Why do people fudge business cases?
We want change. It feels positive and provides satisfaction and career progression. Most people favour change in principle. There is a good reason Barack Obama’s US election winning sound bite in 2008 wasn’t: “Leave things as they are – everything’s fine”.
For this reason business cases tend to favour change and they do so by exaggerating benefits, underplaying risks, underestimating timescales and generally being optimistic. And of course those responsible for approving them usually know about this bias and so they look at business cases cynically and aim to even out the bias. They don’t always understand or have time to review the details of every business case so they often move the bar – the approval criteria – to reduce the risk. For example the policy may be only to approve business cases with short pay-back periods or low capital requirements because they should be lower risk. But that may not be true.
The result of all of this is that the wrong projects are invested in and projects with great business cases don’t make the cut. So what can be done? Some organisations can show the way. Private equity (PE) houses for example buy businesses that have under-utilised potential. They typically execute a few well-chosen projects to increase its market value and then sell once the benefits are apparent. So good business case discipline is a core skill in their business; it’s fundamental to raising the game for organisations. And yet that’s what everyone is trying to do.
We have worked closely with many organisations who excel at business case management and lots more who are not so good. Here are five best practices that most organisations often don’t do at all:
- Ensure that the team building the business case includes operations; they are much more nervous about change and understand risks that project people overlook and so provide a useful balance.
- Ensure that ‘do minimum’ has been considered at least as much as ‘do big project’ and that the business case fully compares the two approaches.
- Perform sensitivity analysis to find out which variables are critical to the business case. Most business cases are incredibly sensitive to a small number of assumptions and the remaining ones have little effect on the business case. This analysis allows the business case to focus additional effort on understanding the risk associated with these critical assumptions.
- Support every key assumption with documented evidence and a named relevant advocate. For example, if it is assumed that sales will increase, the Sales Director should agree with the number and be prepared to put the assumption in his or her budget.
- Keep the business case updated as things change. Review it at a senior level regularly. Almost no organisation does this but if it no longer makes sense to do the project why would you blunder on? Because it would be politically difficult? To carry on with bad projects is to intentionally destroy shareholder value or waste taxpayers’ money.
To embed the discipline described above and avoid fudging the hard questions needs support and culture change from the top of the organisation to the bottom. But getting this right saves a lot of money and stimulates faster progress in projects that maximise benefits.