Business Cases and their challenge
Any sound business decision before investing in either a new service or product should require a positive “business case”. So it should before making any improvement to an existing business situation – e.g. an automation project – as well. Whatever resource invested for an improvement project or for developing a new service should render in a foreseeable future. At least if you want to keep your business profitable or at least sustainable on the longer term.
For those who are not very familiar yet with business cases, the essence – say the golden rule – of what is called a ‘positive business case’ is that the benefits of the outcome(s) of the decision must exceed the costs, say investment (including possible recurrent costs). Still ignoring interest rates, for which you might want to use more specific methods like discounted cash flows or Net Present Value. This blog focuses on how to find the more accurate figures – amounts – behind the costs and the benefits.
As nobody can predict the future with full certainty and 100% accuracy, a business case obviously consists of estimating costs and benefits. Though the more accurate the estimation, the more probability to run your business successfully (read profitably).
However, I (too) often experienced business cases rather as (wild) guesses than well-founded estimations. That’s why I like to share some inspiring insights on how business process knowledge can help you to evaluate costs & benefits, and thus how to assess the business case value even more accurately.
A simple, though reliable method
Basically, the process-based method relies on the quite simple principle that…
Even though I mentioned “activity-based costing” already in this blog about value creation, let’s keep it simple: any activity – thus any process step – costs.
For a service organisation – particularly in western countries with relatively high wages – the main cost is usually the time spent by employees to carry out an activity. For more automated tasks, the use (or depreciation) of rather expensive machines or robots – or soft- and hardware -, might represent a considerable cost as well.
While for manufacturing companies, raw materials, energy, waste, etc. also may become a significant activity-related cost.
…while business processes create value
Obviously, the main – actually only – purpose of a business process is to provide value for customers (either consumers, other businesses or citizens) as well as for the own organisation.
Though ironically, while being a cost, activities can also be a source of benefits for the business case, as you will read here below.
Estimate using process knowledge
Let’s now see more concretely how process management – or at least process knowledge – can help you in estimating the costs and benefits in a well-founded manner.
Costs originate from any resource needed for process steps (= activities). Resources can be:
- (raw) materials or semi-finished products, either purchased or internally produced
- machines (& robots), systems (incl. information systems) – these are usually investments to be calculated as a depreciation
- human resources – not only wages, but also HR-related aspects like safety, training, …
- time – often one of the most important resources ; ‘time is money’ is certainly applicable while executing (running) business processes
- energy, water,
We can distinguish 2 main types of benefits to estimate: savings and added value.
When it comes to business (process) improvement for an existing service or product, benefits will often correspond to savings, thus a decrease in current costs.
In contrast, a new service or product – or its enhancement – means that the underlying processes create new or more value.
In this case, the benefit estimation mainly consists of assessing the (increased) value of the (re)new(ed) service or product ; say the process output.
Although this might seem to be put bluntly, assessing value is basically about evaluating the market value of the service / product you either will sell to customers (e.g. for a primary process), or could buy from a supplier (for a supporting or purely internal process).
While savings are usually more circuitous and time-consuming to be (well-founded) estimated. That’s why below elaborated examples focus on the saving part of a business case.
Examples of business cases for automation
Below simplified examples illustrate the process-based estimation principle for an automation decision with regards to supporting financial processes. Because these processes are fully service ones (i.e. run by knowledge worders), it is acceptable to assume that the main relevant resource is the time ‘consumed’ by the workers executing the activities. Hence, the benefits (savings) estimated are time-based, translated in FTE (Full-Time Equivalents). Based on the salary of the respective workers, it is then easy to convert this in any currency.
1. Accounts payable process
This example nicely illustrates the importance of taking the transaction volume into account: even though the time saving for most process steps is not that spectacular (less than 1 minute for most of them), the savings on a year basis results in more than 2 FTEs. Especially thanks to the large number of times the process is run, say the high transaction volume (70.000 a year).
For those wondering the formula behind the calculations, let’s illustrate the 0,97 FTE for the first process step:
If to create an invoice in the system the worker currently needs 90 seconds, while with the new system it will take only 10 seconds, this means a time-saving of 80 seconds. These 80 seconds result in 80/3600 = 0,02222… hours. Based on 8 working hours a day and 200 working days a year, we divide 0,02222… by 8 and then by 200, resulting in a very small FTE-saving of 1,38888E-5 FTE. Though given the 70000 times a year that this task is carried out, we come to nearly 1 FTE (0,97 more precisely).
Of course, there may be other cost savings to consider for such a process. Think for instance of penalties your organisation might have to pay to suppliers because of payments after due date. If you redesign the process so consequently that you get a warning a few days before the due date, you can save such penalty costs as well. Estimating this kind of costs is no rocket science: consider how many penalties your organisation has paid for late payments in the past.
2. Year-end process
Imagine now below year-end process. This is a process that is normally executed only once a year.
From the matrix, you might conclude that the savings thanks to digitisation of some process steps will be high, given the extraordinary high time savings for these process steps (like 20 instead of 1800 seconds). However, as this process only takes place once a year, the year-based saving is rather negligible – even not 1/1000 of an FTE.
Process simulation & Process mining
Business process simulation tools may be helpful to assess how process changes could lead to benefits and costs. These are more advanced than the quite simple matrix used here above, and allow you to estimate benefits (or losses) following process changes.
Even better is when you can base your estimation on real data. That’s where process mining becomes very interesting with regards to business cases. Particularly when you have event logs including a timestamp indicating the start of an activity and a timestamp indicating the end of the same activity, like illustrated here below.
In such a case, you can calculate the real (evidence-based) time for each activity that has been executed in the past.
Indeed, assume that you have such event logs for the many thousands process instances (transactions) of above described Accounts payable process. Then, your business case would become even more accurate since current costs then can be calculated instead of being estimated.
What is your experience with business cases? Did you ever use such a process-based business case estimation or a similar approach? If not, would you find it interesting to use it? Or would you like to discover even more examples? Please share your wishes, opinion or experience through below Comment box, and receive a survey report on business process simulation tools.
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