In our experience, there are four key components that, if addressed properly, will help companies ensure they develop business cases that are realistic, in terms of total costs, benefits, and risks considered, and evidence-based in terms of data inputs and key assumptions, thereby increasing the likelihood of signing a contract that will be value-adding to the service portfolio and overarching strategy. These components are:
Baselining - understanding and documenting the full scope and associated costs of existing operations in-scope for the business case
Market Assessment - gathering market intelligence on suppliers, customers, and competitors with respect to product/service offerings, pricing, demand, market positions/plans, economic and technology trends, and more
Transition Costs - estimating the internal and external costs of people and technology required to migrate from current to future state service operations
Performance Management - ongoing measuring, reporting, and management of the realization of costs and benefits, as against the approved business case
For each of these areas, we suggest that companies engage a cross-functional team, including senior stakeholders from relevant business units, Marketing, Technology, Finance, Procurement, and other departments. /p>
The Base Case - Importance of Baselining
The most important component of a business case is the base case or projection of current costs. Customers must take the time to accurately baseline and understand the entire relevant scope, not just the immediate scope of the business case.
One example of accurately defining the relevant scope is whether or not to include or exclude inflight projects. Let’s assume that a major application is currently in development and simultaneously the firm is exploring sourcing Application Maintenance and Support (M&S) activities. This project will not reside in the M&S budget as it is not being maintained, however eventually it will require support. Therefore, it is critical that organizations account for the level of future M&S needs to avoid overstating savings and other program benefits.
Often customers fail to view the proposed deal with a supplier at the relationship level. One can assume suppliers view customers strategically, which means customers would benefit from a similar approach. Examples include leveraging economies of scale and strategic account status to negotiate better deals and consolidate agreements. In addition to budgeted savings, customers can also negotiate additional value, examples include enhancing peripheral services, supplier funds allocated to transformation projects, leveraging Centers of Excellence, and favorable terms on contract length and critical SLAs. While more challenging to quantify in a business case, the potential for positive financial impact is significant.
Market Assessment - What You Don’t Know…
As consultants one of the key value-enhancing services that we offer our customers is providing them with market intelligence, whether it’s a benchmarking or mark-to-market exercise, an assessment of the supplier landscape, or an indication of market and technology trends. A typical, multi-part question for consultants on sourcing deals is: “What are our competitors doing, what are they paying, and what direction is the market going?” The answers to these questions, within the context of an organization’s own strategy, capabilities, and assets, are all essential inputs to a sourcing deal and help form key components of an organization’s negotiations and commercial strategy. This often includes guidance on the optimal length of deal, target pricing, supplier candidates for strategic partnerships, contract provisions for relevant technology and economic trends, and more.
If organizations can obtain accurate and timely market intelligence, then they have a shot at moving away from the transactional sourcing mindset and joining those elite organizations that create strategic business partnerships with suppliers to create value, focus on core competencies, and ultimately transform IT to keep a step ahead of evolving business models and demand for enabling IT services.
Transition Costs - Getting It Right!
When building the business case for a sourcing initiative, Transition Costs often require heroic assumptions and are therefore susceptible to errors and oversights. While a new supplier can provide their estimated costs - and termination fees are easily determined - many of the peripheral areas like change management, productivity loss, and supplier ramp up/ramp down issues can make or break a business case. This poses the question of: How do customers identify and realistically reflect all key assumptions underpinning Transition Costs?
Beginning with the external factors, transitioning a service to a supplier presents many risks which need factoring into a business case. This becomes especially true in an existing supplier to new supplier transition. Potential external risks to incorporate are:
new supplier(s) failing to ramp up in timely manner (work authorization issues are a major culprit), and
additional travel requirements to Offshore Development Centers.
As for internal transition costs, customers need to estimate the severance costs (if any), salaries until termination and change management costs which often include external consulting services. All business managers need to be involved with assessing the activities and costs associated with managing this significant organizational change. Finance or Procurement should play a support role given the likelihood of their experience with previous change programs, though business unit managers need to lead the effort along with a cross-functional group of business leaders to ensure the change, cost and other relevant impacts of the program across the entire organization are taken into account.
Performance Management - Where’s The Business Case?
Business cases are essential to funding projects, particularly large sourcing initiatives, and projected cost savings and/or revenue enhancements (and their derivatives) create positive net present value (NPV) projects that may gain approval. While most sourcing business cases are far from iron-clad, managers have become proficient at creating them and gaining the requisite approvals. What’s missing, in our experience, is a rigorous accountability from both the supplier organization and the customer’s business unit leaders for delivering the promised benefits. So, what would proactive management of benefits realization entail? For starters, joint supplier-customer measuring and reporting against the business case and associated benefits over the deal term, with checkpoints at regular intervals to gauge performance. This could be written in to the contract as KPIs for mandatory supplier SLA reporting, and monitored with related IT governance activities such as periodic review of SLA performance.
Another significant benefit of monitoring the ongoing performance of approved business cases, which we’ve seen accomplished at both the business unit and Corporate Finance or Procurement levels, is to better inform senior managers on the return they might realistically expect to achieve on future investment decisions (particularly ones with similar risk and benefit profiles). Current deals may be perpetuated if adequate value is created through delivery of the contract services within agreed service levels, while in reality the deal may be underperforming and the supplier under-delivering. In our experience, organizations that hold their business leaders, and by extension, their suppliers, accountable for business case benefits that triggered funding and investment in the first instance, do in fact get more value out of their sourcing deals and strategic partnerships with suppliers.
In summary, developing business cases that are realistic and evidence-based, with solid footing in the four key areas of Baselining, Market Assessment, Transition Costs, and Performance Management, is essential to executing on strategic objectives. Organizations that manage business cases and their critical inputs through the entire sourcing lifecycle, while engaging a cross-functional team to validate key underlying assumptions, will best position themselves for consistently maximizing value creation.