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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 objectives

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:

  1. Revenue enhancement
  2. Cost reduction
  3. Cost avoidance
  4. Capital reduction
  5. 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

  1. Risk avoidance
  2. 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

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.

Final Note

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.

I hope you enjoyed it as much as I enjoyed doing the episode. Finally, I want you to remember that the only way to get access to our special offers, special pricing, and to get samples of our content is to join the list on firmsconsulting.com/promo. It’s the only way also to get access to our unique advanced content that we make available to FC Insiders (our most loyal members). So if you want to get a sneak-peek of things, test it out, see what’s in there, this is the place to go.

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Recommended books:

strategy consulting firm succeeding as a management consultantSucceeding as a Management Consultant

When people think about the business strategy we often think about the field of strategy consulting/management consulting and firms like McKinsey, BCG, et al. If you are interested in learning how to conduct a management consulting engagement, you will likely enjoy this book. Succeeding as a Management Consultant is a book set in the Brazilian interior. This book follows an engagement team as they assist Goldy, a large Brazilian gold miner, in diagnosing and fixing deep and persistent organizational issues. This book follows an engagement team over an 8-week assignment and explains how they successfully navigate a challenging client environment, develop hypotheses, build the analyses, and provide the final recommendations. It is written so the reader may understand, follow, and replicate the process. It is the only book laying out a consulting assignment step-by-step. A great book if you want to learn consulting skills, including how to put together effective business case analysis.

strategy consulting firm Marketing saves the worldMarketing Saves the World, Bill Matassoni’s Memoir 

Bill Matassoni’s (Ex-McKinsey and Ex-BCG Senior Partner) Marketing Saves The World is a truly unique book. Never before has a McKinsey partner published his memoir publicly. This book is a rare opportunity – a true exclusive – to see what shapes the thought process of a partner and learn about marketing and strategy. The memoir essentially lays out McKinsey’s competitive advantage and explains how it can be neutralized. A great book if you want to enhance your presentation skills and communication skills. If you are interested in learning how to put together effective business case analysis and in general if you are interested in management consulting you will enjoy this book. 

strategy consulting firm Turquoise eyesTurquoise Eyes: A Novel about Problem Solving & Critical Thinking

Turquoise Eyes started off the groundbreaking new genre developed by FIRMSconsulting that combines compelling narrative while teaching problem solving and critical thinking skills. Set after a bank begins implementing a new retail banking strategy, we follow Teresa García Ramírez de Arroyo, a director-general in the Mexican government, who has received some disturbing news. A whistleblower has emailed Teresa with troubling news about a mistake in the loan default calculations and reserve ratios. The numbers do not add up. The book loosely uses the logic and financial analyses in A Typical McKinsey Engagement, >270 videos.

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Cheers, Kris

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Through a Bain business case, Terance discusses how to distinguish between analyzing a problem and assembling the answers to arrive at a strategy.

I felt lucky and relieved to have survived the scare of my last Bain business case. The relief did not last very long. I had to very quickly show that I deserved to be at Bain. With the engagement manager having left, I felt there was greater attention on my performance.

Would I be able to rise to the occasion and prove that this was a personal issue or was there something really wrong with my performance? I also felt a personal obligation to not disappoint the partners who had stood up for me. I did not have long to wait for the opportunity to prove myself.

Leading the business case

Just one week after my performance review, I was assigned to another aviation project. As you will see over time, the aviation sector and strategy became my area of specialization. Bain had been appointed to develop an IT strategy for one of the largest air carriers in the continental USA.

I was assigned to lead an important piece of work. The firm wanted to test me and asked me to be the analyst leading the business case under the support of a more senior consultant. It was going to be tough for me. I had no real finance or accounting background other than my 3 weeks MBA training at the Bain University.

Although I was assigned to work with an experienced consultant, the partner made it clear that I would need to drive the business case. The other consultant would oversee my work and provide input as needed. They would not be responsible for delivery. I would need to own this piece of work.

To be honest I was scared. While I appreciated the opportunity to lead something this big, I was not sure I could do it, and frankly surprised the engagement manager would place such trust in me.

My peers on the engagement did not help matters. The team assigned to this project was a stellar team. All were high-flyers within the ranks of Bain and were regularly cited for their outstanding team work, delivery excellence and exceptional client relationship.

Bain awards outstanding consultants with vacations away to some exotic locale with all expenses paid and they are allowed to take their families. Each of the guys on the team had won a vacation during the last 3 years running. The team consisted of 5 consultants including the partner leading the study.

I really appreciated the way the engagement manager approached this study. That is the reason I decided to bite the bullet and plunge into this project. We sat down and had a long discussion about what he wanted from this Bain business case. He was very hands-off, which I found surprising. He spoke a lot about the principles of the Bain philosophy.

I could see this guy led teams by bringing in smart people, inspiring them and allowing them to work. He mentioned he asked for me to be on the project because he heard I had spoken up for the client’s benefit on my last project. He admired that and wanted a similar style on this study. I clearly remember the 6 principles he had for the engagement:

  1. Take charge and dazzle the client, project team and Bain.
  2. Titles mean nothing. As far as he is concerned, I am the point man on the business case.
  3. A policy of no surprises.
  4. He would provide air-cover as needed and I just needed to ask for help.
  5. Follow the Bain approach but be creative.
  6. Have fun and work as a team.

Having this conversation really helped me. Not only did he inspire me to give my best, but he kept his word. At no point on the project was I treated like a junior member of the team. I was treated like a really senior and established Bain consultant. I remember sitting in the planning meetings and the engagement manager would deflect all finance questions to me.

He made a point of ensuring that no one, not even the engagement partner, would approach the Finance Director unless I was involved and it was part of my plan for the study. This gave me a tremendous boost in confidence. Now I just needed to deliver behind that.

Business case can mean so many things

What the hell do I do? Business cases can mean so many things. I spoke to the Bain business case experts and everyone had different ideas. In one project a business case meant working out the return-on-equity and in another it meant finding the increase in profitability. In yet in another it meant calculating the reduction in labor.

So for the first week, I worked with the engagement manager, partner and the rest of the team to see where they were taking the study. I decided that if each business case is unique, then the business case must serve the needs of the project. Therefore, I could only plan the business case once the needs of the project were clear. That sounded logical to me.

As I worked with the other team members to develop their plans, I developed a framework for my analyses. In hindsight, the framework is so obvious and logical, but at the time, I was pulling my hair out.

It helps to arrive at the framework by yourself since you can then understand why it was developed in the format chosen. The engagement manager would calmly listen to me and make polite suggestions and it was up to me to make the final decision. With power comes great responsibility – or so they say.

My analyses approach

So my analyses approach was simple:

Step 1 – Conduct a 2 weeks review of the IT department’s finances. Basically I was creating their income statement, which they did not have. I was also creating an easy to understand capital investment overview, something which they again did not have.

Step 2 – Determine if their total expenditure was appropriate.

Step 3 – Determine if investments were made in the appropriate parts of the business.

Step 4 – Determine what they could do to improve.

Step 5 – Determine the business case for the recommended strategy.

I ran this by the engagement manager and partner and both of them were happy with my analyses approach. They thought it was easy to follow, exactly what was needed and just a question of finding the information and drawing the insights.

Developing a storyboard

I already knew that the engagement partner would be on my case to prepare my storyboard. So I spent the first week doing the following:

  • Summarizing the key questions and hypotheses I needed to answer.
  • Building a decision tree to ensure I was not excluding anything important.
  • Developing my analyses and data collection templates.

Once this was done, I started working on my storyboard. I must say that developing my first storyboard was a painful experience. It is such a foreign concept when done by yourself for the first time.

Although I had practiced this in the office when I worked in the research team, I had taken for granted the important prompts and pointers provided by the consulting partners. Their comments were really useful to nudge me in the right direction.

I would just have to work without them. I reworked my storyboard every single night and discussed it with the manager the next morning. Each morning he sent it back with the following kinds of comments:

  • Do we need to tell clients we did this?
  • What is this data telling us? Are you sure?
  • What does it mean if they do not adhere to global best practice?
  • What is the most important finding you expect? Why is it not in the story?
  • Why is your story so long?
  • Did you know Winston Churchill demanded his war cabinet provide feedback using one single-sided typed page with double spacing? Why is your storyboard 80 pages? Is the news eighty times as catastrophic as World War II?

He was never flippant or arrogant. He just asked interesting questions in a nice way. It forced me to think this through over and over. I used to literally spend hours talking to employees and helping the other consultants all the while stressing that I had not started my data collection and analyses. The engagement manager did not seem worried. He wanted me to first develop my storyboard.

Presenting a storyboard

By the end of week two I was still not sure how my final storyboard would look like. This was after 7 iterations. Unfortunately for me, the next day the entire project team was having a meeting and we each needed to present back our storyboard. We were scheduled to have the meeting from 9am to 11am.

My tactic was to stall and hope to buy time to gather my thoughts over the weekend and hopefully present on Monday. The project partner rarely came in between Monday and Wednesday, so if I could survive Friday I would have about 5 days to spare.

I did quite well on Friday. Stalling that is. When the partner came in Friday morning, I strongly suggested he have some pastry from the new Dean & Deluca boutique on the ground floor. That killed about 25 minutes since I was extremely polite to allow every woman to pay before me. We spent another 10 minutes on pleasantries upstairs before getting into the detail.

Once we got to work, it was an intellectually tough session. The storyboards were dissected and analyzed. The partner checked for logic in thinking, robustness of the analyses and so on. It was interesting to watch. I also kept asking questions to stall.

At 10:55am, the partner checked his watch and mentioned he was running out of time. The rest of the team got up to leave since they had 11am meetings. The partner motioned for me to stay and quickly brief him. He wanted me to give him the basic message from my storyboard.

Damn! I thought I had escaped.

I basically sucked in a deep breath and told him what I thought the analyses would show. I just went with what I think the data was telling me and its implications:

  • About 75% of the IT budget is locked into legacy contracts decided at corporate level and over which the IT department has no control.
  • The legacy contracts are never reviewed and likely not meeting performance criteria.
  • The planned budget cuts could only be taken on the capital projects side, where passenger and ticketing IT upgrades would be made, since the rest of the budget was controlled by corporate. This would directly impact sales and customer satisfaction.
  • Despite popular opinion, Pacific Air is not spending more than peers, although its pattern of spending does not make sense. It is spending too little on core systems (ticketing) and wants to cut them even more.
  • It is the only airline in its peer group having such a large percentage of its IT budget tied to internal systems versus customer supporting systems.
  • The IT department could invest in the customer systems without requiring a budget increase. They would be able to tighten internal IT costs and shift the savings to the customer facing systems.

I waited for the expected criticism. It never came. The partner said that was a “brilliant” storyline and he looked forward to seeing the analyses.

The insight which indicates you understand management consulting

That taught me a very, very important lesson. Sure, management consulting firms have many phenomenal tools to construct decision trees, hypotheses and hundreds of guides to work out costing and rates of return. However, those tools only breakdown the problem. They do not put the pieces together to present the answer.

That takes intuition, creativity, experience and guts. That was a fundamental lesson in this project which I believe set me up for great success as a management consultant. I realized all the tools exist to break down problems into neat parts for comparison.

The truly outstanding consultants understand this and develop a knack for looking at the pieces and trying to fit them together to present a new picture. That’s a very important lesson that I hope to convey in this piece. Great associates and engagement managers can use formidable analyses to break down problems. Those who can reassemble them into the solution become partners. It’s that simple.

Much later I realized that Henry Mintzberg and Kenichi Ohmae (McKinsey) both outlined this understanding as a critical skill for management consultants. Mintzberg said that not everyone can be a management consultant. Bringing the right combination of intuition, creativity, experience and guts to a problem is something that cannot be taught and not everyone has it. Therefore, not everyone can be a management consultant.

Ohmae arrived at the same conclusion in his book “The Mind of the Strategist” but explained it differently. He said that engineers are linear problem solvers and are excellent at breaking down problems. However, this skill at breaking down problems is a major disadvantage when combining the pieces to develop the solution. Linear thinking does not work. In other words, all management consultants must have the skills of engineering thinking, but having these skills is by itself not enough.

In hindsight I cannot think why anyone would ever solve problems by scurrying off to analyze every piece of data. It is such a waste of time. The deductive approach of solving problem with decision trees and hypotheses is so powerful, it really boggles the mind. Once you make that shift to understanding and using the process, you become a powerful and efficient thinker.

You can imagine your career consisting of 3 parts:

Part 1 – Learning to correctly break down problems and analyze them.

Part 2 – Assembling the pieces to develop the solution and recommendation.

Part 3 – Implementing the solutions and becoming an operator.

Analysts, interns, consultants, senior consultants, managers, case leaders, engagement managers (different terms for different firms) all are in phase 1. It’s that simple. They are still learning to break down problems. An analyst is helping to break down a problem, an associate is breaking down a problem and an engagement manager is overseeing many people as they break down problems.

Phase 2 is much tougher and very few consultants make the transition. Until consultants get to the associate principal, partner, senior partner, director or managing director level, they are not crafting solutions. They are just preparing the pieces which the more skilled thinkers will use to craft the final solution.

Many consultants managed out of Bain, McKinsey and the Boston Consulting Group never understand this point. They leave as associates or engagement managers and think they know how to develop solutions. Unfortunately they have not learnt the skills needed. They only have half of the skill set required. Do not get me wrong, the skills they have are still important, but not enough.

Phase 3 will be discussed much later. The bottom line is that you cannot be an operator in a management consulting firm. You need to transition to a corporate role, run a P&L with resources and fight the daily battle to succeed in the market.

Using the storyboard to structure my analyses

It would be nice to say that I worked brutal hours every day. That fits into the stereotype for management consultants. I did not. Using the storyboard to structure my analyses and data collection made the project ridiculously easy. I should not say that, but it is true.

If you follow the Bain approach to break down problems and follow the guidelines to develop the analyses, you cannot go wrong. You need to constantly think about what you are doing, communicate and incorporate information. If you do this, you will succeed.

Always learn the process for solving problems. Really understand it and use it. Then sit with the data and think about what it is saying. Think long and deep about it.

The business case did dazzle the client

Despite being the junior consultant on this team, I can safely say that the business case did dazzle the client. Most of the hypotheses were proven. The client did manage to make huge investments in the customer facing side of the business, with only a 5% increase to the IT budget.

Rather surprisingly, the client retained us for much more work. I was also surprised when people at the office started referring to me as an aviation and business case specialist. Yet that is the power of the management consulting approach. It works. My star was rising.

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Image from Jon Herbert under cc.

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