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The kHUB Curator Team members have each been assigned a BoK section to own. This includes seeking, editing and sharing content related to that section. The curators are also sharing their perspective of various sub-sections of their chapter and contributing personal examples, experience, or related articles corresponding to the subject matter.
Chapter 7 Insights – Product Innovation Management
From Financial Analysis to Winning Business Case
Manna from heaven would be great, but usually an organisation must deliberately invest in Product Innovation to succeed in the market and deliver long term economic value. One area where Product Managers need tools and support is winning support for investment in their new product proposals, a critical milestone in the Product Innovation Management lifecycle.
One of those tools is Financial Analysis, which the BOK says is “arguably the most important element in the feasibility analysis.” One of the moments that good financial analysis is critical is at the point of producing a Business Case to determine whether or not your new product, or even an MVP, ever gets the investment to see the light of day. A financial analysis presents a new concept or investment proposal, outlines what the level of investment required is, what are the likely revenues and costs and models and projects likely returns and when it is likely to deliver returns.
Having written, contributed to, presented, and reviewed many business cases, it strikes me that there are certain common attributes associated with a good business case that make it more likely to secure that all-important approval.
Financial Analysis is a critical and necessary element of a good business case but is often not sufficient to convince everyone around the table. Different stakeholders look for entirely different things from a business investment proposal, and so therefore I have outlined below what I believe are the most important elements you really need to include to get your investment proposal off the ground.
1. Model your assumptions
“Everything Should Be Made as Simple as Possible, But Not Simpler” – Einstein. Build as simple a model as possible that outlines the assumptions – unit volumes, prices, costs, revenues, whatever is relevant. Section 7.9 of PDMA Body of Knowledge, 2nd Edition does a great job of describing the parameters that are required as part of this analysis. Use variables that can be used to experiment with the assumptions and immediately see the impact on the case. For example, what if demand is 50% of your baseline assumption? Or double? Will prices erode over time? Make credible assumptions and back them up in the model.
Ideally you want a business case that is built upon conservative assumptions but robust in the face of this type of sensitivity analysis.
One other tip – I find it best start work on a case by building the financial model first as it helps drive out the volume, cost, and price assumptions. Once I have a workable financial model, only then do I start writing the case. Whilst it does not exactly “write itself” from there, I do find it makes it an awful lot easier.
2. Quantify the benefits
“Because it’s cool” will not secure capital investment. Neither will “it’s a no-brainer”. The benefits need to be quantified in financial terms. Financially minded people will often be allocating the investment spend, so make sure you also speak to the baseline financial benefits. These usually relate to increased revenues, increased profits, or reduced costs. Even mandatory or compliance investments usually have some underlying financial argument, at very least the cost component and possibly revenue or cost risk implications. Get clear in your head which type of case it is and make the arguments. Use standard metrics, as outlined in Section 7.9 of PDMA Body of Knowledge, 2nd Edition, such as:
- Net Present Value (NPV): the value of the returns over the case period expressed in today’s money
- Payback period: The length of time post-investment for the original investment to get paid back.
- Internal Rate of Return (IRR): The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero.
The higher a project’s internal rate of return, the more desirable it is to undertake the project.
As you quantify benefits, I usually find there is a three-way tension between the following:
- Presenting a case that is conservative in its assumptions (appeals to the risk-averse)
- Showing ambition (appeals to the commercially aggressive-oriented) and
- Your own fears of stepping afterwards into your now-deliver-it shoes.
Navigate this path with care; the ultimate position you adopt will depend on your own risk-orientation and your confidence in the case. I find personally that adopting a mind-set of genuinely trying to do the right thing for your business is always the right place to come from.
3. Align it with strategy
Presumably, you or your organisation has a strategy. If you do not know what it is, find out. Highlight how your proposal aligns with the overall strategy and advances the aims of your organisation. Financial projections will never be 100% correct so at least if you are aligned with strategy then the investment is going to be directionally correct.
4. Ground it in the market, and test early
Have you tested the concept with employees? With sales? With customers? The more you have tested your concept with your target market, whether it’s an internal project or a market-facing one, the more confident you will be in your pitch and the more credible you will come across. Provide this evidence in the case. Consider how lean you can go with the approach so you don’t end up tending to a “build it and they will come” white elephant roaming around on your field of dreams. Plan to build prototypes and test the market before sinking the full investment and communicate this in your case.
5. Tell a story
A good business case tells a story that can be grasped without deep subject-matter expertise. You are usually pitching to a senior audience – the capital expenditure committee or CFO/CEO of your organisation, or possibly sceptical investors. If they cannot understand what you are proposing, then they are unlikely to invest. It is human nature to enjoy stories, so tell one and make it interesting. A story has a narrative, a before and after, or a do/do not do. Paint that picture in the minds of your audience. The “do-nothing scenario” is very powerful way to juxtaposition the proposed outcome vs. the non-investment decision.
6. Make it human
Tell how the investment helps real people – customers or employees; give real examples and use cases. Abstraction loses many people. Show the investment in action so that your audience can identify with what it is you are proposing. Do not bury it in technical jargon. It takes effort to describe the proposal in those more human terms, but it pays off.
7. Remember that nothing is certain
No risk, no reward. Some of your audience may demand certainty of returns, but ultimately you are making a set of assumptions about future events, so you cannot provide complete certainty and you should not have to. To get a guaranteed return on investment, put the cash on deposit in a bank with a fixed rate of return. (Hint – your case should outperform a bank account!) Remember you are in the role of an entrepreneur, taking a stand for your business and making the case why the company should invest in your proposal. You will probably be challenged about the veracity of your position and your motives may be questioned. Keep in your mind that it is so much easier to keep your head down and not to raise it above the parapet. You are doing it because you believe in your vision and take pride in your initiative. Ultimately all you can do is faithfully present your case – your business will thank you for it.
Entrepreneurs do this all the time, and so can you. For ‘business case,’ also read ‘business plan.’ You are proposing that your organisation invest in your proposal, that it give you money to spend to produce something. Why bother? Pitching an idea is a fundamental business process, yet does not get a lot of attention, for some reason that I cannot quite understand, apart from within the start-up arena.
If you are making a business case, you are starting something: so, stand up proudly and make your case. Perhaps you can sit back, and good things will fall into your lap. But for most of us, manna from heaven is scarce and prayer is not a strategy, so use these tips to make your business case fly.
About the Author
Brian Martin has over thirty years’ experience of Product Management, Product Development, Strategy and Innovation in numerous technology domains, most notably in Industrial Electronics, Telecommunications and Cyber Security. He has led a variety of Product Management and Development functions in the B2B sector and has also held responsibility for Business Unit Strategy and Innovation. He holds a BSc. In Computer Applications from Dublin City University, an MBA from the Open University and a post-graduate diploma in Strategy and Innovation from the Irish Management Institute. Brian is currently Head of Product, Strategy and Innovation at Integrity360, Ireland’s leading cyber-security specialist services provider.