Business Case Transparency – Balancing Optimism and Realism with an Eye on Downside Risks

Business Case Transparency – Balancing Optimism and Realism with an Eye on Downside Risks

Even when we know that business ventures contain risks and downsides, we cannot be sure business plans will present them transparently. Martin Ludemann (Corporate Psychologist) offers his experiences working with cross‐functional teams:

‘I have worked with senior executives and managers who are looking for new opportunities. Often they have some great ideas about how new business initiatives might be achieved through the delivery of new sales and marketing programmes supported by a project to build, for example, a new production facility. In their mind, the new initiative will deliver something valuable for their customers and provide work and success for the company, their colleagues and themselves. At this stage, commercial managers play an important role in getting the organisation prepared to move out of its comfort zone, which invariably involves engaging the emotions of others to get them enthusiastic about the new initiative. I like to think of this as the “rose‐tinted glasses” phase.

There will also be discussions addressing the practical implications of what is proposed. As conversations take place, the commercial managers develop their thinking and arguments, and usually it will involve preparing a business case for a decision to proceed. The manager speaks to various colleagues and develops an estimate of the costs, at, say, €175 million over three years, and income of, say, €350 million within six years. And based on this, the initiative would be approved.

But in most organisations, such a high‐level business case will not be sufficient to make a formal decision. For example, if a production facility is involved, the commercial manager must engage with production designers, engineers, surveyors, procurement specialists and finance staff. These professionals will prepare more detailed plans, consider risks and challenges to be overcome, and conclude that the costs will be at least €250 million, with €300–350 million of income, which may put the whole initiative in balance.

A big difference in forecasts can create tension and even conflict between commercial and other managers. Commercial managers may argue with the engineers and finance people. You will hear things like: “You are being too negative and cautious. We can find a way to overcome your concerns, so you should recalculate this.”

Now the commercial manager may be correct in certain respects. Still, the problem is that they may also be taken up with their dreams and thoughts of being a success. So rather than a rational debate taking place, there is something of a fight, which may or may not take place out in the open. The finance and engineering professionals become an internal enemy to be “beaten down.” You will hear arguments such as “You're not acting as part of the team,” “You lack the ‘can do' spirit we need” and “We'll never succeed as a company if we are not prepared to take any risks.”

As a result, some technical and professional staff might feel under pressure to water down their concerns so that a more favourable business case can be presented to senior executives.

I want to emphasise that I am not saying that technical and professional staff will always be on the right side of these arguments. You need commercial managers, who have dreams for the future, who are passionate and emotional, and who see the glass as half full rather than half empty. There is a lot to admire here. But we need to recognise that these commercial colleagues may be pushing an optimistic case, with more chance of downsides than upsides.

You need an environment where commercial and technical staff can really listen to one another. And that is not always so easy. Commercial managers can sometimes resent what they see as a slow and cautious mindset from the technical staff. Conversely, the technical staff sometimes see the commercial managers failing to accept the reality of practical challenges.

So, even when there are many hard facts and technical details under discussion, there can be more psychology going on in business discussions than many people realise. If you don't get this balance right by facilitating high‐quality discussions between different departments, you can have business difficulties, whether on the upside or the downside.

That is why I am happy I have clients here in Germany who are prepared to invest in trained facilitators, such as myself, so their businesses stand a better chance of getting the right balance between risk and reward.’

Here, we see the importance of making decisions ‘with your eyes open’ to the different perspectives of departments and functions in an organisation. Despite many saying that people in an organisation should be ‘fully aligned’, the reality is that views can differ. Engineers are paid to be thoughtful and measured, and commercial managers are paid to venture into the unknown without having all the facts. There is an inevitability to differences of opinion on occasions and the possibility of tensions and even rivalries. Thus, the oft‐quoted mantras ‘We're all on the same side’ and ‘We all want the same thing’ are understandable, but they gloss over the checks and balances and the inevitable differences we sometimes need to save ourselves from groupthink.11

So, you need to design decision‐making processes to ensure, as much as possible, there is constructive behaviour resolving differences, rather than win/lose dynamics between departments, or pretending these differences don't exist.

Alan Paterson (Global Accounts Director and Commercial VP at Santander) offers the following perspective on letting go of over‐optimism:12

‘When I look back over my career, I can see times when I needed the input of all stakeholders to drive the business forward but I can see how an “us” and “them” split can arise. Now, I’ve grown to appreciate the importance of quality discussions with all colleagues working in all the relevant areas, such as finance, risk, legal and compliance. I have also learned from the senior executives I work with. So, nowadays, if I propose something to a decision‐making body, I will always be accompanied by colleagues from these other functions.

I might lead the business proposal presentation and answer commercial questions. However, when it comes to a question of risk or finance, I won't speak on behalf of my other colleagues. If it's a risk issue, the prime opinion that will count will be that of the risk manager. If they say you need to factor in a contingency in a business deal, then that's what will be included in the business case. If there is a finance or HR issue, those colleagues will be the ones whose voices will count the most. Of course, this requires working together as a cross‐functional team, so you are all properly informed. And even if the cross‐functional working is strong, there can still be judgement calls and even dilemmas. So, in the end, it will be the CEO or board who decides what we will do, considering all opinions.

But I learned that “ensuring all stakeholders have a voice and input” is the best policy from a business perspective. Have a culture where the business decision‐making process is factual and respects all inputs. You must take ego out of the equation.

This takes a certain maturity because when I was younger and keen to get on, I sometimes regarded challenge and criticism as an obstacle to my career development. So, when I coach my staff, I try to stress that I will, of course, judge their work based on their ability to listen to the customer's needs and to create offers and solutions that will be attractive. But beyond that, I need them to have realistic plans, which will depend on their ability to work constructively with other colleagues. You want people who can be innovative and drive things forward but ensure they work collaboratively and listen to the experts in each field.

You want processes in your organisation which make projects succeed, and everyone feels a part of that success’.