Preparing a business case is about deciding on the option that promises the best return, relative to the risk of failure involved.
What are the success principles that help you in developing a robust business case?
For a private investor considering an investment, the project option that returns the best profit, relative to the amount invested and the risk of that investment, is likely to prevail. And if the private investor could earn a better rate if they invested in a low risk product such as a 10 year government bond, why would they risk doing any project?
But Government investment appraisal is much more difficult than the private sector process.
Governments are not about making a profit for shareholders, but to make a difference — provide benefit to taxpayers. Indeed those in government are confronted with an endless series of problems, and they have limited resources to solve them.
They need to direct efforts towards making the most progress in solving the biggest problems in the community, for the least investment.
Typically government investment priorities cascade down from whole-of-government, through to portfolio level and then program level within each portfolio. These processes are complex and of course are determined at high levels by the priorities and policies of the government of the day.
Eventually though a decision on which action to take is required; what actual project will we implement? This is the “business case” level of investment appraisal.
The phenomenon of “optimism bias”, which is an inherently human failing that sees a preferred option decided too early in the process. Once the preferred option is adopted, all investigations are tailored towards proving that option up, ignoring obvious risks, underestimating likely costs and overestimating benefits. Meanwhile the benefits of alternative options are weighted down and possibly the costs and risk are amplified.
Most government investors have experience with biased decision making, and they understand the high probability of optimism bias percolating through the process. Frameworks have been developed to reduce the risk of this occurring.
Invariably these frameworks provide good guidance in developing clear objectives, considering a broad range of options, assessing risks and deciding the best option. Infrastructure Australia’s Reform and Investment Framework is a clear example of such a framework
It is important that the business case is as objective as possible, and looking seriously at a real range of options, rather than comparing a favoured option to a series of “straw man” options.
So in a pragmatic practitioner’s approach, how can we reduce the impact of optimism bias, and help governments make good decisions that lead to successful investments?
The answer is actually relatively simple to depict, but hard to implement.
We need to approach the business case process with an open mind, and within a clear ethical framework.
The 7 recommended success principles are:
- Project specification: Spend an appropriate amount of time and effort upfront developing an unambiguous and open minded project specification, without any consideration at all of the preferred option. Ensure this project specification includes the development of clear and measurable “success criteria”. You need to know not only what the objectives of the investment are, but how you will know if they have been achieved.
- Option development: Be honest and rigorous in the approach to option development; don’t rule options in or out too early, and don’t restrict yourself to a narrow list of modal options that all lead to one conclusion.
- Risks: Keep risks on the agenda during all phases of the assessment.
- Reference case: In early phase of assessment, adopt a reference case; an option that at face value, presents the best chance of satisfying the success criteria, without committing to it. This effectively “flushes out” the biases and compartmentalises them into a clear and unambiguous project option.
- Past experience: Learn from past experience, especially from people who have tried similar approaches; remember you cant do the same thing again and expect a different result.
- Rigorous and ethical: Being rigorous and ethical about the data and evidence accepted and used, always citing references and data sources. to be totally transparent.
- Stakeholder engagement: ABOVE ALL, recognise we are all human and have inbuilt biases and filters. Seek a range of opinions from informed stakeholders and industry experts along the way, rather than asking your inner circle of like-thinking experts who are likely to agree with you.
Use this as a checklist when preparing a business case