top of page

Step 4: Crunch the Numbers (Part 1 of 2)


Five Steps to Building a Business Case for Sustainability - Penn State University Smeal College of Business

Finally, I get back to this....the business case for sustainability. People talk about it all the time but few know what it really means.

We are learning how to build a business case for sustainability in five steps:

  1. Prepare

  2. Know your audience

  3. Construct the Case

  4. Crunch the Numbers

  5. Pitch the Case

If you missed the first four posts, go here to catch up. Quick recap: we have said that

  • Big picture: a good business case is a compelling story about meeting a business need

  • Step 1 Prepare: we must find out how and when decisions about proposals and business cases are really made in our company

  • On a Sustainability Platform: To make a business case on a sustainability platform, daylight hidden opportunities for innovation by using your ESRO (environmental/social risk and opportunity) assessment to identify the needs of society along with the shorter-term needs of the business

  • Step 2 Know Your Audience: "The fate of your project or initiative will usually lie with a small group or even one individual." (HBR Guide to Building Your Business Case, 2015)

  • Step 3 Construct the Case involves gathering the right team, identifying and clarify the business need, and testing your assumptions

 

Step 4: Crunch the Numbers

Successfully completing steps 1 and 2 yield a clarified focus on the business need or opportunity. Step 3 Construct the Case unpacks this need, turning it over and pouring out all its contents, sifting through them with the right people to develop deep understanding.

From the gauntlet of Steps 1 - 3 a few Winning Ideas will emerge. Tested, interrogated, and strengthened through exposure to reality, these ideas hold the best promise for the enterprise. Now what?

Step 4 takes this idea and builds a financial case around it that is designed especially for the target decision-makers. Remember: the goal is NOT to get to YES; the goal is to advance the learning of the organization. If you focus on accuracy and learning, you are likely to avoid temptations to manipulate numbers just to get approval. Mark Twain popularized the saying:

"There are three kinds of lies: lies, damned lies, and statistics."

This now famous colloquialism offers a good warning as we turn our attention to the most heralded part of the business case: the numbers. Allow the numbers to tell the most accurate possible story about costs and benefits. Remember that your primary goal is not to win approval for your proposal. Your primary goal is to provide your leadership with the data and information they need to make a fully informed decision. Endeavor to present the full picture of costs and benefits.

After all, the real figures will soon emerge if the initiative is funded and implemented. Don't set yourself up for failure as reality rears its head and your inflated, hopeful numbers wither.

1. Estimate Costs and Benefits

Sounds obvious but is difficult and rarely done well (I am including myself in that). Our cognitive biases will almost inevitably reveal and hide numbers from us like a magician. Much effort must be given to designing a data collection process that counteracts these tendencies to deceive ourselves. Some tips and recommendations:

  • 3 to 5 Year Cash Flow. A spreadsheet that shows a three to five year cash flow from the project can be an effective way of presenting costs and benefits. Find out the expectations and what has worked in the past in your organization. Keep in mind that the right length of time covered by your cash flow depends on what is being proposed. New process or product/service? 1 to 3 years. Major new capital expense such as a new facility? 5 to 10 years or more.

See simple example of annual cash flow below. You have revenues on the top (called "Cash Inflow" on this example but you should call it what is common and accepted language in your organization) and expenses on the bottom (called "Cash Outflow" in the example)

"Costs" are traditionally divided into start-up costs, capital expenditures, and project or operating expenses. Don't forget switching or transition costs. For example, to switch from one energy management system to another might increase productivity over the long-term but the transition won't be cheap.

"Benefits" are traditionally derived from tangibles like increases in revenue and increases in productivity and from intangibles like worker satisfaction or brand equity.

Explore hidden relationships between costs and benefits. For example, one department's benefits might turn into costs for another. Or increasing sales of one product line might cannabilize another. Or funding a capital expense without accounting for the necessary operations and maintenance monies is an almost infamous example.

Finally, to fully represent the full set of costs and benefits, we also incorporate "externalities" derived from social and environmental impact (recall the K-cup example). The worksheet below can help identify these otherwise hidden costs and benefits, but it is also strongly recommended that you partner with experts who can help you quantify the risks, costs, and benefits.

  • DO NOT develop numbers and estimates in a vacuum. You will need to identify key stakeholders and subject matter experts and get the right information from them.

Consider:

-What figures do I need to get right to make sure I have a strong proposal that fully informs decision-makers?

-Who can provide this information?

-Who will be affected by any decision resulting from my proposal? How will I involve them in putting the numbers together?

-Who can help me and challenge my thinking? Who will have a different opinion and perspective on this proposal?

-What internal and external stakeholders can help me accurately estimate the social and environmental costs and benefits?

  • There are numbers and there are validated numbers. Be careful to use and present numbers that have been validated and have buy-in from the departments and business units who will be affected and have the needed subject matter expertise. For example, don't even think of making customer demand predictions without working closely with marketing and supply chain.

  • Watch the bias of your "informants". While you must work with the right internal and external experts to get validated numbers, also be aware of their biases. For example, sales people who live by commission may want to provide inflated figures since it would mean more money for them. And building and operations engineers stretched to capacity might provide low numbers for a service that would lighten their load--or high numbers for a proposal that appears to increase their workload.

Tomorrow.....How to Calculate Return on Investment (ROI)

Know someone interested in making a great business case?

Invite them to sign up.

bottom of page