On 10 June 2015 more than 160 attendees joined an interactive webinar with Professor Leandro Pereira and Claudia Teixeira from Portugal. The presentation was organised by the Benefits Management SIG, and sparked by discovery of paper outlining the Pereira framework appeared in the International Journal of Business Management.
The Global Context for Change
Claudia introduced the presentation with a quote from Rupert Murdoch “The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.”
She argued that business managers are too often focused on cost control measures and therefore fail to pursue their first mission: the creation of wealth. In the current climate it is more important than ever to continuously listen to the market and convert that information into excellent projects.
Kotter and the Standish report concluded that up to 70% of change initiatives fail to deliver the benefits they set out to deliver. In the APM Survey ‘Change for the Better: A study on benefits management across the UK  54% of respondents indicated that cost reduction was a primary driver for projects and programmes in their organisation [rather than the pursuit of benefits per se].
The product life cycle has significantly reduced compared to just a few years ago due to factors such as globalisation, technological innovation, planned obsolescence and social networking. It is a fact that organisations now compete on a worldwide basis as borders don’t exist. The growth in technical innovation is exponential which contributes to a phenomena called ‘techonomy.’
CAPEX expenditure is also growing where CAPEX is the budget required to keep a business competitive and regenerating continuously according to market forces. Generally, business cases and benefits management are more focused on CAPEX than OPEX.
The Problem with Assumptions and Value
A key problem in organisations is the assumptions that are made. There is a clear difference between expectation and estimation where estimation must follow a technique and rigor, free of any personal judgement or wish.
This is critical when preparing a business case. It goes beyond subjective common sense and requires the application of scientific method which means that two different people will reach similar conclusions.
Claudia explained how the value of something is higher before you get it and/or after you lose it using the example of a computer mouse!
The value is not in the asset itself but in the impact it generates. Therefore it is important to measure the value of an initiative through the impact it generates. You need to look at the final effect on the business.
Benefits Modelling and Evaluation Techniques
Benefits Modelling can be used to demonstrate the impact of change initiatives as an organisation moves from the ‘as is’ to the ‘to be’ state. Benefits typically represent the increase of something positive or the reduction of something negative. Dis-benefits however, are the reverse.
Claudia went on to explain the importance of using appropriate evaluation techniques and parameters to measure improvements – i.e. the delta between ‘as is’ and ‘to be’ states. Each benefit requires a ‘picture’ of the current situation, estimate of potential and the results to be tracked.
Accountability for Benefits Management
In the first of four polls the audience were asked “Is there anyone accountable for the benefits management process in your company?”
Just 41% said YES which indicated that there is significant room for improvement.
Leandro outlined the four dimensions of value generation [1st level of his diamond model]. These are; business growth, cost reduction, legal compliance and efficiency increase. Ultimately, the value of the company, or its stock price, should increase at the end of the project life-cycle [as a direct result of the initiative]
Drilling down into the business growth dimension there are only four ways of achieving this namely; by attracting new clients, upselling, cross-selling and finally through retention.
Next Leandro dealt with the dimensions of cost reduction – which also includes avoiding cost increase.
When it comes to increases in efficiency [the time and effort of the people involved] he strongly recommends simply looking at the time released as opposed to how this time is used. That could be another project and separate business case!
Quantitative analysis of Initiative Benefits
In the second poll the audience were asked “How often do you estimate your initiative’s benefits in a quantitative way?”
56% said either that they never, or rarely, estimated benefits in a quantitative way and only 13% said that they always did this.
Leandro observed that this represented a huge ‘knowing-doing gap’ and this led him to infer that if more than half of all projects don’t have a clear estimate of the initiative’s benefits they cannot know what the ultimate value or ROI will be!
Leandro then outlined his approach for measuring quality. He argues that this is best done through the effect [instantiated benefits] as opposed to the cause [primitive benefit]. For example through the reduction of process rework due to number of errors as opposed to an increase in process quality.
Leandro then explained how to measure qualitative benefits through impact by using parametric equations based on business requirements. Such an approach standardises estimates rather than using common sense, which is subjective, and therefor avoids misleading assumptions.
He stressed the importance of sensitivity analysis when estimating cash flows. This can be applied to a range of economic indicators according to a confidence level.
In poll 3 Leandro asked the audience “Are you award of initiative benefits confidence level when presenting the benefits plan?”
Only 18% answered ‘yes’ Leandro stated that this was another significant knowledge gap as improvements in this area would help to properly compare the value of different initiatives.
Benefits Management at the Portfolio Level
Leandro went on to introduce a third level of the model, namely Portfolio. This is where prioritization occurs and sequential analysis aids decision making. He argues that of the four possible benefits categories it is legal compliance that should be afforded the highest priority. For example, non-compliance can lead to the loss of reputation or imposition of penalties. Efficiency is a lower priority than increased revenue or reduced costs as it is virtual money.
The normal perspective is based on traditional budgeting as opposed to zero-based budgeting. The zero-budget principle is where the entire budget is thoroughly reviewed with a clear justification of the costs estimated for each project.
In the final poll the audience were asked “How does your organisation decide on CAPEX for new projects?” The five options were:
- Based on the qualitative benefits estimation
- Based on the estimated costs
- Based on the quantitative benefits estimation
- I don’t know
The results show that a third of all projects appear to proceed on the basis of estimated costs rather than benefits.
Only 28% are based on quantitative benefits estimation which is, of course, the preferred approach. This then is another gap with clear scope for companies to increase the maturity of the prioritisation process.
Leandro moved on describe a more scientific approach to business cases where hypothesis validation is achieved through the use of appropriate business research methods.
Such an approach enables two different teams to arrive at the same conclusions about the ROI of a specific project.
In his conclusion Leandro recommended six steps of business case good practice namely;
- Listen to the market
- Listen to your company
- Start the process with a benefit in mind
- Budget is only a means to achieve the benefit
- Uncertainty is a fact and needs to be estimated
- Two different people must achieve the same results.
Questions and Answers
A short Q &A session followed the webinar and subsequently Leandro and Claudia have kindly provided answer to those questions that it was not possible to deal with at the time. These are available to be viewed below or at the end of the video at the bottom of the page.
Information about the speakers - Leandro and Claudio - can be found here.