The Business Case as a Management Tool
Posted on June 3, 2008
Filed Under Gregg Gallagher, Management, Strategy Execution |
Business cases & plans seem to have a bad reputation these days, particularly in the start-up/early-stage venues.
Why is this the case?
It appears that the aversion to business plans is the highly suspect nature of the financial business cases, particularly as they relate to sales revenue projections on the 2+ year horizon. Such skepticism may be well-warranted, but I would offer that neglecting the potential use of business case analysis as a key management tool - particularly in the start-up context - is a mistake.
How so?
A well-done business case should serve as the benchmark for the company’s operational performance. As such, it defines the set of assumptions that management believes will define the internal and external realities the company will face. Revenue performance is only one of the factors which need to be considered, and in itself, is actually a compsite result based derived from the interplay of a number of other factors which need to be considered and incorporated within the model (e.g., customer acquisition costs, customer retention/churn rates, customer lifetime value, etc.)
Accordingly, the value to management is not in the projections of top & bottom-line results, but in fact, it’s the underlying assumptions themselves. It is here where the Critical Success Factors (CSFs) for the company can and should be identified via sensitivity analysis. For example:
- What if customer service costs are twice what is projected? Three times?
- What if customer churn rates are 50% higher than projected? 25% lower?
- What if it takes 3 months for a customer to ramp up it’s use of our service as compared to 1 month?
By analyzing such alternative scenarios, mangament can identify the firm’s CSFs and focus it’s attention on these key drivers. My own methodolgy is that once these CSFs are identified, to then create analyses based on Conservative-Realistic-Aggressive Projections across these CSFs to determine how best to focus it’s attention.
I leave it as an exercise to the reader to determine my pet name for this approach……
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