Stress Testing The Business Case: 10 Factors To Look for in the Growth Equation

We’ve all been there - “developing the business” case. A new initiative, which may be as small in scope as a new product capability or as significant as launching a new business unit – is memorialized in the “business case”. This document takes on critical importance for the executive stakeholder psyche. It is the statement of record upon which executive level decision making is mad

From an economic standpoint, the business case is  a growth equation: growth of some outcome (typically Revenue, but could be efficiencies too where we “grow” cost reduction) is a function of T (time), F (funding) and some mobilization of “assets” –  human resources, services, capabilities, raw materials, product inputs, etc. Your finance team may also use discounted cash rates or have an IRR hurdle for business case reviews.

Note: the buisness plan is broader in scope and outlines an entire  strategy for an organization whereas a business case is used for  anindividual initiative (big or small)

The successful business case needs to reflect sound strategic planning and analysis, execution risks, company impacts and a credible cost-benefit analysis. Having put together my fair share of these, as well as reviewed many over the years, let’s focus on what to look for to stress test a business case.

Btw – the majority of business cases I mostly spend my time with are associated with revenue growth, so the following list is attuned to that category. But many of the principles and examples I cite are applicable for cost reduction/efficiency business cases.

To Follow: The 10 Factors to Dive Into When Evaluating a Business Case

Here are the 10 key factors of the Business Case I stress test:

1. Use Case - Value Proposition and "MVS"

This is the “demand”  / opportunity side of the business case. I always want to ensure the use case and value proposition being proposed are scalable, what Michael Skok from Underscore VC identifies as the “MVS”, Minimal Viable Segment. In addition, I pay close attention to the following:

• There should be a clear and concise articulation of the use case and value proposition in the context of a well understood Customer Journey. We should be able to understand the “why”, as much as the what and how.

• The value prop should be supported and validated by data from: pilots, test results, customer data (portfolio surveys, surveys, feedback etc.), sales data (win/loss reviews, pipeline analysis), market and competitive intelligence, platform and product usage data, and industry overviews. Customer surveys, platform and product usage data are solid indicators of additive features opportunities and investments  to the platform.

• For initiatives where we are integrating the value chain (see my previous post), data points from partners and/or suppliers provide critical insight. 

2. A Single Customer Doesn't Make a Business CaseBeware the single customer “We must have it” logic underpinning a business case . This is perhaps one of the most difficult and vexing problems for organizations - big and small - to evaluate. Your biggest customer, or what could be your biggest customer, is the impetus for the new initiative.  The very first question to ask is NOT how much revenue a single customer initiative could be, but “how many other customers have this customer’s specific need or use case” ? If the answer is none or we don’t know – we need to go back to the drawing board and do more homework on the Use Case in no 1 above.

3. Rate of Customer Uptake - New & Existing

This is the principal determinant for the growth rate of the new product or service. We can use terms “conversion rate” or  “attach rate” when referencing the win rate of the new solution for new or existing customers.

Well run later stage and mature companies can launch new solutions to net new customers and existing ones at scale, resulting in  higher conversion or attach rates. For a new product for a larger organization ($200M+ ARR), the highest rate of growth I experienced  was a conversion rate of 30% in the first six months for new customers - which we eventually grew to about 90% for that particular offering for every new customer opportunity.

for launch of new offering: first 6 months, expect "linear"   customer traction growth vs. "logarithmic" growth

In my experience with B2B tech sales and new initiatives, rapid traction (presuming it comes!) usually takes at least two quarters. This means that in 12 months we can expect to see a projected growth curve look more linear than exponential. If the business case projected customer traction is exponential within 12 months, that’s a signal which should draw extra scrutiny.

You’ll want to use different "attach" rate assumptions for net new  customers and existing customers (upsell / cross sell). 

Note: In a previous post I wrote about growth strategies and  “integrating value chains”. Let’s look quickly at SaaS companies “integrating” payments and offering as a new solution. Selling payments to new customers will see higher attach rates, then selling payments to existing portfolio. We might expect attach rates of 50-100% for new sales, depending on product positioning for new customers. Upselling to existing costumes, who presumably already have payments solutions, will see a significantly slower adoption rate (monthly single digits for the first several quarters), presuming the offering is competitive.

On the other hand, new capabilities which are additive or an extension to the core platform functionality could see higher growth rates for existing customers, who will understand the need for that functionality; net new customers may be more cautious in adding new capabilities before getting settled with “base” capabilities.

4. Growth Assumptions Using Percentage of Market Share

There are very few cases where developing a detailed growth plan using percentage of market share to project revenue is not going to lead to questions, or more likely, major failure and disappointment.

Using percentage of market calculations is useful for approximations and directional guidance (e.g. what would a company’s revenue  look like in 5 years with 15% market share?). But as the driver for a detailed growth model in a business case, that assumptive approach represents a lack of detail and bottoms up understanding of operational requirements.

5. Assessing the Halo Effect

In my worldview, the halo effect (aka "amplitude effect”) can show up in multiple aspects of the business case. In a more straightforward scenario where the new initiative has a discrete revenue line item attached to it, the calculation for the halo effect is simple; for every dollar in the new item sold, does it result in additional dollars of complementary solution?  Earlier in my career, I oversaw a value add service which had a 1:4 halo effect. For every $1 in revenue the service generated, we identified an $4 in other additional platform revenue.

Halo or Amplitude Effect: 2nd order impact of a proposed initaitive, expressed in terms of revenue benefit.

But we should take a broader lens to determine other amplitude effects, and I would advocate the following in our cost-benefit analysis:

• The new initiative proposed by the business case leads users of our solution/platform /service to upgrade or increase utilization. (evaluate the % of uptake of net new sales or existing portfolio).

• The new initiative reduces customer churn, thus adding ‘benefit” to the top of the ledger in the cost/benefit analysis.

• The new initiative, though not a discrete revenue line item, results in growth of net new customers and/ or increases Average Contract Value.

6. Sales, Marketing, and Customer Success Inputs & Dependencies

The business case which projects customer, unit or platform growth rates needs to account for leading sales resources or supporting (post sales) functions.More mature organizations can  account for sales and marketing costs as marginal outputs or approximations to an existing set of processes and internal functions. 

For example, a sales resource is presumed to be capable of bringing in 4 deals a quarter, at $100K ARR per customer. Hypothetically a customer success resource can support 30 clients per FTE, a support resource can support 500 inquiries a month etc.

For new ventures that won’t be utilizing existing sales and marketing resources, at a minimum we will want to see the relationship between customer growth and sales/ marketing variables. 

7. Model the Revenue Trigger

When it comes to projecting revenue growth, it is important to differentiate customer counts (wins) and revenue/volume triggers. Thorough analysis and planning will itemize out the revenue triggers such as transactions, users, processing volume, instances, API calls, etc. 

In most cases in SaaS, Fintech and enterprise software, customer counts are the multiplier for revenue triggers. Good plans differentiate in the type of customer profiles (“large/medium/small”) with corresponding revenue triggers.

Note: Companies with good historical data can make approximations; however, I would still want to link customer count with the key revenue trigger. The revenue trigger points back to the resources, architecture and other needed inputs to scale the business. 

8. New Resource Dependency and Contribution Lag

The business case is often going to call for additional resources, or at least some reallocation of existing resources. What we often fail to consider is the lag of net new resource contribution to the initiative. I reference a “3/6/9” rule for key, senior technical expertise / developer resources in complex environments:

• 3 Months to fill an open req (“req to hire”).

• 6 months for that resource to get onboarded, be productive and start delivering

• 9 months and that resource is hitting at 100% of need/expectation relative to top performers in the org.

The critical point here is any plan for new initiatives which requires additional resources needs to anticipate resource contribution lag.

Lower expertise positional requirements may be more 1/2/3. Some orgs have great engineering cultures and can get folks in, up and running in 2-3 months post hire, especially for smaller more nimble companies. However, once we hit about 100 people or more, lags become inevitable, especially req to hire ( more constituents to satisfy and increased complexity in administrative chains).

9. Alignment with Corporate Strategy & Trade Offs

Quantitatively evaluate how this initiative aligns with our corporate strategy and objectives. This should be done through initiative (strategy) board or a related aspect of portfolio management. In this context we’re evaluating trade-offs of the initiative and will examine what the impacts are to:

Current and planned product initiatives

Engineering resources

Sales Strategy

Marketing campaigns and  budgets

Broader Budget Allocations

10. Assessing Execution Risk

Often this is the biggest (or the only)  elephant in the room..can the team behind the business case execute in the time frame and with the resource requirements proposed? Will we achieve the objectives to justify the “benefits” in the cost benefit analysis?

At a fundamental level of evaluation, we can look at the track record of the company, business units and/or individuals involved and give ourselves a range of probability of execution success (which we can define as “within time frame, and within budget” and meets “demand criteria”). 

But are there more methodological, or quantifiable ways to approach assessing risk? I'll suggest two:

Scenario modeling: One way to think of quantifying risk is to create worst/low / base scenarios where “worst”  is 25% below base, and the low is 10% below base case  (base is 0%). This approach can give us a range of outcomes and help us make decisions based on continuum of risk probability.

Risk Component Breakdown: However, for initiatives requiring significant investment and trade offs, we can be more detailed and analytical if we break down the initiative into its component parts and start developing a mechanistic model and assign risk levels (i.e. (0 means no risk, 5 means high risk).

• Product & Engineering - identify 1st, 2nd, and 3rd order critical dependencies and we need to assign risk probabilities to those dependencies. Within this context we can also assess our track record for scope / requirements creep, which leads to delays and higher costs.

• Resourcing - skill levels required of net new hires, current ability to hire, using on-demand resources (contractors) etc.

• Use Case & Value Proposition / "MVS" - what are the confidence levels in the use case and value proposition analysis? What is or are the compelling buying event(s) for this new offering?

• Sales / Marketing - what is the current sales effectiveness of the organization? Customer Success? What sort of brand risk is present with the new initiative?

• Legal / Operational - does the business case require or need regulatory approval or other sorts of compliance review? Are there other legal or contractual dependencies (for example partner or supplier agreements)? Other operational needs (internal systems, ERP, accounting etc.)

• Timing - within the first six months of the initiative launching, what overlay of major events are planned for the organization? (e.g. annual meeting, conferences etc. extended absences of key resources) which may impact the initiative? What about external events (e.g. industry events, a planned merger or divestiture in your industry which has significant impact to the initiative, etc.)

There are lots of factors which determine what the right opportunity set is for each organization and the myriad choices they need to consider with limited resources and budgets. I have found focusing on the above mental model to be particularly helpful in quickly zeroing in on key assumptions to a business case. I’m sure there are other factors critical to good decision making -please let me know what has worked for you.

Thanks for reading – until next time.