Getting a ´Yes´ from the CFO. Cost/Benefit Newsletter 166

CFOs and other high level managers know, increasingly, they may be accountable tomorrow for decisions they make today. The CFO who decides to fund your proposal knows that he or she takes on a responsibility for making that decision.

In some minds, a successful business case is one that persuades the CFO to say "Yes" to a funding request. Participants in our Business Case seminars know that This kind of success can be short lived:

"In the past year, have your IT expenditures produced the return on investment you expected?"

The question was put to 241 senior finance executives by CFO-IT Magazine. Fifty seven percent either said "no" or "unsure." Only 9% said they had resolved the ROI debate by relying on one or more formal approaches to ROI for all or most IT expenditures. The rest are either using other decision criteria, or searching for other criteria.

There is a growing awareness among financial specialists that:

"ROI" and "Business Case" are not interchangeable terms.
Decision makers want to see more than a single ROI estimate.
ROI only predicts what happens if things go as hoped.
ROI itself says nothing about the likelihood of seeing those returns, or what it takes to bring them in.

If you are bringing a funding request of your own into this climate, you probably know already that high ROI figures alone will not win the "Yes" you want from the CFO.

What else does it take?

Redefining Success

Start by redefining "success" for the business case, this time from the CFO's point of view. A successful business case:

Provides the information that decision makers and planners need to act with confidence.
Scores high in credibility (is believed).
Predicts what actually happens.

These are precisely the areas where "ROI" has failed, so often, when used as the sole basis for funding decisions.

Bring Them What They Need

There is nothing wrong with the ROI concept itself: It makes very good sense to ask what kind of returns should follow from an investment. But ROI is only one financial metric (read an overview of what a business case should contain, and why, in the Business Case Guide or in the whitepaper Business Case Essentials).

A more useful business case for the CFO would include:

Important business objectives addressed by your proposal
Objectives addressed may go well beyond a good ROI.
A complete cost model for the proposal
This shows clearly that all relevant costs are anticipated and that different choices for action are compared fairly.
A benefits rationale
The rationale for deciding which benefits are legitimate for the case and how they are valued.
Complete cash flow projections
Each cost and benefit item, valued in cash flow terms.
Financial metrics (decision criteria)
Analysis of cash flow projections, may include:

Net cash flow
Discounted cash flow or net present value (NPV)
Return on investment (ROI)
Internal rate of return (IRR)
Payback period
Total cost
(Including capital costs, operating expenses, and non-budgeted funding needs)

Risk and sensitivity analysis

Important contingencies and critical success factors that must be managed in order to bring the projected results
Important risk factors that should be watched
Measured uncertainty in financial projections

Conclusions and recommendations
Practical and specific actions to maximize returns and minimize risk.

One way to help decide which financial metrics the CFO and other decision makers need to see, is to ask them, before building the case. Find out, if you can, which criteria are most important, and which criteria will play a critical role in deciding funding. Ask them how similar decisions were made in the past. Find out specifically why some proposals were funded and others were not.

Cost metrics may be especially important, for instance. If estimated costs exceed budgeted funds or available funds, then you may simply not be able to afford the proposal. In that case, it really does not matter how high the ROI. (Learn the important business case financial metrics from the free spreadsheet tool, Financial Metrics Lite, or the more comprehensive Financial Metrics Pro).

Build in Credibility

The case supporting your proposal stands or falls on its credibility. If the case is not believed, then it does not matter whether you've chosen the right financial metrics, whether you project a high ROI, or whether the picture of future results is accurate.

You can build CFO-level credibility into the business case in several ways:

Recruit and use a reference group
These are stakeholders and decision makers who contribute during the case building process. Used effectively, this group will develop a sense of ownership for the case and, like you, want to see it succeed. They will also add authority and credibility to cost/benefit estimates outside your own area. (Learn more about the reference group or read about it in Chapter 2 of The Business Case Guide).
Include major assumptions and important case design elements in the case report.
At the end of the day, the CFO and rest of your audience should believe the case because they can see for themselves where the results come from.
Identify and measure uncertainty.
You can minimize, but not completely eliminate uncertainty from your projections. You can, however, minimize risks and measure the remaining uncertainty.

Build a Track Record for Accuracy

Are you projecting a $10 million net gain if your marketing program is funded? An extra $5 million in profits if your product proposal is approved?

Ultimately, of course, everyone knows that the actual results will not be $10 million or $5 million, exactly, but the CFO in particular will want to know that your projections are reasonably close to what actually happens. How can anyone know that in advance?

There are two steps you can take to build confidence in the accuracy of your projections--one you can take immediately, the other will take some time.

First, do not present your projections as the output of output of "black box" predicting system. Do not ask your audience to accept predictions based on faith in the authority of your methods or the prestige of your business case consultant.

Instead, build a business case that you can position in this way:

"I have drawn a picture (scenario) of one way the future may work out. The picture is detailed and concrete, based on assumptions about many factors, each of which comes with some uncertainty. However, if the assumptions stand, these results certainly follow."

All the uncertainty, in other words, lies in clearly stated assumptions, not in the way you arrive at cost and benefits estimates. With a good risk analysis, based on what you know about your assumptions, you can make and support statements like this: I have predicted a net gain of $10 million. Actual results may vary, but I am 99.9% confident that the real result will fall between $8.2 million and $11.8 million.

Second, use the case for continuing management and control once the proposal is funded.

The case you build for your next proposal will probably not be your most accurate business case. The case after the next one should be more accurate, and the one after that more accurate still. The only way to take forecasting accuracy to the highest possible level is through a process of continuous improvement, from case to case, in which you validate or adjust methods for estimating costs and benefits.

Continuous improvement in business case accuracy calls for a team effort that requires commitment, time and discipline. Errors and bad judgment calls have to be identified and faced, along with the more successful predictions. ROI and business case projections cannot simply disappear from sight once the CFO says "Yes" to funding. Some forecasting methods may take months or even years to validate and improve.

If that sounds like too much to expect of any real-world organization, consider the alternative: living forever with today's level of forecasting accuracy.

Deliver Accountability

CFOs and other high level managers know, increasingly, they may be accountable tomorrow for decisions they make today. The CFO who decides to fund your proposal knows, more than ever before, that he or she may be held responsible for making that decision.

This does not mean that every decision has to bring a net gain or that stockholders and boards of directors have absolutely "zero tolerance" for errors. Accountability does mean, however, that CFOs can show they made a good decision based on the information available at the time.

A complete business case (including the main points under "Bring them what they need," above) delivers this kind of accountability. A single ROI estimate does not.

Take action! Learn more about business case design from the Business Case Guide. Learn and practice proven methods for building your cases at a "Building the Business Case" Seminar.

Marty Schmidt
16 December 2008
mschmidt@solutionmatrix.com
www.solutionmatrix.com