A Structured Approach to Developing a Business Case for New Enterprise Information Systems

Introduction

The term business case is used to describe both a process and a document. A business case exploits an initiative. Exploiting the initiative from awareness to implementation encompasses a process, referred to in the diffusion of innovation parlance, as the innovation-decision process. The development of a business case concerns this innovation-decision process. The individuals or the decision-making units pass through the innovation-decision process, gaining knowledge of a new idea, forming an attitude toward it, and deciding whether to adopt or reject it (Rogers, 2003, p 20). Gaining the knowledge triggers the awareness or enforces it. Then, it leads to setting the agenda. After the agenda-setting stage is the examination of the available options. Attributes of competing options are matched together, enabling attitude formation in favour or against a particular option. This results in the creation of a shortlist of two or three options. A decision is generally reached at this point. The decision is, therefore, part of the matching stage. However, this is not always true in an organisational setting. There is a third stage after the matching stage. It is the decision (aka, business case) stage. Organisations generally demand rigour in making the decision. A business case document embodies the rigour in the business case development. Consequently, the decision stage culminates with a completed business case document and the decision that results from it: to adopt or reject the innovation. The three stages, agenda setting, matching, and decision stages, compose the initiation phase. If the decision favours adoption, then the implementation phase proceeds. In the context of implementing the new enterprise information systems, the stages in the implementation phase consists of pre-production, production, post-production (that is, maintenance), and confirmation stages. In summary, the business case development is a means, and its end is a business case document.


A complete business case is a formal written argument and a detailed “point by point” analysis (Cannon, 2006, p 4; Carruth, 2001). It purports tojustify the adoption or rejection of investing and thereby, implementing the new enterprise information systems. The analysis takes into consideration the stakeholders (Ministry of Health, March 2005), especially the decision-makers and the end-users. Consequently, a business case document is formal, detailed, and complex.

Using the parlance of “diffusion of innovations” (DOI) theory (Rogers, 1962, 2003), a business case document is a communication tool used to diffuse the new enterprise information systems, and to justify their adoption and implementation. Diffusion refers to the process by which the executive sponsor, who owns the innovation-decision process of the new enterprise information systems, communicates to the upper managers to get their approval of the project and funding.

Diffusion via a business case document for a technological product, such as an enterprise information system, must be directed at a single target audience to be effective. The upper managers represent a chasm that needs to be bridged (Moore, 1991). A completed business case document, containing relevant information for the managers, can serve as that bridge.

In addition to its relevance, a business case must also be responsible and credible. Therefore, the business case must bring relevance, reputation, and responsibility (the 3 Rs) into a number of issues and challenges during its development.

This chapter proposes a business case structure, with the 3Rs underlying it. It continues from the big picture of business case development in the article, The Role of Business Case Development in the Diffusion of Innovations Theory for EISs (hereinafter referred to as The Role of Business Case Development…). The structure, suggested in Table 2, delineates the context to the new enterprise information systems. However, prior to that, certain issues must be addressed:

• What is the purpose of a business case?

• What should a business case document contain?

• How should the business case be structured? How should it be written?

THE PURPOSE of A BUSINESS CASE

A good business case must have a purpose that is clear, specific, and relevant to the organisation and the upper managers. The Role of Business Case Development… mentions “growth and sustainability” as a strategic goal. That term is too broad to be useful in a business case. A similar ambiguous construct is sustainable competitive advantage (Hammer, 1996; Monczka, Carter, Petersen, & McDowell, 2006, p 213). A single detailed statement is far more relevant to the organization than several broad statements. An actual case study reveals one objective of selecting and implementing a proven, up-to-date enterprise financial system. The chosen systems must have the capacity to meet likely future financial-related requirements and growth. This vague objective can be made clearer by citing sustainable competitive advantages that are strategically valuable to the organisation, taking into consideration certain guiding principles (Table 1).

Enterprise information systems are the enabling technologies that foster sustainable competitive advantages under certain guiding principles. Table 1 helps to develop the business case backward from the purpose, and includes ALL the planning activities, resources, and metrics that are critical to the goal (Ministry of Health, 2005, p 9). Recent research indicates that most successful organisations have a crystal clear notion of the organisation’s strategy, and how deploying information technologies can help actualise that strategy.

A Business case Is a Two-Sided coin

The purpose of a business case is to reflect the rigour of planning relative to the level of investment being undertaken (Ministry of Health, 2005, p 3). This is one side of the coin.

The other side relates to justifying the innovation discussed. On one side, there are sustainable competitive advantages or other reasons tojustify the implementation of the innovation. On the other side is the purpose of the business case. Justifying the implementation and matching the best fit pertain to the what and the why questions. Thinking about the innovation-decision process and substantiating the process with the necessary rigour concern the how (and why) questions. In the context of the new enterprise information systems, the specific sustainable competitive advantage represents the primary goals. The enterprise information systems enable seamless integration (Table 1) of information across the whole organisation and its extended social systems. The systems empower the internal people in the organisation to provide the best performance with shared information systems. The systems help to identify and develop centres of excellence with resources and expertise prior to outsourcing. The systems also maximise return on information systems investment across the organisation, maximise the exploitation of opportunities, and minimise the risk associated with the new implementation. All these technological advantages are about the innovation. However, that is not the purpose of the business case, which is a reflection of the rigour on the innovation-decision process.

What Should A Business Case document contain?

The Scope and content of Business cases Vary

Not only must the business case contain the justification of the innovation (what and why) and the rigour of the process

Table 1. Guiding principles and sustainable competitive advantages

Guiding principles Sustainable competitive advantages
• E-business supply chain

• Economic value-added focus

• Globalisation

• Satisfaction of the needs of customers

• Total value management

• Value/supply chain integration, productivity, and collaboration (operational excellence and process redesign)

• Seamless integration

• Best performance: Quality, price, delivery, technology, cycle time (velocity, responsiveness, service), safety

• Enhanced EVA (increase revenue by broadening the offerings and improving customer value, reduce internal and external cost structure, reduce assets, and improve asset utilization)

• Enhanced EBIT, ROI, cash flows

• Perceived highest customer value

• Revenue generation

• Time-to-market/breakeven

Table 2. Suggested structure of a business case

Section Caption Remarks
Title Page
Table of Contents
Executive Summary Prepare a sharp and compelling summary.
1 INTRODUCTION Brief, purpose, scope, limitations
Terms of Reference or Background State the brief (that is, who asks to do what?). What do the readers need to know? If the background is crucial, then there can be a separate Background section.
Purpose of the Report Briefly explain the purpose of the report.
Gaps Analysis Describe the expected consequences (the strategic vision in refer to Section 4). Describe the assessment of the present state (refer to Section 4). Describe the gaps between the present state and the desired future state.
The Proposed Solutions and Its Strategic Value Highlight the strategic value, the selling point, of the solution. Describe the relevant issues and their action plans (related to Section 7, the proposed project). Some questions to ponder are: Is the solution reactive or anticipatory (Figure 3 in The Role of Business Case Development…)? How does the proposed solution FIT into the big picture? If the solution is reactive, describe the urgency of the radical change. If the solution is anticipatory, explain the critical strategic area (Table 1 and strategic vision in Section 4 and Section 6). Why does the solution matter?
Project Ownership (and Consultant) Corporate power dictates the level of detail this section requires (assumed).

Who is the executive sponsor? How supportive is the executive sponsor to the business case? Who is the expert the executive sponsor has consulted?

Scope and Delimitation Delineate the scope of the problem.
Methodology Briefly describe the methods or methodology of Section 3.
Structure of the Business Case Document Briefly outline how the business case is presented.
2 CONCLUSIONS AND RECOMMENDATIONS
2.1 Conclusions How does the executive sponsor evaluate the Business Case (eg, cost-benefit analysis)? How logical or intuitive is the evaluation? Based on the financial and nonfinancial analysis, summarise briefly how the business case will impact positively and negatively on the organisation? What are the critical success factors? The critical failure factors? How are the options considered and documented?
2.2 Recommendations Which option has the executive sponsor chosen and why? The Recommendations section (or the Proposed Project section) may attempt to answer further questions such as: How does the executive sponsor propose to rally the support, involvement, and usage? How does the executive sponsor ensure success?
3 METHODS What are the contingency plans? How does the executive sponsor come about the plan? How reliable is the evidence used to develop the Business Case?
4 FACTS AND ASSUMPTIONS This section may form part of the Introduction section.

Legend: E = Essential, O = Optional

Table 2. continued

Section Caption Remarks
Strategic Vision Identify the strategic vision, the guiding principles, and sustainable competitive advantages (Table 1). Assess the key strengths and weaknesses. This may be incorporated under the future state of the Introduction section.
Needs Analysis Describe briefly the needs and relevant issues. This section may be incorporated under the Gaps Analysis of the Introduction section.
Options Analysis Describe briefly the options considered in this business case. This section may be incorporated under the Proposed Solutions of the Introduction section.
5 FINANCIAL ANALYSIS How does the EXECUTIVE SPONSOR explore the sensitivity of key assumptions in the analysis?
Total Cost of Ownership (TCO) Combine the net present value, discounted cash flows, and total cost of ownership in the financial analysis. Determine which option enhances the value to the organisation and not which option has the lowest TCO. Make sure to scrutinise all “hidden costs.”
Business Risks How does the EXECUTIVE SPONSOR identify, assess, and resolve the risks involved?
6 NONFINANCIAL ANALYSIS What external factors drive the Business Case? How will the competitive advantage, macro environments, and stakeholders (competitors, customers, and vendors) impact the organisation? With what of key assumptions in the analysis?
Sustainable Competitive Advantage(s) Describe in detail the innovation, its scope, its goals (the sustainable competitive advantages in Table 1), and the expected consequences. How does the innovation fit into, for example, the seamless alignment or the organisation’s strategy? How does the innovation enhance the competitive advantage? How does it create the differentiation of the organisation from its competitors? What is the “compelling reason” why the innovation must be put into action? What value does the innovation provide?
Macro environments
Stakeholder Analysis St Gallen Management Model suggests two approaches. One is the “strategic stakeholder value.” The other is the “ethically critical stakeholder value.” The former approach assumes that a balanced consideration of the long-term interests of all stakeholders is the best way to maximise shareholder value. The latter approach evaluates all potential stakeholders equally toward “ethically justifiable legitimacy.” (Ruegg-Sturm, 2005)
THE PROPOSED PROJECT
Project Plan How does the project plan look like? What are the key milestones? How abstract or detailed is the project plan? How does the project plan mitigate the risks of occurrence of undesirable consequences (refer to Appendix A section)?
The innovation-decision process How did the executive sponsor conduct the initiation phase? What is the change strategy? How will the executive sponsor implement the new enterprise information systems? Reiterate the change strategy, costs, and risks?

Legend: E = Essential, O = Optional

Table 2. continued

Section Caption Remarks
Project Participants How detailed has the Business Case been documented with regards to the resourcing requirements (that is, the capacity and capability requirements)? Specifically, what are the skills, experience, and time commitment required of the project team? What are the skills, experience, and time commitment required within the business after the completion of the innovation-decision process? How does the executive sponsor propose to manage the risks related to the resourcing requirements? How does the Business Case take into account the additional resourcing required through and after the implementation-decision phase?
Appendix A UNDESIRABLE CONSEQUENCES TO AVOID Refer to Project Plan section above.
Appendix B REFERENCE SITES

Analysis, Depth, and Quality

The keys to a successful business case are in-depth analysis and quality. A Risk-adverse organisation with an analytical bent will usually spend considerable time and effort in fully understanding all the aspects and implications of any significant investment (Carruth, 2001, p 10). Too much analysis is not cost effective. The content of the business case must limit and highlight few but crucial aspects that impact the organisation. Implementing new information systems affect the operation and well-being of the organisation concerned. The question is: Which of these “effects” give the greatest impacts to the organisation? Thus, there is a need to limit and highlight the critical factors. The focus is, therefore, on the quality of the information and the depth of analysis. Cannon (2006, pp. 2-4, 194-252) suggests 29 analytical tools, such as balanced scorecards, cost-benefit analysis, critical success factor, life-time cost analysis, risk analysis, sensitivity analysis, and SWOT analysis. The amount of analysis carried out is irrelevant. In a good business case, the analysis must reflect the right depth of a critical factor that impacts the organisation as a consequence of strategically investing or not investing the chosen option (Weill & Ross, 2004).

Managing Risk and Defining Undesirable consequences

Aside from the in-depth quality analysis, the business case must identify important assumptions (also referred in Figure 1 of The Role of Business Case Development…). Risk-taking attitude, sustainable competitive advantages, organisational innovativeness, politics, cash flows, and total cost of ownership are examples of relevant assumptions.

Risk is foremost to these assumptions. The implementation of new enterprise information systems involves risk. How does the organisation react to risk? The answer can be found in the organisations past actions.Risk-seeking, innovative organisations exploit innovative opportunities which have potential for big returns. Risk-averse organisations are very late adopters of technology, and are less innovative. To risk-averse organisations, the business case must mention similar implementations undertaken by competitors or other organisations.

Managing risk is simply gaining more power over the uncertainty brought about by the innovation-decision process. Borge (2001) suggests certain techniques to managing risk:

• Being aware of the risks by defining, at the start, the possible undesirable outcomes;

• Knowing that taking deliberate action can increase the odds of desirable consequence and decrease the chance of unexpected or undesirable consequences;

• Weighing risks vs. benefits

Defining all possible undesirable consequences is easily overlooked or taken for granted because, as Borge (2001) puts it, there is no universal definition of a bad outcome. Like the “new idea” to exploit, the “undesirable consequence” to avoid depends on the perspective of the people involved. Therefore, the undesirable consequence must be explicit in the business case. As mandated by the Sarbanes-Oxley Act, the executive sponsor and the project team members should be able to see the threat early, and understand them before they become clear and present dangers (Green, 2004).

Here is a last word on the risky business of managing risk. The rigour of developing a business case is NOT minimising the risk. It is balancing risk with opportunity to create the best overall value (for details, refer to the concept of “value at risk” by Borge).

Other Important Assumptions

The attitude to risk is not the only relevant assumption. There are other assumptions that need to be addressed and identified. For example, how do new enterprise information systems foster seamless alignment in the organisation? How does the proposed implementation fit into the organisation’s strategy? Table 1 has suggested certain sustainable competitive advantages. Therefore, how does the business case describe in detail the innovation, its scope, its goals (the sustainable competitive advantages), and its objectives (the expected consequences)?

Corporate culture, specifically the power structure mentioned in the conceptual framework of The Role of Business Case Development…, is another basic assumption. A business case may rely more heavily on the opinions of the executive sponsor or any other leaders with powerful opinions. The mention of the “power” person or people gives credibility (or reputation, the second R) and responsibility (the third R) to the business case. If the business case is to diffuse successfully, the premise of the corporate culture dictates a disclosure of ownership of the implementation. Furthermore, IT governance essentially involves stating who is the executive sponsor who is responsible to making the IT decision and who will be accountable for diffusing its usage in the organisation (Weill & Ross, 2004; refer to project ownership in the Introduction section of Table 2).

NPV, DCF, and TCO

The net present value is an old measure that most accountants and financial professionals rely heavily on valuation to business decision making.

One related valuation method is the discounted cash flows (DCF) method. It estimates the current market dollar value of the new enterprise information systems. Based on expected future cash flows and discount rates, the DCF value drives capital budgeting and therefore, the innovation-decision process. For organisations with positive cash flows, the cash outflows for future periods can be estimated with a certain degree of reliability.

Another important concept is the total cost of ownership, or TCO for short. The traditional notion of cost is the money paid in exchange for tangible and intangible projects or services, where costs can be either direct or indirect. Before making the adoption decision, a capital budgeting analysis will be required. It involves breaking down the amounts to be paid. For example, with the enterprise information systems, the acquisition costs include initial software, hardware, installations, training, configuration, supporting, and consultation costs. Other cash outflows are used for maintenance, further training requirements, modifications, supports, and upgrades (Cua & Theivananthampillai , 2006; Piedad, 2001). The initial acquisition cost represents a capital expenditure. The subsequent ongoing costs are operating expenditures. These so-called operating “expenses” accumulate over time, and equate to at least a third of the initial acquisition cost (Schweitzer, 2003). They must be included in the total cost of ownership, otherwise, they will become hidden costs.

Combining the net present value, discounted cash flows, and total cost of ownership, give to financial analysis the much needed context as to valuation, strategy, finance, and corporate governance (Morin & Jarrell, 2001). There is one caveat. TCO is like air. Its absence is fatal, but it must remain discreet and in the background when present. Although determining the lowest TCO is good, deciding on the option with the lowest TCO puts emphasis on minimising the cost through TCO. It is, therefore, not wise. Instead, the question to ask is not which option has the lowest TCO? Rather, which option enhances the value to the organisation (Cua & Theivananthampillai, 2006; Morin & Jarrell, 2001)?

Planning for the Past, Present, and Future

In DOI, the innovation-decision process develops along a normal course. Imagine the whole project as a life cycle consisting of the two major phases (the initiation and implementation phases) with several stages in each phase. The completed business case (the third type of the business case) occurs in the decision stage of the first phase, and effectively links the initiation phase to the implementation phase. Thus, a completed business case must contain the story of the past (what was done in the awareness stage and matching stage), the present (the available options and critical factors to make the decision), and a preview of the project management (Nokes, Greenwood, Major, & Goodman, 2004) with regards to the implementation of the new enterprise information systems.

Nonfinancial Factors

Other than the sustainable competitive advantages, there are other nonfinancial factors, such as the macro environments and the stakeholders. These are two of the six categories under the St Gallen Management Model (Ruegg-Sturm, 2005). The macro environments are particularly useful in weighing the external circumstances that can impact on organisation’s growth and sustainability. Organisations often define their success by the degree to which they are able to meet the needs of the various stakeholders. Some stakeholders are the conditions to success. Others affect the creation of value. The purpose of stakeholders analysis is to maximise shareholder value in the longer-term (Morin & Jarrell, 2001; Ruegg-Sturm, 2005).

structuring and writing the business case

Using a business report format, the business case (Table 2) identifies the gaps between the expected future state and the present state (Section 1). The conclusions on the business case, together with the recommendations, follow in Section 2. Subsequent sections are the methods (Section 3), facts and assumptions (Section 4), financial analysis (Section 5), nonfinancial analysis (Section 6), and the implementation plan (Section 7).

As business cases are complex, the executive summary becomes the most important part of the business case. Pugh and Bacon (2004) emphasise the “executive treatment,” and suggest several approaches of diffusing the innovation via the executive summary. The upper managers are busy people. They have time to read a summary but not an entire proposal. They also have a crucial role in the final decision and therefore, they will form their “attitude” towards the business case in three quick steps: the executive summary (first step), the introduction (the second step), and the conclusions and recommendations (the third step). By the third step, they usually have an idea whether or not the executive sponsor has undertaken the necessary rigour in developing the business case, and whether or not the business case is worth investing.

conclusions

The key points in the business case are the 3Rs (relevance, responsiblity, and reputation) of the strategic value of the new enterprise information systems. What value impacts the organisation the most? With the relevance brought about by the strategic value come the in-depth analysis and the quality (not quantity) of information. The project ownership in Section 1 and the stakeholder analysis in Table 2 concern responsibility, crucial to Sarbanes-Oxley Act and corporate/ IT governance. Project ownership sets accountability for the decision and diffusing the usage of the new enterprise information systems. Stakeholders’ analysis sets the social responsibility. The rigour of the business case development foster a mindset that the organisation is able to fully consider risks, and that the organisation is able to mitigate the risk concerned with the initiation and implementation of the new enterprise information systems. The reputation of the organisation is at stake in this instance.

Lastly, the proposed structure in Table 2 is a blueprint, but should not be used as a boilerplate.

KEY TERMS

Business Case: Completed business case document. Business case process.

Business Case Development: Walks through the initiation phase of the innovation-decision process and talks about the project plans that concern the implementation phase.

Completed Business Case Document: A formal written document that argues a course of action. It contains a point-by-point analysis to making a decision for a set of alternative courses of action to accomplish a specific goal.

Diffusion: Essentially communicating a new idea (aka, the innovation) within a social system (such as an organisation) with the intention that the audience of that communication adopts or use the innovation.

Diffusion of Innovations: Theory concerns the how, why, and at what rate the new idea (commonly referred to as innovation) diffuses.

Implementation Phase: Proceeding after the initiation phase, the implementation phase of enterprise information systems consists of pre-production, production, and post-production (also known as upgrade and maintenance). Refer to innovation-decision process.

Initiation Phase: Consists of awareness stage, matching stage, and lastly, the decision stage. It is the first phase of the innovation-decision process. The second phase is the implementation phase. Refer to innovation-decision process.

Innovation: Represents a product, a service, or an idea that is perceived, or should be perceived by the audience or the market in which this innovation is intended to be new and of value.

Innovation-Decision Process: Starts with an initiation phase through which the individuals or decision-making units move from knowing (understanding/identifying) the new idea (the innovation), to forming of an attitude toward the innovation, and subsequently, to deciding whether to adopt or reject the implementation and use of the new idea. The awareness stage is the agenda setting stage. The attitude formation stage is the matching stage. In addition, the decision stage to adopt or reject the innovation terminates the initiation phase. An adoption decision continues the process toward the implementation phase, which consists of the pre-production, production, post-production, and confirmation stages.

Risk: Connotes a possible negative impact to something of value. It symbolises the probability of a loss.

Total Cost of Ownership: Also known as TCO, is a rigorous and holistic methodology. It helps to estimate how much an investment will cost to operate over its lifetime. It takes into account all direct and indirect costs. The indirect costs are generally insignificant individually. However, they become very substantial when accumulated over time.

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