Building The Business Case Mentality

By: Christopher Waldeck

Whether setting up a new organization or beginning the transformation process for an existing one, you face a similar problem: There are a million things to do (and/or already going on). Some of them rely on others being done first. Some are superfluous. Some should probably be done by someone else. As an analytics function (especially a new one), there are always a tremendous number of opportunities to go after - many rough surfaces that need smoothing.

Let's begin with a quick reflection on human nature: When faced with many options of apparently similar value, we probably won't get anything done. 

What's worse, it makes sense that this situation would paralyze us. It can be completely justifiable to sit and wait for more information to become available. In Microeconomics, the study of real option value reveals how it can be optimal to wait before making any moves when more information is expected to come to light.

Of course, business, even when it is options valuation, is not only options valuation. In reality, if you commit to a work stream - even the wrong one - you and your team will make progress and solve problems that need to be solved. A ship heading to the wrong port can still make better sailors, and may make some useful discoveries by accident.

That said, you don't want be landing in the wrong place routinely. There are some guidelines that can help prioritize opportunities in terms of value to the organization you're working with.

Step One: Approach Each Option As An Outsider

​It's easy to get tied up in the day-to-day but critical to remember that the daily grind is what created the processes you're here to simplify.

​You need to get your head above water, and the first thing to master is Meaningful Abstraction: The art of framing a problem in its simplest terms, and solving it with only its inherent constraints (dropping organization- and industry- specific constraints or norms people consider in their) daily work.

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Most bad processes are implemented because someone had his hands tied and either couldn't or wasn't willing to break down the barriers that needed to be broken. When you are going over the ways you can better equip an organization to do business, you need to free yourself of constraints others have internalized. By constructing a solution free of these limitations, you can look at the effect your optimal solution would have on the business as a whole, and, importantly, quantify the implicit and explicit costs the constraints place on the organization.

Often, shedding light on the costs of (sometimes maddeningly arbitrary) constraints is enough to create the momentum to have them removed. When you conceptualize every available opportunity by looking at its full potential impact, you will be sure to give each one its due.

Once you flesh out what each opportunity could potentially accomplish, you're ready to move on.

Step Two: Align The Options With The Organization

I start with what all businesses do (at a ridiculously high level):​​

1. Buy Things - Businesses need inputs: Labor, Material, Facilities, etc.
2. Change Them - Transforming, aggregating, and transporting is all part of adding value.
3. Sell Things - Because coffee is for closers

Then I use these basic buckets to classify my opportunities and line them up against the organization's strategy. Immediately, some options will start looking juicier than others.

If your organization is positioned as the low-cost seller in the market, opportunities around Buying just floated toward the top. Seeking out, say, an initiative that created a plug-and-play vendor model in your supply chain would make sense, since your overall strategy is dependent on having access to the best input prices in the market. 

A company that spends all its money on R&D ​may not, in general, care too much about hemorrhaging money when it comes to selling - especially at product launches - because payback timelines are critical in NPV calculations. Accordingly, it would weigh the opportunity to cut sales costs differently from a business that needs to run a very lean SG&A line.

Leverage your business's strategy as a guide: There's no need to reinvent the wheel.

Step Three: Be Obsessed With ROI & Context-Specific

In an ideal world, businesses spend money based on the expected value of returns to the company minus costs.

Like the strength of interplanetary gravity effects in a solar system, (expected) inflows and outflows of a business occur in quantities precisely determined by their marginal value relative to one another.

Example: Firms would stop spending money in product development when more could be gained by redesigning manufacturing processes or increasing the size of a salesforce. 

​In business school, this kind of equilibrium is hastily introduced to (and forgotten by) future MBA's as thinking on the margin. In Economics, we say it maximizes total profit.

An Illustration:

Many have seen these graphs before. Your Econ 101 professor told you a story about how the first few chicken nuggets are great, but, after 10 or so, they stop adding to your happiness.

​The same concept is at play here: Increasing the investment in a given part of your business will eventually yield smaller and smaller results. Also, in reality, the results from investment in one sector depend on the amount already invested in that field and the levels of investment in other sectors as well. 

In practice, the approach maximizes ROI by:

1. Calculating the return of projects on a project-by-project basis (a discretized version of the Marginal Rate of Technical Substitution, partially illustrated above)
2. Pursuing the most valuable projects (net cost) first

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While this might seem intuitive, it is actually discouraged by most companies through two avenues: Setting budgets months in advance of spending & creating operational templates. 

Think about the budgeting process for your organization. Does it facilitate this approach? If it became clear that the expected ROI of a CAPEX project was greater than that of an anticipated marketing campaign, how easy would it be to divert funds? Obviously, supplier relationship management (SRM) and some contract concerns may be in play when diverting large sums, but many businesses have such siloed budgets that even reallocation across marketing channels becomes unthinkable over time.

Bottom Line: When the product launch template gives the marketing group a DTC budget, regardless of the anticipated outcome, they're going to spend it.

By challenging the playbook and insisting on context-specific ROI calculations, you'll properly evaluate each opportunity at the right time and in relation to all other opportunities in that moment. What's more, by conducting this analysis, you'll gain a greater understanding of how investments across your enterprise tend to effect one another.

Step Four: The Business Case

​I imagine many readers have seen the aforementioned, uncritical approaches to making investment decisions out in the world. In truth, these practices span entire industries: Simple (probably true) notions are often used inappropriately to validate specific actions. Does advertising work? Sure. Is the next commercial you're thinking about running worth its price? Not so clear. Will it increase product adoption? By what amount? For how long? Without answers, you simply can't defend letting money out the door.

These answers and the manner in which you derive or approximate them are precisely what belongs in your business case.

A healthy business case should include exhaustive measurements or approximations of the costs and benefits of each program. This is where a lot of people give up, and it's why you got called in to streamline the confused web of business processes and priorities the organization has today. The larger the toolkit you can build to evaluate these metrics, the better your business case, and the more value you can unlock. 

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Wrap Up

While a lot of money flows out of a lot of businesses with nowhere near the level of scrutiny I lay out above, this approach will help you build a rock-solid project justification. Nothing answers "Is the juice worth the squeeze?" quite like cold, hard numbers.

By introducing this level of rigor, you will raise the bar for your organization and ensure that your projects are high-value, impactful, and visible.
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