Business Case Analysis in a Consulting Study
Recent clients’ feedback indicates that most people do not know what the point of a study is, or what is the most important output to a client. Well, the point of any study in management consulting – whether it is a strategy, pricing, organizational optimization, salesforce effectiveness, operations or implementation study – is to ultimately present a business case analysis to the client.
Different but similar
It is true that all these reports are different in their content; contents types like analysis and recommendations are starkly different in each of these study types. However, all studies share the same underlying analytical process around top-down, bottom-up, and hypothesis, etc. It doesn’t matter what type of study being carried out, the ultimate output to the client is a business case analysis, or what we in consulting also call the benefit case (the latter makes it clearer to anyone that you are presenting to the client the benefits of your recommendation).
This article shows you the general steps you need to follow to generate business case analysis a client can effectively use.
The Importance of Business Case Analysis
The business case analysis, or of the benefit case analysis as its name implies, simply helps the client understand the overall benefit(s) of the recommended option and the steps to take to realize the stated benefit(s). If you are not presenting a business case, you are making it very difficult for the client to make the decision to implement the recommendations you are providing.
Steps to take when preparing Business Case Analysis
The figure below explains in clear terms what business case analysis is and should contain. Borrowed from the second edition of the book “Succeeding as a Management Consultant,” this slide presents the right way you should depict the business case analysis in every study.
Business Case Analysis Step 1: Understand the Financial Levers
The first step is to understand the financial levers. Ask yourself, what drives profits for the client’s business? This depends on the company. By and large, you are ultimately looking at the Return on Invested Capital, the major driver of shareholder value creation. That said, you can prioritize profit or any other metric that is important to your client. In the end, the question of what levers to pull is important.
In a simple manner of speaking, the levers of profit are revenue and cost (Revenue – Cost). The levers for revenue could be revenue from product line 1, 2, 3, and so on. A step further will show that the lever for revenue of product line 1 would be price and volume (price x volume). You continue this process until you have exhausted all major drivers of the problem.
Business Case Analysis Step 2: Focus Effort(s) at the Point of Greatest Leverage
The next step would be to focus your effort(s) at the point of greatest leverage. To do that, you will need to deploy the right set of analyses that answers the following question. Which of these levers do we need to pull in order to fulfill the following: one, solve the problem; two, generate the maximum benefit; and three, the easiest to do. These three conditions are important.
Business Case Analysis Step 3: Understand the Impact of Identified Benefits on Client’s Financials
Once you have prioritized those levels, you then have calculated the effort it takes (in terms of cost and time); deduct it from the prior benefits to get the net benefit to pull these levers. You have to repeat this for all the other levers you have identified (if you have identified more than 1).
Business Case Analysis Step 4: Categorize the Identified Benefits
The fourth step is categorization. You categorize the net benefit of pulling one lever into 1 of 7 groups. In this article, we are first going to focus on the first five, and later discuss the last two. The last two are equally valuable if you can use them. But for now, the first five (5) broad buckets any net benefit can be placed in include the following:
- Revenue enhancement
- Cost reduction
- Cost avoidance
- Capital reduction
- Capital avoidance
As an example, if you pull a lever to increase the price, you are ultimately going to increase revenue (provided a relative change in cost is smaller than the change in revenue). The resulting business case analysis (benefit case) from such activity would be a “revenue enhancement case.”
Let’s assume, again, on a client’s engagement, you identified 17 levers that you could possibly pull. The next step would be to work out the type of net benefit you can get from each of these 17 things and then categorize it into one of the above-listed categories.
The two other categories of “the seven” are
- Risk avoidance
- Risk reduction
I will not delve into details on the two last buckets as risk calculation requires a special article of its own. Subscribers who follow the “Partnership” and “Rebuilding a Consulting Practice” series know that I built my consulting career on strategy risk analysis as I was known for finding creative ways for the executive to think about risk in their business. I certainly have a lot to say about how management consultants should think through risk.
Business Case Analysis Step 5: Identify Corresponding Investment
That said, once all your net benefits are categorized in 1 of the 5 buckets (revenue enhancement; cost reduction, and avoidance; capital reduction and avoidance), you need to identify two things. These things are one, the investments the company needs to make to achieve those net benefits; two, the time it would take for such cost incurred (for the client to generate the benefit) to pay itself off.
Business Case Analysis Step 6: Model the Impact of Each Benefit and accompanying Investment on Client’s Financial Metric(s)
To make this clear to the client, your next step would be to model the net impact of each of the benefits and its accompanying investment (cost) on the client’s Profit and Loss Statement, Balance Sheet, Cash Flows; if needed, Payback Period, Internal Rate Of Return (IRR) and Breakeven Analysis.
If you present that to a client at the end of any study you give them three valuable things. One, the reason to go ahead and implement. Two, the blueprint for knowing what the potential size of the benefits of each recommendation (which you can categorize even further into high, medium and low range benefits). And three, the levers they need to attack to do this.
Levers: a Power Tool
Think of levels as power. When you are telling a CEO that all the levers their business could pull lies in the division managed by a very problematic division head that doesn’t see eye-to-eye with the CEO, you are basically outlining, to the CEO, the scope of the challenges to implementing the recommendation. And this is very useful to the CEO or an executive because they can then say to themselves, “You know what, the benefits are there but we need to make some organizational changes if we are going to realize such benefits… And we have been having trouble with this executive, he hasn’t been easy to work with, he pushes back amongst many things. If the future of the company truly depends on us changing that division, we can’t let this person just do what they want forever. We’ve got to make some changes.”
That is the usefulness of this process to the client. It is not just about the numbers. It is about understanding where the benefits lie, who is responsible for them, how easy are they to work with, and what changes are needed for the client to realize those benefits.
So at the end of every study, this is what you need to present to the client, business case analysis (benefit case) as detailed above. It is the easiest, but least done thing. Having seen many studies from boutique consulting rival firms, I realize that while most do create a business case (benefit case), a large number of them are not consistent. The benefits are either spurious, or not clearly articulated. The document is difficult to understand, or it makes no effort to break down issues into levers. And in all of the cases, there aren’t even any benefits.
Take for instance a management consulting study that says “the benefit is that we will change the organization.” Yes, we know that. The question is why is the change necessary? What are the values the client stands to gain from such change? Poorly done business case analysis (benefit cases) are even more glaring in organizational design studies. This is because, more often than not, many executives and consultants just think, “Well, it is a soft issue. There is no point putting some numbers to it.” But, of course, you can put numbers to it. Sentiment dictates share price on a daily basis. How come there is a number to that? There isn’t a lot of science to how the numbers are reached but it is there and commands respect. There are equal numbers to put business case analysis (benefit case) together, irrespective of the type of study.
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Succeeding as a Management Consultant
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