What is the best timeframe for a business case?
What’s the correct time horizon to use when building a business case? We advocate for a 3-year look but why not 5 or 10 years? Wouldn’t a longer horizon build a more accurate business case?
Let’s start with a quick refresh on the ROI calculation. ROI is an annual, not cumulative value. A 10% ROI means the project will return $10 each year for every $100 you initially invested. In the first three years for example, that project would have generated $30 in return. After 5 years the project would have generated $50 and by 10 years the project would have returned $100.
Why is 3 years the best timeframe for a business case? Why not just the first year?
Technology projects tend to have higher costs in the initial year as users are trained and begin to use the technology. CRM systems for example will have not just training challenges but adoption and workflow challenges that make the first 12 months more difficult. By the second year, deployments tend to stabilize and by year 3 most deployments have reached a steady return. If we calculate the ROI using the net benefits from just the first year it will be lower than if we average the benefits in the first three years and calculate the annual ROI with that average.
Well, that proves 5- or 10-year calculations will be higher.
Those longer time horizons will generate a higher ROI but let’s consider two factors: just how much higher and how much confidence do you have in those “distant” estimates? Keep in mind the objective of an ROI business case is to justify a decision with a credible business case. This isn’t a financial investment with guaranteed returns in each year out to a few digits past a decimal point. These are estimates that generate a projected ROI to make a go- or no-go decision on a technology investment that has an undefined end of life.
So how much higher?
Let’s look at an example where the average ROI calculates at 6%, 8%, and 10% over the first year, first two years, and first three years. To get that 8% ROI in the first two years the ROI in year 2 must have been 10% (6 + 10 is 16 / 2 years = 8% average). That same math tells us the third year ROI was 14% (6 + 10 + 14 = 30 / 3 years = 10% average). So, our ongoing steady state annual ROI in year 3 and beyond is 14%. If we project that out, we get a 5-year ROI of 11.6% while the 10-year ROI is 12.8%. Past three years the increase becomes small. That’s why we point out that if you didn’t close the deal with the 3-year ROI, you’re not likely to close the deal going out further with your business case.
The risk to a 5- or 10-year horizon is the increased skepticism toward the estimate. Remember, credibility is key. You’re making estimates at a point years from now when technology is very likely to have changed. Your solution will have evolved, competitors will have entered the market, and there will be a rise and fall of the people at the organization considering your product.
If you need those extra years to get the deal past a hurdle, consider instead if you can add more to the benefits you’ve included to show a strong, and credible 3-year ROI.