliver should be described and, where possible, costed. In some organisations both tangible and intangible benefits will be incorporated into the investment appraisal and justification, assumptions and the rationale behind the calculation of costs for intangible benefits will need to be explained. Some organisations will not allow the incorporation of intangible benefits into any calculation – this should be established before time-consuming work is put into costing work.
  • Costs and Timescale – the development project costs can extracted from the Project Plan; operational, support, enhancement and consumables costs may be estimated using a percentage of the total project costs. This will enable the Project Board (and the Executive in particular) put the assessed Business Benefits into perspective. The most common way to do this is to create a Costs: Benefits Analysis and an Investment Appraisal.
  • Investment Appraisal – illustrating the balance between the development, maintenance and support costs against the financial value of the Business Benefits over the total life-cycle of the end product.


Measuring The Business Case

  • The Business Case may be measured in any way which is appropriate for the organization and/or the project.
  • This might include a simple appraisal of the benefits to the businessthat the outcome may bring, recorded in a straightforward narrative or, better, a series of paragraph statements within the Project Brief and the Project Initiation Document.
  • An enhancement of this would be to record an estimate of the value of each benefit against each benefits statement.
  • Where this approach is used, it is essential that each value be supported by a statement of the assumptions behind the valuation; it takes some courage to go out on such a limb which, with the eventual benefit of hindsight, may prove to be inaccurate – but it is the right thing to do!
  • The preferred approach is to use a Costs:Benefits Analysis approach. This well usedtechnique provides a year-on-year statement of the costs of development and operation of the project’s outcome and compares them to the expected benefits expressed in financial terms.

  • Costs are reasonably straightforward to identify – the Project Plan provides an excellent start point and operational costs, consumables and enhancements can be derived by applying sensible percentage up-lifts on a year-by-year basis. Although not a hard and fast rule it can be expected that operational costs will be 3-5 times the cost of development for most undertakings.
  • Identifying costed benefits is a much trickier task. It is often helpful to break potential benefits into the following categories:
  • Tangible Benefits
  • Intangible Benefits
  • Tangible Benefits – where there is confidence that the identified business benefits will be achieved and its measurement is comparatively straightforward. Examples are a reduction in effort, giving up a lease, selling redundant equipment, leasing out part of a building.
  • Intangible Benefits – where the identified business benefits are very difficult to measure and, often, to identify. Examples are increased productivity, improved staff morale, higher company profile leading to increased market share.
  • There may also be a “halfway house” where an expected business benefit is likely to be achieved, but the follow-on business benefit (which is the main target) may or may not be achieved and is very difficult to measure. An example would be a project outcome aimed to improve customer relations and perceptions significantly, which in turn will reduce the number of enquiries and complaints, leading to a reduction in the number of staff needed to run a customer help-line.
  • For example, the organization might do well to consider alternative investments (or projects) for its time, effort and funds. Also a different project approach might result in a more attractive profile where the cashflow is more beneficial to the customer organization.
  • To present an accurate picture to the Project Board, an Investment Appraisal is useful.
  • The Investment Appraisal discounts the Costs:Benefits calculations to reflect the return on investment in present day terms – the Net Present Value. This enables the Project Board (in particular the Executive) to measure the effects of cashflow and the approach taken.

  • The discount rate will vary across organizations – 6% is typically that used inthe public sector following advice from HM Treasury; the discount rate can be as high as 30% in some parts of the private sector.

Using the Business Case

  • The Business Case, where it is expressed in terms of an Investment appraisal, can be used for many types of decision support.
  • A sensitivity analysis may be carried out to identify the areas upon which the Business Benefits are heavily dependent.
  • The technique requires maintaining all elements within the Investment Appraisal stable, except for the one being tested. Major benefits indicated as particularly sensitive would be intensively managed through the normal PRINCE2 planning, control and risk management structures.
  • The Business Case will always be up-dated, minimally, at the end of each Management Stage and for creation of Exception Plans, where Tolerance has been triggered.

Business Case Tolerance

  • Tolerance may be applied to the Business Case where it has been measured in one form or another. Use of a Costs:Benefits Analysis and Investment Appraisal will greatly assist in forecasting whether Business Case Tolerance will be exceeded or not.
  • As the projects draws to a conclusion, the Business Case will receive its final re-appraisal in the “Closing A Project (CP)” process when the Post Project Review Plan is prepared.
  • This plan provides the approach and authority for a review of the operational end product after a period of use (typically 6-12 months after hand-over) and will measure the extent to which the end product is delivering the claimed Business Benefits.
  • The Business Case is a key feature of the PRINCE2 Method.
  • It exists to justify the setting up, start and continued progress of the project and is used to measure whether the whole undertaking was worthwhile after a period of use.
  • The Business Case will be a critical feature of any project whether it is a short statement or a fully featured Costs:Benefits Analysis and Investment Appraisal.
  • But to get the most out of the Component, it will always be necessary to express the Business Benefits using some form of measurement – this is the Business Case.
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