Investment Analysis – what’s the SCORE?
In this article I introduce my SCORE approach to cash flow and investment analysis. I then drill down into the benefit analysis that underpins the revenue assumption and conclude with a personal account of a legal services change programme – with illustrations using Amplify™ software.
The ‘J curve’ diagram shows a typical project cash flow and is the basis of economic evaluation. There are two parts to the cash flow: the outflow investment – the expense, and then the inflow of revenue – the return.
All economic analysis is based on the cash flow. Where I worked, we had two main economic indicators that were calculated for each project and used as part of the business case.
- NPV (Net Present Value) – discounted cash flow at a prescribed cost of capital – discount rate.
- IRR (Rate of Return) – effective interest rate of the cash flows
Let’s take a look at the assumptions behind the value calculation. These are key to understanding the business case, which is only as good as the underlying assumptions.
What’s the SCORE? Understanding investment analysis
Do you have a favourite sport or TV competition – football or rugby or Strictly Come Dancing? What do you look out for? The SCORE! Remember that point as I explain Investment Analysis.
The five key elements of investment analysis are shown on the diagram – SCORE!
- S = Sanction of the Project
- C = Capital Cost
- O = Operating Start-up
- R = Revenue Stream
- E = Endurance of the Asset
SCORE is a useful acronym because it implies a reference point and a benchmark for the key assumptions which need to be delivered by the Project Plan.
In this article I am focusing on ‘R’ for Revenue which represents the income from the project – the benefits & revenue net of costs – sometimes called the margin; where the costs are mainly logistics and operating.
When calculating the Revenue part of the NPV calculation, I recommend conducting an economic analysis that covers the full range of benefits from; tangible, to less tangible and intangible. Also, known as; hard measurable, soft measurable and not measurable.
These different benefits types formed part of a benefit catalogue that I helped to create whilst working on IT projects in a major corporate organisation.
New Technology for the Lawyers
I think that lawyers are the most argumentative people to work with. That’s not a prejudice. It’s an observation based on my experience of working with the legal profession which involves lots of arguing!
The increased Revenue generated as a result of investing in new technology (Blackberries) for lawyers, formed part of the business case for the initiative.
The case was based on improving the efficiency of the legal team (over 200 in-house lawyers around the world) and the benefit was assessed as ‘the avoided cost of reduced spend on external counsels providing support, time saved being released to do other work, and the accelerated induction of new staff’.
The benefits are shown in a benefit flow diagram and associated benefit summary table.
Our sponsor, a crusty old lawyer and a Scot with connections to landed gentry, was keen to embrace the investment opportunity, including the benefit of giving his legal team new technology including ‘Blackberries.’ I remember him stressing in a Sponsor meeting, “I’m convinced we should give all our lawyers these new ‘gooseberry’ devices.” Despite his unfamiliarity with the jargon – or technology – he proved to be a valuable sponsor.
I have incorporated the assumptions on time saved and external counsel hours into a cash flow benefit and equivalent NPV.
I remember presenting to the Global Legal Leadership Team in Los Angeles. I had a room full of lawyers, eyes open and jaws dropping, when I showed them the benefit catalogue and the cash flow curve.
The Chief Counsel remarked that this was the first time ever, that the Leadership Team had ever been presented with an NPV report. Suffice to say, he strongly endorsed both the overall strategy and associated projects. With that level of support, you won’t be surprised to know that the new technology, matter management and workflow were implemented, and embraced by the lawyers and benefits realised – although, as you might expect, there are some lawyers in the team who are still arguing about the changes!
About Tim Podesta
Tim is passionate about the art and science of Investment Analysis for Projects. After 35-years with BP, as engineer, commercial manager and programme director, he retired in 2016.
He now works as independent consultant on various assignments. His natural areas of subject matter expertise are Benchmarking, Investment Analysis and Front-End Planning for Projects, based on his extensive industry experience.
Amplify™ value-delivery software
Amplify™ Strategy Execution Management (SEM) software is designed to encourage stakeholder engagement and ownership in the identification, planning, and tracking of business benefits, key to the development and ongoing viability of validated business cases. Amplify™ features include quantitative metrics for measuring benefit and cost, reporting variance against plan, and facilitating enterprise-wide feedback.
Amplify™ supports an integrated value-delivery approach combining the;
- Delivery of initiatives on-time, on-budget and to scope
- Achievement of business outcomes, whether financial (e.g. OpEx savings) or non-financial (e.g. headcount reductions or customer acquisition)”
Amplify™ has a broad range of dashboards such as; NPV, Investment, Stage-Gate Process and Map ROI, updated in real-time, enabling organisations to optimise their investment in projects, programmes and portfolios.
Built-in Benefits Realization Plans, cost profiles and schedule reporting support monitoring and tracking the impact/value of a wide range initiatives including Strategic Programmes, Business Transformation and Post-Merger Integrations.
Request an Amplify™ Demo today to learn how it helps you to achieve your goals and priorities, optimise the ROI of your change initiatives and boost business results.