Developing a Business Case: Introduction to the Strategic and Economic Cases

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Alice Pugh explains the importance of having both a strategic and an economic case when raising a business case.

This blog was first posted by the National Civic Impact Accelerator, based at Sheffield Hallam University. They are part of a series looking at what a business case is and how to develop one at a University. Visit our page to read the first blog in the Business Case series.

Strategic Case 

This is the second blog covering two of the five sections of developing a business case. The purpose of this strategic case is to make the case for change and to demonstrate how the chosen project provides a strategic fit to the organisational purpose and the challenges faced.  

Making the case for change is arguably the most important aspect of the business case. A robust case for change must demonstrate how the intervention would be an improvement on the business-as-usual (BAU) case, developing a clear rationale, outputs, and benefits, which will improve upon the BAU. With all objectives being SMART (Specific, Measurable, Achievable, Relevant and Time-constrained), to enable post-project impact evaluation. The SMART objectives selected in this section will also drive the rest of the process throughout the model. Crucially they will provide the basis of the creation of options as solutions to the challenges faced and the appraisal process within the economic case.  

Demonstrating strategic fit shows that the project provides synergy and holistic fit with other programmes, projects and strategies within the locality. This requires bidders to have a firm understanding of the ongoing policy landscape, which is considered within their own project planning. This is to ensure their project has a strategic fit to all relevant local, regional, and national policies and targets. Consultation and cooperative working are encouraged in the strategic case development between relevant project partners, stakeholders, and policymakers, to ensure effective and efficient delivery of outputs and avoid unnecessary waste, inefficiencies, and duplications.  

Throughout the business case research, consultation and engagement with stakeholders should be conducted from the earliest stage onwards. This will provide a greater understanding and evidence base of the current situation, as well as potential opportunities for improved alignment and co-creation.  

Logic Change Process

The Strategic Case requires the key following questions to be answered:  

  • What is the current situation/Business-as-usual (BAU)? A strong understanding and evidence base of the business-as-usual case must be developed, to identify what is wrong with the business-as-usual and why it needs resolving.  
  • What SMART objectives need to be achieved to improve the business-as-usual situation? Identification of SMART spending objectives that embody the purpose of the project. The spending objectives will usually match with the expected outputs of the project.  
  • What Business Needs or Inputs will be needed? Identification of the changes that will need to be made to the organisation’s business to bridge the gap from business-as-usual to the attainment of SMART objectives. These changes are known as the business need.  
  • What is the wider holistic fit? How do these SMART objectives and business needs holistically fit with the wider national, regional, and local government policies and objectives?  
  • What is the Logical Change Process? An explanation of the logical change process to be taken will be needed, this is to explain the chain of cause and effect, describing how meeting the business needs will lead to the attainment of the SMART objectives. This all needs to be supported by reference to appropriate objective evidence, in support of the data and assumptions used. This should include the source of the evidence; an explanation of the robustness of the evidence base; and relevance of the evidence and the context in which it is being used.  

Economic Case 

The purpose of the economic case is to identify the proposal that best delivers public value to society, including the wider social and environmental effects.  

The economic dimension is where detailed option development and appraisal-based selection take place. This section of the business case is driven by the SMART objectives and delivery of the business need, identified in the strategic case. It estimates the wider social value of the different options at a place-based level.  

Demonstrating the best public value requires a wide range of realistic options to be appraised (long list), in terms of how they meet critical success factors and spending objectives for the scheme. Based on how well the options in the long list then meet the critical success factors and spending objectives, this list is reduced to a short list of options.  

The shortlist of options must include the Business-as-usual option, a realistic and achievable ‘do minimum’ which demonstrates the current situation, and any other options that should be carried forward, though a minimum of 4 options need to be carried forward to be appraised.  

These short-listed options are then subjected to value-for-money assessments to determine the option which offers the best public value to society. To understand the true value for money of these options, a cost-benefit analysis, cost-effectiveness analysis, or similar appropriate methodology, must be used to identify the option which offers the best public value to society. In the value for money assessment, a range of factors must also be considered, including the cost of risks; optimism bias; additionality factors; the whole life of the costs and benefits of the scheme; unquantifiable or unmonetizable costs and benefits; and sensitivity analysis.  

Appraisal of Options Process

The economic case requires the key following questions to be answered:  

  • What are the critical success factors? The critical success factors are the attributes for the successful delivery of the project, against which initial assessments of options will be appraised. Critical Success Factors for the project are crucial, not merely desirable and they must be relevant to the agreed SMART objectives and business needs. 
  • What is the long list of potential scheme options? A wide range of possible scheme options need to be identified and assessed in their ability to achieve the critical success factors which have been agreed upon.  
  • What is the short list of options? Based on the assessment of the long list options, the options which best meet the critical success factors should be taken forward to the shortlist to be appraised. A minimum of 4 options must be carried forward and one must be the business-as-usual option.  
  • What is the net value to society of each short-listed option compared to the business as usual? Each option, including business as usual, must have all relevant associated costs (including the costs associated with any risks) and benefits valued in monetary terms, unless not proportionate or possible to do. Usually, this is done by conducting a social cost-benefit analysis or social cost-effectiveness analysis for each option, though where appropriate other methodologies may be used. Benefits and costs which cannot be monetised should be referenced within unquantifiable benefits. Full life estimates of the costs and benefits to be realised should be included. All risk costs must also be monetised, and additionality factors and optimism biases considered and applied.  
  • What is the preferred option? Once the benefits and costs of each option have been assessed the Net Present Social Value (NPSV) and Benefit Cost Ratio (BCR) for each option should be calculated. Sensitivity analysis should be then conducted to understand how potential variations in key input or output variables may impact the net social value of the various options. The option which then optimises social value, providing the best value for money, should be selected as the preferred option. This is usually the option with the best NPSV and/or BCR, if the preferred option does not have the best NPSV or BCR, an explanation in detail should be provided, particularly if there are significant unmonetisable benefits.  

This blog was written by Alice Pugh, Policy and Data Analyst City-REDI / WMREDI, University of Birmingham.

The views expressed in this analysis post are those of the author and not necessarily those of City-REDI / WMREDI or the University of Birmingham.

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