Issue link: https://industrialmanagement.epubxp.com/i/656209
march/april 2016 15 • Confirmation bias: We tend to seek out confirming evidence for our hypotheses and our ideas. Our initial decisions become self-fulfilling prophecies. • Commitment escalation: Making decisions and committing resources does not necessarily guarantee a reward and may produce a loss. Under this circumstance, it is difficult to accept sunk costs. • Hindsight bias: Once we know something, we can't remember when we did not know it. This challenges our ability to learn from past failures. • Overconfidence/overoptimism: Having a rosy expectation of the unknown. Results in underestimating technical challenges or time required to complete a project. The array of projects that organiza- tions, especially large ones, take on can be dizzying. With so many projects, there is a risk that some may overlap and lead to double counting benefits when one or more business cases claim the same benefits. Feasibility, risks and mitigations Feasibility considers whether the potential solution is operationally, technologically or economically viable and likely to occur in a timely manner. Risk considers if a potential event or condition helps or hampers the project objective. The business case should point out risks explicitly and, where possible, identify mitigation. Examples of risks include limited availability of skilled personnel, late vendor delivery, unexpected bugs in software implementation, longer than expected government approval cycles and the introduction of new government regulation. Because risks also can be beneficial, they can provide positive outcomes, like completing the project ahead of time or at a lower cost. Although often used as a strategic tool, SWOT analysis is a useful way of framing the risk analysis in the categories of strengths, weaknesses, opportunity and threats. It provides The business case should point out risks explicitly and, where possible, identify mitigation. a view of the potential negative and positive outcomes. Risk analysis also requires consid- ering risk across two dimensions: proba- bility and impact. If it is possible to quantify the probability and the impact, then conduct an analysis. However, the risks often are not fully quantifiable, so a more qualitative evaluation may be possible. The risks can be reflected in the financial analysis through sensitivity analysis. For example, if the cost of the project were 50 percent higher than expected, the NPV for Option B in Figure 2 on Page 13 would still be positive, although 29 percent lower. Would the decision-makers still approve this project? What if the benefits were delayed by a year? In addition to varying the cash flows and their timing, the rate (i) should be varied as part of the sensitivity analysis because the factors that influence the rate can change over a project's lifespan, particularly if the project will take several years. Sensitivity analysis should note that projects often get planned in one country and delivered in another, introducing the complexity of foreign exchange rates, which change over time. The various scenarios should be documented. This type of sensitivity analysis would provide insights into the project's likely success by examining which risks have the most impact on a potential project. When factoring risks, it is worthwhile to think about the final result in proba- bilistic terms rather than deterministic terms. The net benefit is not a single figure but a range of outcomes that can be captured with a high and low figure. Unfortunately, many organizations may only accept a single figure. Recommendation, timescale and execution The final recommendation is the natural outcome of the analysis and research presented to the decision-makers. If they accept the recommendation, then it's time to execute. The business case should indicate the implementation plan, duration, proposed governance, milestones and phases, estimated timing, resource requirements and change management efforts. Critical success factors, the timing of the benefits and the expendi- tures also should be part of the business case. Organizations should institute metrics to track the project's progress and the proposed benefits. These should be reported periodically. Revisit major cases during and after project delivery. They form the basis for the project baseline. If the business environment changes, review the business case for continued relevance. Post-project analysis will ensure that, as a whole, the organization is making good decisions. Business case best practices include: • Keep good documentation and use history to inform decision-making. • Explicitly document assumptions, and support statements with data. • Cover important data in a logical sequence. • Tie the business case to strategic objectives. • Involve others in the business case development process. • Identify stakeholders' objectives and address them in the business case. • Review business case with sponsor(s) or champion(s). • Consult subject matter experts during the business case development. • Differentiate between cash and noncash savings. • Differentiate between costs being based on allocated or true unit costs. • Consider best and worst case scenarios. • Be mindful of potential biases. Ultimately the organization needs to achieve an objective that will improve profitability. The manager, the consultant, the engineer and the analyst all need to understand how and why business cases are developed. The executive seeking to consolidate multiple distribution centers could have benefited from this advice. v