Operating metrics

These will vary with the specific performance improvement initiative. Examples include:

• Sales: Increase online conversion rates.
• Costs: Lower processing cost per application form.
• Productivity: Increase volume of transactions processed per labor hour.

Financial metrics

Once you have an operational improvement, then, you need to put a value on that improvement. If it's an additional sale that should be straightforward (but use contribution, not gross revenue).

Next, you need to measure ROI. We recommend calculating two measures (and, again, no more than two):

• Net present value: Discount the expected net cash flows of your project at a rate that reflects their risk.
• Payback period provides a quick-and-dirty indicator of how long your initial investment is hanging out there before it gets paid back.

Metrics you don't need

For the purposes of writing a business case, anybody offering to calculate or provide business case training on the following is wasting your time:

1. Simple undiscounted ROI (every project has risk, you can't ignore it).
2. Projecting income statements and balance sheets (these are accounting concepts, you are making an economic decision).
3. Average rate of return (ignores time and risk).
4. Return on capital employed (see point 3).
5. Return on assets (see point 3).
6. Any kind of monte carlo simulation (you don't have the data and it's analytical hallucination for 99% of IT projects.

You calculate payback as:

Stream of cash inflows divided by the original cash investment

So, if an investment produces a $100 a year for five years and the original investment is $300, then, the payback period is three years.

Payback is a useful, rough guide for assessing risk when doing any kind of IT due diligence. The longer the payback period the greater the risk.

It has limitations though:

• Says nothing about the timing of cash flows (no discounting);
• Ignores cash flows after the payback period;
• Tells you when your investment principal is paid back, but is silent on the return on your capital.

Payback is, in summary, a solid supplement to an ROI analysis built around a net present value or discounted cash flow analysis.

For more ultra-concise, practical information on IT business cases and IT due diligence, please see the The Business Case Checklist.

An IT business case makes the argument for an IT project, product, or service.

ROI models are only part of the business case. A good business case has words and numbers pulled together into a cohesive, well-structured argument.

Business cases do three things:

1. Quantify and value a business opportunity. Your technology product or service is simply a means to this end.
2. Justify the investment of resources based on a sound (not self serving) return on investment (ROI) model. This financial model calculates the expected benefits (always the trickiest part), total costs, and the overall return on investment.
3. Serve as a plan to deliver the business opportunity. Business cases help sequence work based on its value, which, then, drives the more traditional task-based project plans.

For more ultra-concise, practical information on IT business cases and IT due diligence, please see the The Business Case Checklist.