Business Case Analysis in Government and Non Profit Organizations
Case builders in government and nonprofit organizations cannot turn to increased sales, profits, or shareholder equity for business case benefits.
They may assume that cost savings or avoided costs are the only legitimate financial benefits for their organizations. The problem is that cost savings may be nowhere in sight for proposed mission critical initiatives or actions.
They ask:
- Can you build a business case if you are not in business?
- Are there financial benefits in the government or nonprofit case besides cost savings?
- Do standard financial metrics such as NPV, IRR, or ROI have meaning in the not-for-profit world?
Questions like these come often these days from leaders in government, education, community service, and the rest of the nonprofit world in our business case seminars. Many of these people feel they are being asked to do the impossible.
On one hand, more and more spending decisions have to be justified and documented with business case analysis. Starting with the Klinger-Cohen Act of 1996, for instance, US Government organizations have faced a steady stream of new laws, directives, and guidelines requiring responsible decision making and business case accountability.
On the other hand, government and nonprofit organizations are not in business to grow sales, increase earnings or build shareholder equity. Those are primary sources of business case benefits and financial justification for the profit-making company. They are not an option for the government or nonprofit organization trying to justify funding proposals, projects, or initiatives. When cost savings are nowhere in sight, however, case builders ask: Is there still a "business case" for going forward?
Whose Benefits are These, Anyway?
Earlier this year I spoke with the Director of a small nonprofit community service organization whose governing board had made the "impossible" demand. She wanted to buy a specialized software application for the group's one computer. The board wanted a business case.
This group collects surplus food donations from restaurants and food stores and then distributes it to homeless and other very needy people. Unpaid volunteers provide the labor. The use of a small office and expenses are covered by grants from local businesses. Financial action in this group is almost non-existent.
The Director believed they could increase service volume by 30 to 40% or more with the help of the management software--through better coordination, better communication, and the creation of a service database. But the software vendor was not interested in donating the package. Purchasing would create the largest single line item in the annual budget. It was not going to save any money and there are no sales revenues or profits to look for.
How on earth," the Director wanted to know, "can we justify this with a business case?
The answer is "no way" if the case looks only at the costs and benefits for the organization itself. I suggested she meet with her board members before developing the case and agree with them--up front--on an answer to the question: Whose benefits belong in the case? The right answer to that question can make the government or nonprofit business case an entirely viable creature.
What is Your Mission? Whom Do You Serve?
Most government organizations are mandated by law to consider the populations they serve when measuring the value they deliver—although many in government are not fully aware of this principle or how to bring it into the business case. Fewer such laws apply for educational, charitable, and other nonprofit groups, but the principle is equally valid there. In order to answer the question "Whose benefits belong in the case?" answer first two other questions: "What is your mission?" and "Whom do you serve?
Then, ask:
"Will the proposed initiative or investment help you:
- Accomplish your mission?
- Meet other important objectives?
- Improve service delivery?
- Improve service quality?
- Deliver new services?
- Lower the risk of failure?
- Solve known problems?
If the answer is "Yes" to any of these, the benefit belongs in the business case (see Business Case Essentials or Getting Your Budget Approved for example cases, or see the whitepaper "Soft Benefits in a Hard Business Case"). Then, in order to develop business case benefits, ask, what is that worth to the population you serve? The Director mentioned above had no trouble showing a very large return on investment for the software application, once she and the board agreed that benefit value should be measured in terms of value delivered to food recipients. Once cash flow estimates for costs and benefits are admitted to the government or nonprofit case, they can be analyzed and evaluated with the same financial metrics that serve in private industry, including discounted cash flow (DCF)/net present value (NPV), internal rate of return (IRR) and payback period.
Note, however, that if the Director had not secured the board's agreement before completing the case, there would have been no business case. Value is in the eye of the beholders, and the case builder may have to establish that value before delivering case results.
Take action! Learn and practice proven methods for building your cases at a "Building the Business Case" Seminar. Learn more about business case design from one of our books, Business Case Guide, Getting Your Budget Approved, or the world's most frequently cited business case book, Business Case Essentials.
Marty Schmidt
25 December 2011
mschmidt@solutionmatrix.com
http://www.solutionmatrix.com/
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Marty J. Schmidt+ 2004 - 2012. Legal notice. Unauthorized use or publication strictly prohibited under United States and International Copyright Law. Request permission to use.
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