IT Investment Business Case in 7 Steps
March 28, 2012
How to evaluate an IT investment project
Obviously business organizations want to get the best of their technology investments. But because of economic uncertainty, they often remain cautious about those investments. The major criterion for measuring the success of any IT investment project is value to the business. A business case helps take this criterion into account when evaluating and analyzing IT investment projects. IT investment business case builds a framework for measuring ROI and determining business value.
This publication describes a 7-step approach to writing a sample business case for IT investment. It provides business case development guidelines intended for companies which look at implementing new systems and IT solutions into their business environments.
What is a Business Case?
Business Case is a decision-making tool that helps to identify and measure the effects a particular decision will have on profitability and financial success. It is a document that states about how the decision will alter cash flows over a fixed period, and also what costs will incur and how revenue will change over the specified period.
Following the given definition,
a Business Case for an IT investment will determine the impact a new system will have on a company’s profitability, and also the financial changes that will happen after the system is implemented. IT investment business case will pay specific attention to financial indicators such as Internal Rate of Return (IRR), Cash Flow and Payback Period in order to allow decision makers to analyze the financial outcomes and to approve or reject the proposed IT solution.
IT investment business case defines the business need for the investment and also quantifies the costs and benefits resulting to this investment. It clarifies whether the investment is worth doing and determines when the costs and benefits will accrue.
A 7-Step Approach
Below we suggest the seven steps in building a business case for IT investment projects.
- Describe the business problem
- Appraise the potential benefits of the IT investment project
- Estimate the potential costs
- Evaluate possible risks and issues that might arise during the implementation
- Recommend the preferred solution to the problem
- Define the implementation approach of the project
- Measure ROI
The given approach is common, and you can follow these steps to develop your own business case that meets your company-specific needs and expectations.
Step #1. Describe the business problem
The first step in creating IT investment business case is to comprehensively determine the business problem that must be addressed by an IT investment project. You must review your business environment and determine the aspects driving the need for the investment, including:
- The reasons of the problem
- Any issues related to human resources, processes, or technologies
- The impact of the problem
- The period within which the problem must be solved
There are several common business problems that force companies to look for new IT systems and implementations. These problems are as follows:
- A need for business growth. Business growth can be reached either through acquisition or organically. However, existing IT solutions and ERP software may be unable to provide sufficient support for subsidiaries and branch offices. Through improving and strengthening software functionality it is possible to ensure business growth.
- A need for cost reduction. During economic fluctuations, some organizations need to strengthen their profit margins and reduce their operating costs. Cost reduction can be reached through implementing a software system that automates manual processes and focus personnel on exceptions.
- Inefficiency of business process. Some organizations suffer from time-consuming, manual and inefficient process environments, and then the implementation of modern IT systems will be the way to solve the problem and eliminate process inefficiency.
- Obsolete systems. A company may utilize obsolete systems that are no longer updated and supported. If so, the company needs to consider investing in a new IT system that feature modern functionality and is therefore much effective.
Step #2. Appraise the potential benefits
Investing in modern IT solutions can give companies the tools they need to address their business problems while removing obsolete systems and reducing operating costs. These and other benefits can be expected from successful IT implementations.
The second step in developing IT investment business case is about determining the benefits. The following are the types of benefits a business organization can expect to earn from implementing an IT solution. When evaluating different IT options, the organization must consider how well each of the options delivers these benefits:
- Business growth, which can be achieved by minimizing costs and improving overall IT infrastructure
- Process automation achieved through removing manual processes and deploying a system that allows reducing staff costs and minimizing activities
- Improved decisions and efficiency through business intelligence and real-time reporting
- Better collaboration, which contributes to teamwork, data exchange and informed decisions
Step #3. Estimate the potential costs
Obviously there is a need to estimate the costs of an IT project and then determine whether this project remains cost-effective and worthwhile. The third step in creating a business case for IT investment is to determine the total cost of ownership for various IT investment options under consideration.
For an IT solution implementation there are the following types of project costs:
- Cost of expanding the solution
- Implementation costs
- Customization and configuration costs
- Support and administration costs
- System requirements costs
Step #4. Assess the possible risks
An IT investment project involves a portion of risk that determines the chance the value of the investment will drop. Understanding the attitude towards managing the investment risks is the forth step in developing IT investment business case.
For most organizations, there are several common groups of risks that surround their business environments and have an impact on their IT implementations. These risk groups are as follows:
- Operational risks. This group includes two main risks – low user adoption and low reliability of operations. These risks can be mitigated by implementing a reliable solution that is user-friendly and easy to navigate. Also do not forget to include in your business case a note about staff training necessary for faster user adoption.
- IT risks. A general set of IT risks and warnings includes short shelf life, lack of operational functionality, and incompliance with technology requirements. You can mitigate these risks with a system that combines comprehensive functionality and is configurable and adaptable to changing requirements.
- Financial risks. The major financial risk is the expensiveness and incompliance of a selected IT solution with initial budget. Additionally, the solution may require expensive modules, extensions or customizations. You can solve this issue with selecting a comprehensive system that is available at the price adjusted towards to the size and complexity of your organization.
You must determine and assess these groups of risk for every IT solution proposed, and then create a comparison matrix in your business case that visualizes the findings.
Step #5. Recommend the preferred solution
The fifth step in creating IT investment business case is to summarize all the previous steps and analyze the following findings:
- The potential benefits of every solution proposed
- The potential costs of every solution proposed
- The risks associated with every solution proposed
Through the analysis of the benefits, costs and risks of the solutions, you can select the most suitable solution, which is cost-effective and involves a lower portion of risk. You must recommend the preferred solution to the senior management of your organization. In your IT investment business case you will describe your recommendations, with reference to the cost-benefit and risk analysis.
Step #6. Define the implementation approach
Once the preferred solution is selected and then approved by the management, now you can focus on developing an approach to implementing this solution into your business environment. The 6-th step in creating IT investment business case is to describe your implementation approach and to provide your sponsors and partners with confidence that the investment project has been well thought through.
We suggest you consider the following solution implementation factors when negotiating with your sponsors and partners:
- Skills, expertise and knowledge required for delivering the solution for your business
- The cost-effectiveness of the solution and how the business will benefit from it
- An implementation approach that standardizes software implementations in your company
- A critical path for all the implementation steps that must occur
- A document that states about the implementation process, milestones, and deliverables of your IT investment project
Your ultimate goal is to describe your implementation approach in a way that highlights the benefits of the proposed solution and the key steps of the implementation process. If you accomplish this goal, then the sponsors will get a big picture view of your IT investment project and how this project can be implemented.
Step #7. Calculate ROI
The final step in developing IT investment business case highlights the importance of measuring ROI of your investment project. This step is of high importance as it determines in financial terms whether the project remains cost-effective and brings about desired results, within allocated resources and scheduled period.
You must explore how the proposed IT solution’s benefits and costs are applicable to your company’s operations. This task can be done through measuring ROI (Return on Investment), which is major indicator of profitability of the proposed solution. ROI will tell you whether your business will reach financial efficiency with your IT investment project.
The common formula for calculating ROI is as follows:
When measuring Payback, you must consider all business operations impacted by the new system. Also pay attention to time savings, cost savings, and increased revenues associated with the new system.
When measuring Investment, be sure to consider all expenses relating to the system, including acquisition, training, maintenance and so on.