´Can You Ever be Certain? Part I´ Cost Benefit Newsletter No. 85

Good business case analysis will not eliminate uncertainty about the results of business decisions, but it can reduce the uncertainty to a minimum, measure what remains, and provide the tools for minimizing risk as the action goes forward.

Decision makers these days are driven by watch words like "comfortable certainty" and "accountability." Decisions to invest, enter new markets, change strategy, or launch alliances have always come with risks as well as potential rewards, but in the current business climate there is--no doubt about it--a new urgency to questions like these:

"How do we know that we're going to see the projected results?"
"Are we sure this the best business decision?"
"How can I prove, later, that I'm acting responsibly now?"

Senior managers who participate in our business case seminars say, increasingly, that the margin of tolerance for management error is shrinking, visibly and tangibly.

Most people know that business case analysis is supposed to answer questions like these, firmly and finally. That's what decision support means, after all. Nevertheless, we hear from increasing numbers of decision makers with business case results in front of them, who are still haunted by these questions. If you are in that position, and you've already built the business case for the decision ahead, what more can you do? Is there any certainty to be had in the business world?

Risk: Reduce it, Measure it, Manage it

Good business case analysis will not eliminate uncertainty about the results of decisions, but it can reduce the uncertainty to a minimum, measure the uncertainty that remains, and provide the tools for keeping the risk at a minimum as the action goes forward.

That requires best practice cost and benefit estimates and a serious risk and sensitivity analysis (for an overview of what this includes, please see our whitepaper "Business Case Essentials," For more detailed practical guidance, see the Business Case Guide). That will not happen, however, if your approach to business case analysis fits one of these "worst case" scenarios:

What's wrong with these Pictures?

Worst case 1: Fund Me!

I have heard--you have probably heard--business people talk about previous business case work in terms like this: "My business case was successful--I got my funding!"

People write cases all the time to support funding requests and that is as it should be. But there's an important difference between cases designed to prove that funding is a good idea, on the one hand, and cases designed to find out if funding is a good business decision on the other.

Compare the case to a scientific research project. Research scientists have personal theories and they often have a strong ego-involvement in seeing their theories proved correct. Good research experiments, however, are designed to test theories, not prove them right. Give your pet theory every chance to fail, try seriously to make it fail, and give competing theories their best chance to prevail. If your theory still stands, so much the better. That's the only way to "prove" a theory with credibility.

Similarly in business, support for funding will be credible if the business case shows convincingly that costs are not underestimated, that benefits are not overly optimistic, that important risks are in view, and that alternate actions have been compared fairly against the requestor's proposal.

Worst case 2: The Crystal Ball Syndrome

"I have looked into the crystal ball and I see $10M net gain if we implement my proposal." The words will be different, but that's almost the message that comes with many case results and recommendations.

Good business case analysis is not the output of a "black box" predicting program, to be trusted and believed because the methodology comes with an impressive pedigree or a good track record. Instead of the crystal ball message, good business case results communicate this idea:

"I have drawn several pictures of the way the future may work out. These are detailed and concrete scenarios, based on assumptions about many factors, each of which comes with some uncertainty (future prices, resource requirements, competitor actions, market growth, business volume, government actions, inflation, currency exchange rates, and many other things that are not certain). However, if the assumptions stand, these results certainly follow."

All the uncertainty, in other words, should lie with your assumptions, not with how you developed the cost/benefit estimates. And the important assumptions should be in plain view.

Can you ever be Certain?

You can never absolutely certain about anything having to do with the future, including projected business results.

However, assuming that your business case avoids both of the worst case problems above, there is a level of certainty just below "absolute" that business case builders can aim for and case users can ask for.

We can be very, very sure (say, 99% certain, or 90% certain), that an action or decision will bring business results within a given range. And, if that range is too broad for comfort, there are steps you can take to narrow the range--if you're willing to put more resources into the business case project. That range is called a confidence internval.

Continued next week in Part II, "Can You Ever be Certain?"

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
2 February 2006
mschmidt@solutionmatrix.com
www.solutionmatrix.com