Creating value is about exceeding expectations. For any business decision, we must understand the expectations of the decision-maker, and provide a path to exceed those expectations. For leaders and managers seeking approval from their colleagues in the finance function for new projects and initiatives, this is an increasingly urgent priority, because organizations are looking ever more closely at the ‘business impact’ of their resourcing decisions. Chief financial officers (CFOs) are increasingly following up on approved projects, examining whether the original promises that were made were achieved. The ‘fire-and-forget’ process for business cases, where approved cases are quickly forgotten as teams implement projects, is becoming rare. At the same time, many organizations are also increasing the amount of scrutiny before the business case is approved.
With increased scrutiny of funding decisions, vague definitions of success for the proposed project are not good enough. Senior leaders want to see that their funding decisions have led to demonstrable change in business results, and they want an evidence-based approach to measuring impact. For any manager or leader required to make a business case for resourcing their work, it is key to understand what CFOs mean by business impact, and to know the five key steps for creating effective business cases.
What is business impact?
Here is a simple way to think about business impact. Understand the world as it is today. Then imagine, in a very clear and concise way, the world as you would like it to be. What is the difference between those two states? That represents the potential business impact of any initiative (see Figure 1).
If you cannot clearly articulate and quantify the difference between the two, you shouldn’t do the project. If you cannot articulate what success looks like with a high level of clarity, you shouldn’t do the project. And if you can’t understand in a clear and concise way the current state of the business, providing a baseline for the impact created to be measured, then you shouldn’t do the project either.
Addressing these points is essential, but still not enough, as leaders are demanding measurable results. Angelo Mavronis, a senior finance leader at aerospace and defense firm Lockheed Martin, likes to say that “a good business case is a blueprint for implementation. If I want approval for my project, I have to go much further than articulating its potential benefit. I have to demonstrate how we’re going to operationalize it so that the business gap is truly closed – and how I can prove to you that it was my project that closed the gap.”
Understanding business impact requires empathy. Put yourself in the shoes of the person that you’re asking for resources. You have to articulate to them why it is worth giving you the money, and you have to provide them with a path for paying the money back. Think of it in personal terms: if you were to put your money on a credit card that was charging you interest of 10% per annum, how would you pay that card off?
Scott Walker is the chief financial officer of Aetna, the health care benefits division of CVS Health. As a CFO, he’s willing to do his homework to understand the business problem that needs to be funded. But if he knows more about the problem than the person who’s asking for the resources, then that quickly becomes a concern and is likely to reduce his willingness to fund the initiative. If you are bidding for your resources, it is your responsibility to put your business challenge in language that someone like Walker can understand.
An example of business impact
A manager at a global pharmaceutical firm was working with their team on a business case for an onboarding initiative. They knew it was a critical need for the organization – yet they were struggling to get approval from the finance team for the budget required. They had set out a clear plan, had listed the number of hires they wanted to make, and had a schedule for getting those recruits trained. The cost estimates were very detailed. Yet the manager still struggled to get traction. How were they missing the mark?
The answer lies in the way that the manager approached the problem. They looked at it from a traditional human resources perspective. What they needed to do instead was to understand the business problem and sell the business impact of their solution.
There are five steps for evaluating business impact, in the form of questions that need to be addressed.
- What is the business problem that needs to be solved?
- Why is that a problem?
- How do you know?
- How will this initiative solve the problem?
- How will you know?
The first question is: what is the business problem that needs to be solved? In our example, the business challenge was that this pharmaceutical organization was in the middle of a successful product launch and was scaling up manufacturing to meet demand. Without new employees, revenue targets would be missed, and customers would not have access to critical medication. This was not an onboarding case: this was a revenue-generating business case.
Next, ask: why is this a problem? And how do you know it is a problem? The organization did not have the critical employees needed to manufacture the product at the required volume and quality. Many of the employees that had been brought into the manufacturing environment to date did not have the specialist skillset required to meet the needs of the position. New recruits were being trained inconsistently across the company and they were subsequently using different methodologies in their work. As a result, employees could not move from one plant to another and be productive, as existing performance data indicated.
The lack of consistency in onboarding also meant that the time to hire and get a person to the required level of proficiency varied dramatically across the company. The average time for the process was much longer than industry benchmarks – and even worse, many new employees left shortly after being hired. The first-year attrition rate was more than double that of the following four years, and much higher than the industry averages. To make the situation even tougher, labor market conditions were working against the business. With a limited pool of workers, this skilled workforce enjoyed high levels of employment across the market, and there was tremendous demand from competitors.
Getting the attention of leadership
The team working on the onboarding initiative showed the impact of labor issues on production and the costs to the organization in terms of missed sales targets – targets which senior leaders had committed to achieving. By reframing the business case in this way, conversations with senior leaders quickly changed. The case went from the ‘maybe we’ll get to this’ pile on leaders’ desks, to the ‘we have to find a way to get this done’ pile. The manager leading the project quickly realized that they were going to deliver on a business result that was critical to the company objective. They had defined the problem in the context of the business and illustrated why it was a problem that needed to be solved, but still they were not finished.
They now had to address the fourth question: how will this initiative solve the problem? Very often, leaders hear a problem pitched to them, and then hear a solution proposed that does not solve that problem. The challenge here is whether the solution will achieve measurable results.
To answer this, go back to the second question – how do you know there is a problem? That question helps you identify metrics, because you are looking for evidence and quantitative data that help define the problem.
In the onboarding example, the manager’s team was able to connect the dots between different pieces of evidence to demonstrate that the lack of qualified employees would lead to production gaps for the new product. They showed how the organization could speed up its acquisition of the people it needed, and more quickly get them working at a consistent level of productivity. This initiative would solve the production issues that the company faced.
The final question: How will you know? The ultimate financial goal of any project is to deliver a return on investment (ROI). Ideally, the ROI is tangible and can be measured and translated into more cash flow for the organization. Asking “how will you know?” means revisiting those measurements to ensure that the gaps were closed, promises were kept and targets were achieved: in other words, that business results were produced.
As the team in this example moved forward with their business case, they had developed a series of measurable metrics. These included the length of time it took to hire a full-time-equivalent employee (FTE), the length of time needed to make an FTE productive with the required skill set, and an attrition rate for first-year employees that was much lower than the baseline. They could link all of this to the production levels indicated on the company’s timeline, which had been set as part of its revenue goals. It was the same business case, but the real challenge was how it was communicated.
Lessons learned from similar processes
The lessons of business impact build on a foundation that has been used many times before. Technology firms define creating business impact as a multi-part process. You scope, schedule, execute, document, complete and measure a project. Those six steps are repeatable and quantifiable for any technology initiative and can be applied in all manner of change projects.
The two most important steps are those at the beginning and at the end. The scope is another word for the context of the problem that’s being solved: as leaders, we need to think of the context as the business challenges that our organization is facing, and how our actions will improve performance. The end of the process is measurement. Often, much of managers’ understanding is tacit. Organizations increasingly demand that it is made explicit.
Where do you begin?
In this article we have described the five steps to achieving business impact. But at the heart of this there are two simple questions.
The first question is: Why? Why are we doing this? Why is it a problem? Why is it a problem we’re solving? And the second question to continuously ask is: How do you know? How do you know it is a problem? How do you know that your solution will solve the problem? How do you know that you will make an impact on the performance of the business?
Understanding business need is like peeling back the layers of an onion. The more that you ask, and answer, these key questions, the more layers can be stripped away – and the closer you will come to being able to develop solutions that deliver real business impact.
Joe Perfetti teaches equity analysis at the University of Maryland and is an innovation fellow with Duke CE. He is an educator in our Building Financial Acumen and Building Strategic Agility online courses.