Developing Your Shared Services/Outsourcing Business Case

A business case is a document that describes a business problem and outlines a proposal for how the problem will be addressed or overcome. It must contain a logical and convincing argument that justifies a business decision to spend funds. It’s a structured proposal that describes the work to be done and it is used as a tool for decision making, as well as being a blueprint for the solution that the program will deliver if it is approved. The business case provides the economic justification and overall change rationale for the proposed program.

From an economic perspective a business case quantifies and details the associated costs and quantifiable (labor and non-labor) and non-quantifiable benefits of the proposed solution.

This article provides guidance on building a business cases for organizations that are contemplating a shared service or business process outsourcing (BPO) initiative.

It comes from the series, “Guidelines for Shared Services and BPO,” developed by Alsbridge to reflect a shared understanding of good practice in outsourcing. Subsequent columns will discuss the following areas: organizational design, change management and SLAs and service levels, charging and benchmarking.

Why Do a Business Case?

The objectives of a business case are to:

  • Provide a background and context to the proposal it contains.
  • Communicate business needs and the options for meeting those needs, along with the costs and benefits.
  • Estimate the costs, benefits and related financial metrics of the proposed solution.
  • Provide a baseline for cost management during development and future benefit tracking.
  • Develop a compelling case for change that will secure the required executive support.
  • Establish the success criteria.
  • Secure approval to move forward with the program.

A business case is refined during successive stages of the project life cycle. Typically, there are four levels of detail:

  • High-level business case
  • Strategic outline business case
  • Intermediate business case
  • Full business case

Overall the nature of the questions asked are expected to be the same regardless of the stage; the main difference is around the level of detail that each stage warrants. In this way the amount of effort expended on the business case is kept proportionate to the stage of the project, and unnecessary work is avoided.

Levels of Business Case

A High-level Business Case may contain no more than a summary statement outlining the questions above; all that is needed is enough information to enable those responsible for making the investment decision to take an informed view on the best way forward.

A Strategic Outline Business Case is still a summary document, but with just enough detail to support an informed decision on whether to proceed or to revisit the project scope. It should include an options appraisal of the high-level options for meeting the objectives such as make or buy, together with an initial view of the costs, benefits and risks.

An Intermediate Business Case is a document that records the detailed options appraisal undertaken during the development of the procurement strategy. These options will be based on an ongoing assessment of strategic fit, achievability, value for money and affordability. Information at this stage is based on relatively detailed indicative assumptions about costs, benefits, risks, etc.

A Full Business Case contains a similar level of detail as the Intermediate Business Case, but with all the information confirmed as it becomes available from suppliers during the competitive tendering process. It should provide all the information needed to support a decision to award a contract and commit actual funding.

The full business case is revisited throughout the life of the project or service, to confirm that the business needs can still be justified and that the expected business benefits are being achieved.

When to Do a Business Case for Shared Services and BPO

A business case isn’t a one-off exercise. It should be developed and updated iteratively throughout the lifecycle of a shared services program (i.e. evaluate, implement, evolve — see the figure).The work on the business case will differ, depending on where an organization is in the lifecycle. For example, the work required when an organization is looking at feasibility will be high-level and relatively low-cost, compared to the work required on the business case that supports a major investment in new systems.

This following section describes the Alsbridge FastSource Lifecycle in summary terms and maps the various “types” of Business Case onto it, as indicated by the numbers on the figure.

 The Alsbridge FastSource Lifecycle
Alsbridge shared services lifecycle.

The Evaluate Phase

The journey to shared services usually starts with a series of evaluations of the options, starting at a high level, with successive drill-downs into more detail as the opportunity and understanding develops. The figure has three iterations of evaluation (Research, Feasibility and Strategy), but there may be more or fewer.

The research stage is often undertaken to understand the potential that shared services has to offer; usually this is done by analyzing what other organizations have experienced, and applying that learning to the current situation. If this research gives a convincing argument that shared services may be beneficial, then usually a feasibility study is undertaken.

A feasibility study is a relatively high-level exercise, which enables the organization to understand the options, and the likely “order of magnitude” costs, benefits and business case. It will usually focus more on the strategic drivers and options, rather than on the detail of the shared services solution. Assuming that the feasibility study is positive, and the organization wants to proceed, then a more detailed strategy will be developed.

The shared services strategy articulates the end goal (operating model, process scope and outline design, sourcing, financing, etc.). The work on a business case is done in the feasibility study and strategy stages as follows:

 Feasibility Study

Here the business decision is to agree whether or not there’s a prima facie case for shared services/BPO, and to approve the expenditure on developing a shared services/BPO strategy. This is a strategic stage. (“Do we have a strategic need for shared services?”). Therefore the analysis will be at a high level, with the primary focus on understanding the business need, the high-level options, the likely shape of the operation (its scope and how it will work), the potential sourcing options, the likely risks, implementation options and timescales. This stage is about the principles of shared services/BPO and the strategic fit — it isn’t about agreeing to absolute detail such as the detailed scope of the shared services/BPO or exactly which processes are included and excluded.

In terms of financial costs and benefits, the analysis to support a strategic decision only needs to be “order of magnitude”; so broad estimates of headcount and costs should be sufficient, and benefits can be estimated by reference to a high-level understanding of process maturity and the application of benchmarks.

The decision to proceed or not is likely to be based on a broad understanding of the strategic needs, options, risks and timescales. Very detailed cost analysis would be wasteful at this stage if a no-go decision is taken. The level of detail needs to fit the requirements of the organization, and the amount of work is highly dependent on the size and complexity of the business. However, in broad terms a four- to eight-week study, with a team of two to four FTEs is typical. More than this would make the study too expensive, unless the organization is confident that it will move forward into development of a shared services/BPO strategy (in which case the organization may decide to bypass the feasibility study altogether). Things to consider include the following.

External considerations: The market and case studies

  • Which organizations/companies have shared services/BPO?
  • Why did they do it?
  • What did they do?
  • What benefits did they achieve?
  • What are the main locations?
  • What are the pros and cons of the various options?

Internal considerations

  • What is the strategic context?
  • What are the drivers and business imperatives?
  • What needs to change?
  • What are the potential solutions? Is an in-house or an outsourced approach more appropriate?
  • What are the potential risks?
  • What are the likely challenges in managing the stakeholders?

Strategy

While the feasibility study is about taking a strategic decision regarding shared services/BPO, (“Why should we do it?”), this stage is about developing a clear strategy for shared services/BPO (“How should we do it?”). This strategy will articulate the future model and timing, including sourcing options (in-house or BPO), based on a detailed understanding of the current metrics and a robust assessment of the available options for improvement. At the end of this stage the organization will have a high-level blueprint of the processes, systems, commercial and operating models, plus a business case and an implementation approach. There should also be stakeholder buy-in and approval to proceed. The business decision supported at the end of this work is to either stop or move forward to commence detailed design and/or supplier selection.

The development of a strategy for shared services/BPO is a much more detailed task than the feasibility study. The topics covered in the business case will be broadly similar, but with a drill down into a lower level of detail. The strategic argument for shared services/BPO is unlikely to differ much from the feasibility study, but the process, systems, and financial analysis will refine the work undertaken in the feasibility study, and will provide factual evidence, particularly in relation to the current costs, headcount, and process maturity. The benefits part of the business case will be assessed based on the detailed understanding of the current position, and the application of benchmarks.

The Implement Phase

The implementation of shared services/BPO in the lifecycle usually takes one of two routes, either build and operate in-house (shared services) or outsource (BPO). In the in-house model, the client organization needs to design its own processes, build the shared services operation, and then transition and operate the service. With outsourcing, most of the build and design work is done by the service provider, and the client organization’s main responsibility is to design and operate the retained function and to ensure successful transition of the services to the new service provider.

 Full Business Case for Internal Shared Services

Once a shared services strategy is signed-off, detailed design can commence, covering the future operating environment (processes, technology and organization) for both the shared service center and the retained function.

The business case at the end of the design work is a full business case, and it’s required to support the major expenditure and procurement associated with the build, transition and operation of the shared services. The full business case is an evolution of the strategic business case. Compared to its predecessor, it’s based on a much clearer understanding of the process changes and costs of change. For example, systems build costs will be based on a very clear view of the processes, and the benefits will be based on a clear future organization model.

 Full Business Case for Outsourced Shared Services

Where BPO is the chosen option, a full business case is required to support two types of major expenditure: first, the one-off transition and transformation of the services and, second, the ongoing services charges, which may be contracted for five to seven years (or more).

As with the in-house shared services approach, the full business case for an outsourcing approach can only be completed following the design work. This will include designing the requirements, selecting the supplier, designing the retained organization, and agreeing on the transition and transformation approach.

The work required to support the full business case will include:

  • What is the service delivery model?
  • What is the funding and commercial model (e.g., how much financial engineering)?
  • Is gain-share an option, and what are the arrangements?
  • How will service continuity be achieved?
  • How will location be selected?
  • What is the staffing model?
  • What is the design of the retained processes?
  • What is the approach to transition?
  • What are the disaster recovery and contingency arrangements?
  • How will systems be migrated, including legacy system closedown and data conversion?

Content of a Business Case

A business case should contain information covering five key aspects: strategic fit, options appraisal, commercial aspects, affordability and achievability.

Strategic Fit

This section presents the strategic case for the initiative and explains how the scope of the proposed project fits within the existing business and IT strategies of the organization, and the compelling case for change, in terms of the existing and future operational needs of the organization.

The minimum content you need for this section includes:

  • Description of the business need and its contribution to the organization’s business strategy
  • Objectives; why it’s needed now
  • Key benefits to be realized
  • Key risks
  • Critical success factors and how they’ll be measured
  • Main stakeholders

Questions you must address include:

  • How well does the proposed way of meeting the requirement support the organization’s objectives and current priorities?
  • If it’s a poor fit, can the scope be changed?
  • Is the project needed at all?
  • Have the stakeholders made a commitment to the project?

Options Appraisal

This section presents the economic case for the initiative and documents the range of options that have been considered within the broad scope identified in response to the organization’s existing and future business needs. It aims to arrive at the optimum balance of cost, benefit and risk.

The minimum content you need for this section includes:

  • High level cost/benefit analysis of (ideally) at least three options for meeting the business need (where applicable)
  • Include analysis of “soft” benefits that can’t be quantified in financial terms
  • Identify preferred option and any trade-offs

Note that options appraisal must be carried out in detail before selecting a preferred option.

Questions you must address include:

  • Has a wide range of options been explored?
  • Have innovative approaches been considered and/or collaboration with others? If not, why not?
  • Has the optimum balance of cost, benefit and risk been identified? If not, what trade-offs need to be made (e.g., foregoing some of the benefits in order to keep costs within budget; taking carefully considered risks to achieve more substantial benefits)?

Commercial Aspects

This section outlines the potential commercial arrangement.

The minimum content you need for this section includes:

  • Proposed sourcing option, with rationale for its selection
  • Key features of proposed commercial arrangements (e.g., contract terms, contract length, payment mechanisms and performance incentives)
  • The procurement approach/strategy with supporting rationale

Questions you must address include:

  • Can value for money be obtained from the proposed sources (partners and suppliers)?
  • If not, can the project be made attractive to a wider market?

Affordability

This section presents the financial case for the initiative and assesses its affordability and the available funding. It links proposed expenditure to available budget and existing commitments.

The minimum content you need for this section includes:

  • Statement of available funding and broad estimates of projected whole-life cost of project, including departmental costs (where applicable)

Questions you must address include:

  • Can the required budget be obtained to deliver the whole project?
  • If not, can the scope be reduced or delivered over a longer period?
  • Could funding be sought from other sources?

Achievability

This section presents the project management case for the initiative and addresses the “achievability” aspects of the project. Its primary purpose is to set out the project organization and actions that will be undertaken to support the achievement of intended outcomes, including procurement activity where applicable.

The minimum content you need for this section includes:

  • A high level plan for achieving the desired outcome, with key milestones and major dependencies (e.g., interface with other projects)
  • Key roles, with named individual as the project’s owner; outline contingency plans (e.g., addressing failure to deliver service on time)
  • Major risks identified and an outline plan for addressing them; provider’s plans for the same, as applicable, skills and experience required

Questions you must address include:

  • Can this project be achieved with the organization’s current capability and capacity?
  • If not, how can the required capability be acquired?
  • Can the risks be managed (e.g., scale, complexity, uncertainty)?
  • Does the scope or timescale need to change?

Summary

We offer six final pieces of advice for developing your business case for outsourcing:

  1. It’s essential to tackle business cases in a structured way, drilling down into the detail as the project progresses.
  2. Overall the nature of the questions asked are expected to be the same regardless of the stage. The main difference is around the level of detail that each stage warrants. Each stage provides a basis on which to review whether or not to proceed with the initiative.
  3. The business case needs to include an “as is” view of the service and a “to be” view.
  4. The business case needs to be clear on what the expected benefits are (e.g., cost, added value considerations or both).
  5. Projected costs and savings must be realistic.
  6. It’s also essential to be realistic about the impact of change on your organization.

Useful Links

Alsbridge
http://www.alsbridge.com/

Alsbridge’s “The Practitioner’s Guide to Shared Services and BPO” (links to four guides on the topic).
http://www.outsourcingleadership.com/research.shtml

“Volume One, Developing a Business Case,” in PDF form:
http://www.outsourcingleadership.com/15537VolumeOne.pdf