Purpose of this Practice Guide
The practice guide outlines the essential tasks, knowledge, and skills required for effective business analysis across various programs and projects, including those focused on products, services, or process improvements Its concepts and techniques are versatile and implementation-independent, making them applicable for both manual and automated solutions within any project life cycle.
The purpose of this practice guide is to define what business analysis is and to demonstrate the practical application of the discipline This practice guide accomplishes the following:
• Provides a practical discussion of the business analysis work,
• Defines what the work of business analysis is as it relates to programs and projects,
• Discusses why the work is important,
• Provides specific examples of how the work is performed,
• Explains how different types of project life cycles impact the timing and type of business analysis work performed,
• Highlights areas where business analysts should collaborate with other team roles for improved program and project performance, and
• Fully aligns to the tasks, knowledge, and skills that comprise business analysis as identified by the extensive role delineation study conducted for PMI in 2013.
Need for this Practice Guide
When business analysis is properly accounted for and executed on programs and projects, the following benefits are achieved:
• High-quality requirements are produced resulting in the development of products and services that meet customer expectations;
• Stakeholders are more engaged in the process and buy-in is more readily achieved;
• Projects are more likely to be delivered on time, within scope, and within budget;
• Implemented solutions deliver business value and meet stakeholder needs; and
• Organizations develop competencies in business analysis that are reusable for future projects.
Many organizations fail to incorporate effective business analysis into their project work, leading to projects that do not achieve the desired business value According to a 2014 report by PMI, this oversight significantly impacts project outcomes.
• In the past 12 months, 64% of the completed projects successfully met their original goals and business intent.
• In the past 12 months, 16% of projects that started were deemed failures.
• “Inaccurate requirements gathering” was reported by 37% of organizations as a primary cause of project failure.
• Poor requirements management practices are the second leading cause of project failure, second only to changing organization priorities.
Research indicates that organizations face ongoing project challenges due to inadequate performance in requirements-related activities Effective requirements management is crucial in business analysis, representing a substantial part of the overall work Organizations with established business analysis practices significantly enhance their chances of project success, whereas those lacking such maturity experience costly repercussions.
PMI is committed to resolving project issues identified in recent research by developing a practice guide aimed at improving requirements and business analysis in the industry This guide, along with other PMI resources, equips organizations with the tools necessary to successfully execute critical initiatives Grounded in extensive market research, PMI's business analysis initiatives enhance understanding of effective practices, ultimately driving better business outcomes and helping organizations surpass customer expectations.
PMI’s Increased Focus on Business Analysis
Requirements are a critical aspect of project management, and their importance has led to the evolution of PMI standards The PMBOK® Guide – Fourth Edition now includes the Collect Requirements process as part of the Project Scope Management Knowledge Area, highlighting the growing recognition of requirements in both programs and projects.
1 Hillman, Amy 2013 The Rise in Business-Analytics Degrees Retrieved from www.huffingtonpost.com/amy-hillman/the-rise- in-businessanaly_b_3273749.html
2 Project Management Institute 2014 A Guide to the Project Management Body of Knowledge (PMBOK ® Guide – Fourth Edition), Newtown Square, PA: Author
The Fifth Edition 3 has been updated to incorporate the Project Stakeholder Management Knowledge Area, and PMI is advancing its efforts by creating a dedicated practice guide for business analysis, with plans for a comprehensive consensus-based standard in the future As the global landscape grows increasingly complex, organizations that proactively engage in requirements activities can enhance their competitive edge by minimizing waste and ensuring that projects deliver significant business value.
As organizations increasingly leverage business analysis for competitive advantage, the demand for skilled practitioners in this field is on the rise, as highlighted by the U.S Bureau of Labor.
The demand for business analysis professionals is expected to rise by 19% by 2022, highlighting the necessity for skilled practitioners in the field As organizations increasingly focus on enhancing business analysis practices for their programs and projects, there is a significant need for individuals to develop the essential skills required to occupy these vital roles.
Intended Audience for the Guide
This practice guide is designed for individuals engaged in business analysis, regardless of their official title It aims to enhance practitioners' competencies and improve the application of business analysis in various programs and projects.
What is Business Analysis?
Business analysis is the application of knowledge, skills, tools, and techniques to:
• Determine problems and identify business needs;
• Identify and recommend viable solutions for meeting those needs;
• Elicit, document, and manage stakeholder requirements in order to meet business and project objectives;
• Facilitate the successful implementation of the product, service, or end result of the program or project.
In short, business analysis is the set of activities performed to identify business needs and recommend relevant solutions; and to elicit, document, and manage requirements.
Business analysis encompasses a wide range of activities, from identifying business needs to implementing solutions, with various supporting tasks within each domain.
This practice guide delineates essential tasks that enhance the understanding of business analysis, including problem identification, opportunity analysis for portfolio investments, and the evaluation of solutions It emphasizes the importance of grasping the business environment and its constraints, as well as the processes of analyzing and verifying requirements Collectively, these tasks and domains offer a comprehensive definition of business analysis.
3 Project Management Institute 2014 A Guide to the Project Management Body of Knowledge (PMBOK ® Guide – Fifth Edition),
4 Business analysts are categorized under management analysts Refer to report which can be found at http://www.bls.gov/ ooh/business-and-financial/management-analysts.htm
Business analysis plays a crucial role in various business initiatives, including programs, projects, and ongoing operations like monitoring, modeling, and forecasting This practice guide primarily emphasizes business analysis for programs and projects, but the outlined practices are applicable to all areas where business analysis is performed.
Who Performs Business Analysis?
Skillset and Expertise Needed for the Business Analysis Role
A number of varied skills and competencies are needed in order to perform the business analysis role effectively
As business analysts enhance their skills and gain project experience, their competency levels rise significantly Interpersonal skills commonly utilized by project managers are also crucial for effective business analysis Key skills and expertise essential for individuals engaged in business analysis activities on various programs and projects include effective communication, problem-solving, and stakeholder management.
• Communication skills, including strong business writing and verbal communication skills,
• Familiarity with multiple project and development methodologies,
• Ability to work effectively in a team environment, including virtual teams.
How Organizations Implement Business Analysis
This practice guide outlines the principles of business analysis without detailing the specific roles associated with it, as these roles can vary significantly between organizations.
The roles within an organization are shaped by several factors, including the industry type, organizational size, and the maturity level of its program management, project management, and business analysis practices Additionally, the specific project life cycle being utilized also plays a crucial role in defining these roles.
Defining business analysis is more crucial than specifying the role of a business analyst, as organizations can approach this in various ways For optimal project outcomes, tasks may be best handled by a team of business analysts, a single analyst, or even an individual in a hybrid project manager/business analyst role The key to project success lies in the effective, consistent, and high-quality execution of business analysis activities, rather than the title of the person conducting the work.
Organizations today may find that business analysis is being performed within their organization by one or more of these roles:
• Data, functional, operational, systems, or user experience analysts;
• Product managers or product owners;
• Requirements, software requirements, systems, or value engineers; and
The Relationship Between the Project Manager, Business Analyst,
The collaboration between project managers and business analysts is essential for the success of programs and projects When these two roles work together effectively, the likelihood of project success significantly increases However, misalignment often occurs, leading to a disconnect between their activities Instead of fostering a strong partnership, project managers and business analysts may find themselves working independently or even in opposition, which can hinder project outcomes.
There is a prevalent confusion between project managers and business analysts due to overlapping responsibilities and inconsistent definitions of their roles across various industries and organizations As the role of business analysts evolves, this confusion intensifies, particularly in organizations that increasingly recognize the importance of business analysis and are hiring more business analysts.
This practice guide aims to clarify the distinct roles of project managers and business analysts by highlighting key collaboration points essential for project success These visual cues emphasize critical areas where teamwork is necessary, while also addressing perceived overlaps in their responsibilities Additionally, the guide outlines opportunities for business analysts to collaborate with other roles, enhancing support for various programs and projects.
The Need to Build the Relationships
This practice guide aims to enhance collaboration between key roles by offering a deeper understanding of business analysis and its vital contribution to project success.
When project managers and business analysts lack alignment, it can lead to significant inefficiencies, overlooked tasks, and confusion among stakeholders, ultimately hindering project success To enhance project performance and drive organizational success, it is essential to implement actionable strategies that foster collaboration between these two critical roles.
Definition of Requirement
Who has the Responsibility for the Requirements?
Assigning the responsibility for defining requirements is crucial and should be entrusted to individuals with adequate business subject matter expertise and decision-making authority The role responsible for conducting business analysis may vary based on the project life cycle, but it is essential that this role is filled by resources possessing the necessary business knowledge and authority.
A project manager must possess strong analysis skills and expertise to effectively oversee requirements-related tasks They are responsible for incorporating these tasks into the project management plan, ensuring that all requirements activities are completed on schedule and within budget, ultimately delivering value to the project.
Requirement Types
Requirements serve to clarify and communicate business needs or necessary capabilities This guide broadly defines the term "requirement," emphasizing the importance of understanding the specific type of requirement during elicitation, documentation, and management processes It is essential to identify whether the requirement addresses a business need, a customer need, or a need from a particular stakeholder group To enhance clarity and context, requirements are frequently categorized by type.
The PMBOK® Guide – Fifth Edition outlines key requirement types, including project, product, quality, and stakeholder requirements Among these, product requirements are emphasized and can be further classified with specific qualifiers This practice guide addresses these requirement types, which are considered essential for the elicitation and analysis processes in project management.
• Business Requirements Describe the higher-level needs of the organization as a whole, such as business issues or opportunities, and reasons why a project has been undertaken.
Stakeholder requirements encompass the diverse needs of individuals or groups with a significant interest in the outcome of a project This broad definition includes customers, suppliers, partners, and various internal business roles, all of whom play a critical role in shaping the initiative's success Understanding and addressing these requirements is essential for achieving favorable results and fostering strong relationships among all parties involved.
Solution requirements outline the essential features, functions, and characteristics of a product, service, or outcome that fulfill the needs of the business and stakeholders These requirements are categorized into two main types: functional requirements, which specify what the system should do, and nonfunctional requirements, which define how the system performs its tasks.
• Functional Requirements Describe the behaviors of the product.
• Nonfunctional Requirements Describe the environmental conditions or qualities required for the product to be effective.
• Transition Requirements Describe temporary capabilities, such as data conversion and training requirements, and operational changes needed to transition from the current state to the future state.
Project requirements and quality requirements are distinct from business analysis efforts, as they fall under project work While a business analyst may be assigned these tasks, they are primarily the responsibility of the project manager Since these requirements are beyond the scope of business analysis, they are not covered in this practice guide.
• Project requirements are defined by PMI as “the actions, processes, or other conditions the project needs to meet.” These requirements focus on aspects of project execution.
According to the PMBOK® Guide – Fifth Edition, a quality requirement is defined as a condition or capability used to evaluate conformance by validating the acceptability of an attribute that contributes to the overall quality of a result.
In business analysis, nonfunctional requirements, also known as quality of service requirements, differ from quality requirements While quality of service requirements focus on the product's quality, quality requirements pertain to the characteristics of a project's deliverables To clarify this distinction and prevent confusion, this practice guide consistently uses the term nonfunctional requirements to describe the category of requirements that define product quality conditions.
In many organizations, requirements are organized either through separate documents for each type or within a single document divided into sections When utilizing a requirements management tool, the type of requirement is specified upon its addition to the online repository Regardless of the management approach, it is crucial to identify the requirement types relevant to the project during business analysis planning and to address them effectively during elicitation and analysis activities.
The Structure of the Practice Guide
Section 2 on Needs Assessment
Section 2 discusses the business analysis work that is conducted to analyze a current business problem or opportunity and to assess the current internal and external environments of the organization for the purpose of understanding what needs to occur in order to attain the desired future state Some of this work may be undertaken by business analysts before a project is proposed Section 2 further explains the business analysis tasks to understand the goals and objectives of the organization, define problems and opportunities, assess the current capabilities of an organization, define the desired future state, identify capability gaps, and contribute to the development of a business case for the purposes of proposing viable options that will enable the organization to meet its business objectives This section presents various techniques for analyzing and assessing the organization as well as valuation techniques for assessing the viability of solution options.
Section 3 on Business Analysis Planning
Section 3 discusses the work that is conducted in order to define the business analysis approach and plan for the completion of the requirements-related activities necessary to meet the needs of the project Section 3
Stakeholder analysis is essential for assessing participants in business analysis efforts, guiding the planning and decision-making process for an effective business analysis plan Additionally, the chosen project life cycle significantly impacts the timing and methodology of business analysis planning, with variations in approach depending on the specific life cycle selected.
Section 4 on Requirements Elicitation and Analysis
Section 4 discusses the iterative nature of the work performed to plan, prepare, and conduct requirements elicitation and to analyze and document the results of that work A number of elicitation and analysis techniques are defined and explained Examples are included to provide context and describe how to practically apply these techniques on projects Different forms of requirement documentation choices are discussed and guidelines for writing high-quality requirements are provided A large percentage of project time is spent on elicitation and analysis; therefore, this section provides a thorough explanation of concepts in order to help practitioners better perform in these areas.
Section 5 on Traceability and Monitoring
Section 5 covers the comprehensive set of activities for approving requirements and managing changes to requirements throughout the project life cycle The benefits associated with capturing requirement attributes and building a traceability matrix for a project are discussed Section 5 provides a formal requirements change process and discusses how changes to requirements are analyzed, assessed, approved, communicated, and managed throughout a project Baselining requirements, impact analysis, configuration management, and version control are also addressed Additionally, considerations for a streamlined approach to traceability and monitoring are noted.
Section 6 on Solution Evaluation
Section 6 discusses the business analysis tasks that are performed to validate a solution that is either implemented or ready to be implemented This section focuses on both qualitative and quantitative evaluation methods; discusses how evaluation criteria and acceptance levels are used to perform an evaluation of the solution; and discusses work performed to evaluate, analyze, and report on the evaluation results A number of evaluation techniques are defined and examples are shared to demonstrate the practical application of their use.
Overview of this Section
A needs assessment involves analyzing a business problem or opportunity through a comprehensive evaluation of both internal and external environments, as well as the organization's current capabilities This process helps identify viable solution options that can guide the organization towards achieving its desired future state.
This section of the practice guide presents a thorough method for evaluating business needs and pinpointing high-level solutions It emphasizes the importance of collaborating with stakeholders to analyze and articulate business challenges and opportunities The extent of formal documentation for a needs assessment may vary based on organizational and regulatory requirements.
Why Perform Needs Assessments
In business analysis, needs assessments are essential for evaluating the business environment and addressing current problems or opportunities These assessments can be formally requested by stakeholders, mandated by internal methodologies, or recommended by business analysts before starting a project or program A project is defined as a temporary effort aimed at creating a unique product, service, or outcome, while a program consists of related projects and activities managed together to achieve benefits that would not be possible if managed separately.
Needs assessment is a critical preproject activity that occurs before initiating any program or project However, if external factors such as a corporate merger or significant market share loss arise during the project, it is essential for the business analyst to revisit the needs assessment This ensures that the previously made decisions remain relevant and aligned with the current business situation.
A needs assessment includes conducting a gap analysis to evaluate the organization's actual performance against its desired performance This analysis informs the creation of a business case, which, alongside the needs assessment, establishes the groundwork for defining project objectives and contributes to the project charter.
Bypassing a needs assessment can lead to a lack of thorough analysis, resulting in an inadequate understanding of the business need A business analyst conducts this assessment to clarify the organization's problems or opportunities, ensuring the right issues are addressed Skipping this formal process often results in solutions that either fail to tackle the core business problem or are unnecessary, potentially including superfluous features.
Identify Problem or Opportunity
Identify Stakeholders
Stakeholder identification is a crucial step in the needs assessment process, aimed at determining which individuals, groups, or organizations are impacted by the area under review Stakeholders are defined as those who can influence or be influenced by the decisions, activities, or outcomes of a program or project, making their identification essential for effective analysis and engagement.
When an organization seeks to leverage new technology or automate existing manual processes, it is crucial to identify stakeholders who will be affected by these changes Various methods for locating stakeholders are discussed in Section 3 on Business Analysis Planning, providing a more detailed exploration of this topic.
During needs analysis, it is helpful to identify the following stakeholders:
• Sponsor who is initiating and responsible for the project,
• Stakeholders who will benefit from an improved program or project,
• Stakeholders who will articulate and support the financial or other benefits of a solution,
• Stakeholders who will use the solution,
• Stakeholders whose role and/or activities performed may change as a result of the solution,
• Stakeholders who may regulate or otherwise constrain part or all of a potential solution,
• Stakeholders who will implement the solution, and
• Stakeholders who will support the solution.
The affected stakeholders for a needs assessment can be categorized into one of four categories using a responsibility assignment matrix such as a RACI model:
• R—Responsible Person performing the needs assessment,
• A—Accountable Person(s) who approves the needs assessment, including the business case, when warranted,
• C—Consult Person or group to be consulted for input to understand the current problem or opportunity, and
• I—Inform Person or group who will receive the results of the needs assessment.
An insurance company aiming to decrease processing times and costs for automobile and homeowner claims recognizes the need to involve various stakeholders in the solution development To effectively identify participants for the needs assessment phase, the business analyst creates a RACI matrix to clarify roles and responsibilities.
Table 2-1 shows an example of a partial stakeholder list for the insurance company Other possible stakeholders might be the claims operations manager, claims examiners, partners, and suppliers.
Table 2-1 Example RACI for Assessing Business Need
Assess current state of the organization A I R C C
Collaboration between project managers and business analysts is crucial for effective stakeholder identification and RACI analysis While project managers focus on analyzing roles throughout the project, business analysts may delve into specific areas like needs assessments or requirements elicitation at a more detailed level By working together, both roles can support each other and ensure that their efforts are complementary, avoiding any duplication of work.
Investigate the Problem or Opportunity
A business analyst aims to grasp the essential aspects of a problem or opportunity without performing a full requirements analysis at this early stage The term "situation" is used neutrally to refer to the context surrounding the issue or opportunity under investigation.
A business analyst begins by interviewing stakeholders to understand the current environment and assess existing documentation related to processes, methods, or systems within the business unit To document the current "as-is" processes, the analyst employs process modeling techniques Additionally, the analyst may observe the business in action to identify key elements of the existing processes, a technique known as observation.
For more information on observation, refer to Section 4 on Requirements Elicitation and Analysis.
Gather Relevant Data to Evaluate the Situation
To effectively address a problem or opportunity, it is crucial to first gain a comprehensive understanding of the situation, followed by the collection of relevant data to assess its magnitude Insufficient data may lead to solutions that are either inadequate or excessive Therefore, business analysts must accurately measure the size of the issue to ensure the proposed solutions are appropriately scaled.
When internal data is unavailable or difficult to gather, organizations can utilize benchmarking to compare their metrics or processes with those of similar companies in the industry This practice helps identify industry averages, although competitors often keep their nonpublic data closely guarded Additionally, benchmarking can involve comparing different internal units or processes Suitable data for benchmarking includes various performance metrics, operational processes, and industry standards.
• Cycle times for a business process to complete transaction volumes, occurrences of exceptions or problems, and delays caused by the exceptions or problems;
• Amount of money lost per transaction, per sale, by losing a customer, from costs to acquire a new customer, through waste, and from calls to a help desk;
• Website visitors, website conversions, sales inquiries, new accounts, and new policies;
• Potential increases in sales, market share, customer base, and new contracts;
• Market size, potential new market share, current competition, and pricing structures in place; and
• Competitive analysis of products offered, feature and benefit comparisons, pricing, and policies regarding the foregoing.
Once the desired data is assembled, techniques such as Pareto analysis and trend analysis can be used to analyze and structure the data.
Draft the Situation Statement
Once the problem is clearly understood, the business analyst must create a situation statement that outlines the current issue to be resolved or the opportunity to be pursued This process is quick yet crucial for establishing a comprehensive understanding of the organization's challenges or prospects If the situation statement is unclear, incorrect, or if stakeholders have conflicting views, there is a significant risk of identifying an inappropriate solution.
The format of a situation statement is as follows:
The insurance company, leveraging new technologies and a strong online presence, aims to enhance its claims processing by utilizing mobile technology.
Prior to creating a project charter, a business analyst prepares a situation statement to be included in a formal business case Drawing from insights gathered during the initial needs assessment, the analyst evaluates the identified business need and the preliminary impact of the problem on the organization This foundational information enables the business analyst to craft a comprehensive situation statement.
Over the past three years, the cost of processing claims has risen by an average of 7% annually The current claim submission methods, whether via phone or online, lead to considerable processing delays, necessitating an increase in staff to handle calls and conduct personal investigations of claims.
The problem, as assessed, was one of increased costs to process claims, including additional labor costs.
Note: The financial impacts identified in the situation statement will later be referenced during the completion of the cost-benefit analysis.
Obtain Stakeholder Approval for the Situation Statement
After drafting the situation statement, it is crucial to obtain agreement from the identified stakeholders, as this step guides the assessment of the business need Skipping the formal approval of the situation statement can lead to misunderstandings about the current situation Business stakeholders are essential in ensuring that the situation statement accurately reflects the circumstances Neglecting to refine the statement with their input may lead to solutions that only partially address the business need or fail to meet it entirely.
The business analyst plays a crucial role in initiating and facilitating the approval process, which can vary between formal and informal based on organizational preferences Often, the initial review of the situation statement does not lead to immediate approval, necessitating revisions to ensure stakeholder alignment To navigate this process effectively, the business analyst employs essential skills such as facilitation, negotiation, and decision-making to guide stakeholders towards consensus.
Assess Current State of the Organization
Assess Organizational Goals and Objectives
Business analysts may review organizational strategy documents to gain insights into the industry, market conditions, competitive landscape, and existing products and services If these documents are not available, conducting stakeholder interviews may be essential to gather the necessary information for effective strategy development.
Organizational goals and objectives play a crucial role for business analysts as they document business requirements Relevant goals and objectives offer essential context and direction, guiding changes or solutions that effectively address the identified business needs.
Business requirements outline the goals, objectives, and essential needs of an organization, serving as the foundation for initiating a project These requirements are established prior to identifying a solution, highlighting what is vital for the business and the reasons behind it For more details on business requirements, refer to Section 4 on Requirements Elicitation and Analysis.
Organizational goals and objectives are articulated in internal corporate strategy documents and business plans, where corporate strategies convert these goals into actionable plans Goals are generally broad and may extend over multiple years, while objectives are specific, shorter-term targets, typically lasting one year or less, that support the achievement of these overarching goals.
Organizations achieve their objectives through various programs and projects, with the business case serving as the key connection between goals and these initiatives As illustrated in Figure 2-1, goals encompass multiple objectives and can be supported by several business cases and tactical plans Approved business cases provide essential inputs for programs and projects, although it's important to note that not all projects are linked to a business case This section will concentrate on those projects that do have an associated business case.
Goal and objective modeling approaches are discussed in Section 4.10.7 on Scope Models.
To ensure effective subsequent work, a business analyst must document unclear or unspecified goals and objectives Well-defined goals and objectives are often described as "SMART," which stands for Specific, Measurable, Achievable, Relevant, and Time-bound This approach is widely recognized and serves as a reliable framework for setting clear objectives.
Example—In the previous insurance company example, the insurance company had a goal of reaching
$5 billion in revenue within 5 years, with a 20% net profit margin The company also had the following supporting objectives for the coming year:
Goal-Objective-Business Case Hierarchy
Figure 2-1 Example Hierarchy from Goals to Business Cases
Clear, concise, and observable outcomes are needed.
The outcome should be testable and measurable.
The outcome should be realistic and resources devoted so it can be achieved
(Sometimes the “A” stands for Attainable and other times as Assignable, meaning who or what will achieve it.)
Outcomes should be aligned with the organization’s mission, vision, and strategies (Sometimes the “R” stands for Realistic or Reasonable.)
A specific time period should be attached to the outcome, in line with the business need (Sometimes referred to as Timely.)
Figure 2-2 SMART Goals and Objectives
• Increase revenues by 10% by December 31 (necessary to help them reach their 5-year goal),
• Decrease overall claims costs by 5% in the same time period,
• Reduce time needed to process claims by 6.25% in each quarter of the year.
Goals and objectives play a crucial role in needs assessment by providing context and direction for changes that meet business needs Ideally, all programs and projects should align with these stated goals and objectives, except in cases of unforeseen challenges or opportunities The connection between programs, projects, and business goals is established through the business case, which is developed as a key component of the needs assessment process Even in the absence of a formal business case, it is essential to utilize goals and objectives to steer business analysis effectively.
SWOT Analysis
In the absence of formal plans, business analysts can utilize SWOT analysis to evaluate an organization's strategy, goals, and objectives This method, which stands for strengths, weaknesses, opportunities, and threats, is widely used to foster discussions with stakeholders, particularly regarding critical aspects of an organization in specific situations.
SWOT analysis employs four key categories to provide a comprehensive context for evaluating business needs, effectively translating organizational strategy into actionable requirements By examining both internal and external factors, SWOT enables a thorough investigation of the current situation, facilitating informed decision-making for businesses.
The organization possesses key strengths that can effectively address challenges and leverage opportunities Notable advantages include a highly knowledgeable research team, a robust brand reputation, and a significant share of the market.
Identifying and addressing weaknesses is crucial for improving a situation, as these weaknesses can encompass factors such as limited market recognition, insufficient capitalization or tax base, and negative publicity stemming from real or perceived failures.
Identifying potential opportunities in the external environment is crucial for addressing challenges and capitalizing on new possibilities Examples of such opportunities include targeting underserved markets, taking advantage of a competitor's discontinued product line, and recognizing customer needs that can be met with innovative new products.
The market landscape presents various threats that can hinder the effective resolution of business needs Key challenges include intensified competition leading to increased market share for rivals, the introduction of innovative products by competitors, mergers and acquisitions that enhance a competitor's influence, and the emergence of new regulations that carry the risk of penalties for noncompliance.
SWOT analysis is an essential tool for gaining insights into the overarching aspects of a business need Business analysts can leverage SWOT to develop a systematic framework that dissects a situation into its fundamental causes and contributing factors.
Example—Figure 2-3 shows a sample SWOT diagram for the insurance company example.
Relevant Criteria
Goals and objectives serve as essential criteria for decision-making in selecting the most beneficial programs or projects When focusing on revenue generation, initiatives aimed at market expansion or new product development become crucial Conversely, if the primary objective is cost reduction, prioritizing programs that enhance processes or eliminate costs is vital.
The insurance company aims to boost its revenues by 10% by the end of the year, making revenue growth a critical focus To achieve this goal, the organization must prioritize selling new insurance policies and exploring market expansion opportunities Consequently, initiatives designed to enhance sales will play a vital role in reaching this objective.
Expense reduction initiatives are crucial for the company, as they contribute to overall financial health The criteria established during the review of organizational goals and objectives will play a key role in evaluating and prioritizing potential solutions.
PROBLEM: INSURANCE CLAIMS TOO SLOW
The company faces opportunities and threats in the claims processing landscape While staff shortages and inflexible claims policies pose challenges, the organization benefits from a technically savvy IT team and a low rate of claims fraud, contributing to a positive customer experience despite slow cycle times However, competitors are leveraging mobile capabilities for faster claims reporting, which could impact policy retention as their advertising emphasizes quick processing The widespread acceptance of mobile technology presents an opportunity to mitigate staffing issues, as the necessary software for mobile claims is relatively easy to acquire or develop.
Figure 2-3 Example SWOT for Business Problem
Perform Root Cause Analysis on the Situation
Once a situation is identified and documented, it must be analyzed before taking action After consensus on the problem, the business analyst should deconstruct it to identify root causes or contributing opportunities, enabling effective recommendations for viable solutions This practice guide will combine root cause analysis and opportunity analysis into a single topic for clarity.
Root Cause Analysis is a critical analytical technique aimed at identifying the fundamental reasons behind variances, defects, or risks In the context of business challenges, this method uncovers the root causes of issues, enabling organizations to develop effective solutions that can mitigate or eliminate these problems.
Opportunity analysis involves a comprehensive examination of key aspects of a potential opportunity to assess the feasibility of successfully introducing a new product or service This process often necessitates further research into potential markets to ensure effective implementation and achievement of goals.
There are a number of techniques used to perform root cause and opportunity analysis, and most work for both This practice guide presents the following common methods:
The Five Whys technique aims to identify the root cause of a problem by asking "why" up to five times, allowing for a deeper understanding of the issue While business analysts may not literally ask five questions, this method serves as a valuable starting point to clarify the business problem before exploring solutions Often, business professionals propose solutions without fully understanding the underlying issue, making it crucial to utilize the Five Whys to ensure clarity Although additional techniques may be necessary to further refine the root cause, the Five Whys approach provides a solid foundation for problem-solving in business contexts.
It is important to ask “why” using appropriate questions and to limit the actual use of the word “why,” because it can cause the interviewee to become defensive.
Example—In the insurance company example, a Five-Whys dialog might proceed as shown in Table 2-2.
Cause-and-effect diagrams are valuable tools for identifying the root causes of problems or opportunities by breaking them down into manageable components These diagrams provide a high-level overview of the underlying factors contributing to an issue or the key drivers behind an opportunity, enabling a clearer understanding of the situation By focusing on the true causes rather than symptoms, cause-and-effect diagrams adopt a systems perspective, considering the broader environment surrounding the problem while minimizing distractions from individual behaviors or staff-related issues.
Various types of cause-and-effect diagrams can effectively identify root causes of problems These techniques are often used in conjunction with the Five Whys method to analyze issues thoroughly Practically, this combined approach enhances problem-solving and facilitates deeper insights into underlying causes.
To effectively identify the root cause, it is essential to delve two to three levels deep into the analysis Two of the most effective cause-and-effect diagrams that aid in this process are outlined below.
Fishbone diagrams, also known as Ishikawa diagrams, serve as visual tools that capture the current situation and identify high-level causes of problems, making them effective for root cause analysis They guide users towards areas that may yield the most valuable insights for further investigation, often highlighting gaps in data that should be addressed However, while useful, this technique alone may not fully uncover all underlying root causes.
Note: Fishbone diagrams traditionally use the word “effect” because they are cause-and-effect diagrams
However, it could easily be a situation or problem instead.
There are various ways of depicting a fishbone diagram Figure 2-4 shows one such rendition Here are some guidelines for using fishbone diagrams:
○ The problem to be solved is placed at the head of the fish, which can be either facing to the right or left.
To effectively address a problem, it is optimal to identify between three to eight causes or categories Utilizing standard categories such as machines, methods/systems, materials, measurements, people/customers, policies, processes/procedures, and places/locations can significantly streamline the analysis process and enhance clarity in identifying underlying issues.
○ For each cause identified, ask why that cause is occurring and label any subcauses discovered
Generally, two to three levels will be sufficient to gain insights into the problem to understand its root causes.
Table 2-2 Sample Conversation Using Five-Whys Dialog
Sponsor We would like to add the ability for policyholders to submit claims from their mobile phones We figure it would speed up claims processing considerably.
Business analyst I’m new on this team Can you help me to understand why this is a problem? [Why 1]
Processing claims can be a lengthy process; however, a mobile application can streamline this by enabling customers to file claims immediately following an accident or storm Additionally, leveraging smartphone features such as cameras and video technology can enhance the claims process.
Business analyst What do you think is the major delay in processing claims? [Why 2]
The delay in processing claims often stems from the time lapse between an incident and the policyholder's claim submission, which can extend the process by several days to a week Additionally, our corporate policy mandates a thorough investigation for claims that are likely to exceed specific limits, affecting approximately 80% of all claims.
Business analyst Can you tell me the reason behind the need to investigate so many claims personally? [Why 3]
Sponsor We’re a pretty conservative company, and to avoid fraud, we like to personally view the damage.
Business analyst What other alternatives for speeding up claims have you tried in the past, and why didn’t they work? [Why 4]
Sponsor Well, we tried skipping the investigation for all but the highest claim amounts, and our losses jumped way up
We encouraged customers to reach us on a dedicated mobile line, but for unknown reasons, they often didn't have our number accessible As a result, we did not receive enough calls to justify maintaining this initiative.
Business analysis analyst What did you attribute the higher losses to? [Why 5]
Sponsor We found out that many of the damages were not as bad as the claims indicated I think we overpaid by around 20% if I remember correctly.
Identify and analyze key patterns of causes that serve as valuable metrics for detailed study, as they are more likely to uncover the root cause of the issue Highlight these significant factors for clarity and focus, as illustrated in Figure 2-4.
Interrelationship diagrams are specialized cause-and-effect tools that effectively visualize complex problems with intricate relationships among multiple variables While they are valuable for identifying key variables, similar to fishbone diagrams, they may not fully uncover all root causes, as one problem's cause can be another's effect These diagrams aid stakeholders in comprehending the connections between causes and effects, highlighting the primary causes that contribute to the overall problem.
Creating an interrelationship diagram enables participants to examine each aspect of a problem separately, facilitating a non-linear analysis By concentrating on individual dimensions, participants can effectively break down complex situations into manageable components Once the analysis is finalized, the completed diagram provides significant insights into the overall problem To maximize effectiveness, follow these guidelines for utilizing interrelationship diagrams.
○ Identify the potential causes and effects, up to a maximum of ten to be practical.
Determine Required Capabilities Needed to Address the Situation
Identifying the root causes of a situation enables the specification of effective methods for correction or capitalizing on opportunities In straightforward process improvement scenarios, it might suffice to suggest process modifications without the need for additional capabilities or resources.
In complex scenarios and emerging opportunities, businesses may require additional resources such as advanced software, machinery, skilled personnel, or physical assets A business analyst plays a crucial role in identifying the necessary capabilities by conducting a root cause analysis and evaluating key factors that contribute to success when exploring new opportunities.
Determining new capabilities can be approached through various methods; however, without conducting a formal root cause analysis, business professionals may hastily implement solutions for their perceived issues This often leads to the introduction of new capabilities that only partially address the problem and can incur unnecessary costs.
Analyzing each problem alongside its root causes can reveal essential capabilities needed for resolution A useful tool for this analysis is a capability table, which allows business analysts to identify limiting factors or issues, outline their root causes, and specify the necessary capabilities or features to effectively address these problems.
Capabilities may also be represented in a visual model like a feature model, see Section 4.10.3 for more information.
Example—Table 2-3 provides a capability table for the insurance company example.
An affinity diagram is an effective tool for identifying capabilities, as it visually organizes ideas into related categories and subcategories In problem-solving contexts, this method helps to categorize major causes and align them with the necessary capabilities for resolution.
Problem/Current Limitations Root Cause(s) New Capability/Feature
Insurance claims too slow Limited claims agents • Additional trained agents
• Higher pay for claims agents Necessity for in-person inspections • New policy for skipping examinations based on insured’s policy length, claim history, and initial intake interview
• Use of insured’s technology to record damage Limited claims adjusters • Additional trained adjusters
• See Section 2.2 Reports delayed Limited ways to accept/record claims and reports
• New methods of accepting claims
Paper reports • Eliminate paper reports
Affinity diagrams serve various purposes, particularly in identifying common themes from a range of disparate findings They effectively connect related issues surrounding a problem or opportunity, offering insights into the collection of factors that contribute to root causes This capability makes affinity diagrams valuable tools for understanding problems and generating potential solutions.
Example—Figure 2-7 shows how related causes and capabilities can be organized for the insurance company example.
Conducting benchmarking studies of external organizations that have successfully addressed similar challenges or seized comparable opportunities can be an effective way to identify new capabilities These studies not only inform final recommendations for the organization’s situation but also highlight which strategies to avoid.
PROBLEM: INSURANCE CLAIMS TOO SLOW
Hire Additional Staff Limited claims agents Limited claims adjusters
Delays in responding to claim filing
Raise Pay for Claims Agents Turnover of claims agents
Set Minimum Threshold for In-Person Inspections
All claims require in-person inspection
Trouble in scheduling inspection appointments
Limited ways to accept/record claims and reports
Eliminate Paper Reports Paper reports cause delays
Stakeholders are keenly interested in competitive activities, making it essential to have insights readily available Additionally, benchmarking extends beyond competition; it often occurs when one government agency shares successful strategies with others, fostering collaboration and improvement across jurisdictions.
A competitive analysis study typically falls into one of three types:
• Casual review of other organizations’ public documents such as corporate reports or web pages,
• Study of the major variables factoring into a solution or “secret shopping” at competitors’ stores or websites, or
• Reverse-engineering a specific product to determine its component details and the capabilities needed.
Benchmarking, similar to competitive analysis, offers valuable insights into how other organizations tackle the same challenges faced by your organization By assessing capabilities through benchmarking, organizations can uncover innovative solutions that they may not have considered independently, saving time and resources that would otherwise be spent on trial and error.
Through benchmarking, the insurance company may identify that a competitor provides video chat sessions with claims adjusters This feature should be carefully evaluated to assess its potential value in enhancing the proposed solution.
Assess Current Capabilities of the Organization
Identifying the necessary capabilities to address a situation is crucial, followed by assessing the organization's existing capabilities Often, organizations possess the resources required to resolve issues through methods like process improvement or staff reorganization, eliminating the need for additional capabilities While these solutions are typically straightforward, they may still present challenges in implementation.
A formal needs assessment often reveals that the necessary capabilities are lacking Therefore, before suggesting new capabilities, the business analyst must evaluate the existing ones in relation to the specific situation.
Common methods for assessing the current capability state include, but are not limited to the following:
Analyzing current process flows through "as-is" evaluations or existing model reviews helps identify areas for refinement and opportunities for extending capabilities This analysis not only highlights resources that can be redeployed for new functionalities but also uncovers gaps where necessary processes are lacking, indicating a larger disparity that needs to be addressed.
Enterprise and business architectures serve as frameworks for detailing an organization by outlining its key components, including people, locations, processes, applications, data, and technology Implementing a formal architectural framework allows for the assessment of current capabilities However, it is crucial to ensure that the documentation accurately reflects reality, as existing models may become outdated Therefore, validating and updating these architectural models is essential to maintain their relevance and effectiveness.
A capability framework is a structured compilation of an organization’s capabilities, akin to business architecture, which organizes these capabilities into manageable segments This framework serves as a valuable tool for assessing and establishing a current baseline of organizational capabilities.
An insurance company typically possesses existing process flows for its claims processes, which can serve as a foundational reference While some enterprise architecture may already be established, it is crucial to update the process flows to accurately represent current practices and refine the architectural components for enhanced detail Both elements are essential starting points for improving operational efficiency.
Identify Gaps in Organizational Capabilities
To effectively address the gaps between current and required capabilities, it is essential to conduct a gap analysis This technique involves comparing the existing state with the desired future state to pinpoint the necessary "to be" features and functions that need to be developed Identifying these missing capabilities enables organizations to strategically enhance their competencies and achieve their goals.
In the needs assessment phase of an insurance company, the business analyst evaluates existing capabilities against the required capabilities to pinpoint any gaps necessary for reaching the desired future state Identifying these missing capabilities is crucial as they form the basis for initiating a program or project aimed at resolving the business problem An updated capability table, illustrated in Table 2-4, outlines the deliverables designed to address these gaps effectively.
Table 2-4 Capability Table with Gaps Listed
Root Cause(s) New Capability/Feature Project Deliverables to Fill Gaps
Insurance claims too slow Limited claims agents • Additional trained agents
• Higher pay for claims agents
• New training program for agents
• Increased hourly rate for claims agents Necessity for in-person inspections
• New policy for skipping examinations based on insured’s policy length, claim history, and initial intake interview.
• Use of insured’s technology to record damage
• Create new corporate policy with thresholds for visits
• Develop new processes and interface to import insured’s pictures of damage Limited claims adjusters • Additional trained adjusters
• New processes and interfaces to facilitate claims
• New training program for adjusters
• Develop new processes and interface to import insured’s pictures of damage Reports delayed Limited ways to accept/record claims and reports
• New methods of accepting claims
• Develop new interface for online acceptance of claims
• Develop new interface to submit remote claims reports
Paper reports • Eliminate paper reports • Create online and mobile reports
Recommend Action to Address Business Needs
Include a High-Level Approach for Adding Capabilities
A complete recommendation includes a high-level proposal stating how the needed capabilities will be acquired
This approach is not a detailed project management plan and does not include the level of detail in a project charter
To enhance system capabilities, business analysts should seek initial feedback from business and technical architects when recommending new or modified hardware or software In complex scenarios, collaboration with architects is essential to create a high-level overview of how the new capabilities will integrate with existing systems and applications, while also identifying any significant dependencies that may arise during the implementation process.
Example—Using the insurance company example, additional security infrastructure may be needed to allow claims to be submitted from mobile devices or to allow video chats with claims adjusters
Dependencies require time and money to implement before the desired capabilities can be added and will affect the net benefits of the chosen solution.
Provide Alternative Options for Satisfying the Business Need
When addressing a business problem, it's essential to consider multiple viable solutions rather than a single option Common approaches include the standard build vs buy alternatives, as well as hybrid solutions and various vendor choices A business analyst plays a crucial role in this process by evaluating and analyzing the information collected during the needs assessment to identify and recommend several potential solutions.
Providing alternatives is essential to demonstrate that various options have been evaluated, addressing potential objections from proponents of those alternatives Additionally, the preferred solution may face limitations due to factors like budget, timeline, staffing, or vendor preferences, making it necessary to explore other viable options that could be more acceptable.
The business analyst plays a crucial role in the decision-making process by providing recommendations supported by facts and evidence, although the ultimate solution choice is made by the business sponsor or problem owner Input on solution feasibility is also gathered from the solution team or those tasked with development, ensuring a comprehensive approach to selecting the best option.
Identify Constraints, Assumptions, and Risks for Each Option
Analyzing project proposals requires a clear understanding of the constraints, risks, and assumptions involved, which is essential for addressing business needs effectively This comprehension is also crucial during project planning if the proposal is approved.
Collaboration between business analysts and project managers is essential in risk management, as project managers assess overall project risks while business analysts focus on product-specific risks Additionally, business and technical architects contribute by identifying further constraints and opportunities, such as the risks linked to specific solution options or segments of the business analysis process.
Constraints, whether business or technical, limit a team's options in executing a project and must be assessed when generating alternatives For instance, if there is a time constraint for delivering a solution, a custom-built option may not be feasible and should be excluded from preferred choices Additionally, it's crucial to investigate design and implementation constraints early in the process to ensure effective decision-making.
Assumptions are beliefs accepted as true without proof, often underpinning recommendations, proposals, and business cases that predict future outcomes based on limited information from the compiling team It's essential to document major assumptions to ensure decision-makers are informed during their evaluation of these recommendations If any assumptions are later found to be incorrect, it becomes crucial to reassess the identified needs or potentially revisit the entire business case.
Risks are uncertain events that can impact project objectives, either positively or negatively Business leaders must consider potential risks associated with different project alternatives, as these can significantly influence their decision-making It is essential to identify major risks for each option, along with possible mitigation strategies and their associated costs Additionally, any risks requiring a response may increase the overall cost of the proposed solutions.
Assess Feasibility and Organizational Impacts of Each Option
Before choosing the preferred option, a business analyst evaluates the feasibility of each potential solution This process may lead to the elimination of certain options that do not meet feasibility criteria The assessment focuses on comparing various solutions based on key feasibility factors to determine their viability.
(explained below) This comparison along with the elimination of any options that are not deemed sufficiently feasible is called feasibility analysis.
Analyzing the feasibility of alternatives allows for a focused cost-benefit analysis, reserving detailed evaluations for the most viable options This type of feasibility analysis differs from a full business case, which encompasses a comprehensive economic assessment By conducting complete business cases solely for the most promising alternatives, organizations can conserve valuable time and resources.
Feasibility is influenced by multiple factors rather than a single element like cost or time To effectively analyze feasibility, it is essential to consider a range of important factors and address relevant questions associated with each.
Operational feasibility assesses the alignment of a proposed solution with business needs, while also considering the organization's willingness to embrace change and the sustainability of that change post-implementation.
Meeting business needs is paramount, as any solution that fails to address the core problem renders all other considerations insignificant Key questions to evaluate this alignment include:
• How well does the option in question meet the business needs?
• How does the solution fit into the organization, including its impact on the organization?
• How well do potential options meet the nonfunctional requirements, for example, sustainability, maintainability, supportability, and reliability?
Technology feasibility assesses the availability and affordability of the necessary technology and technical skills required to implement and sustain a proposed change It also evaluates the compatibility of the proposed change with existing components of the technical infrastructure Key considerations include whether the technology can be acquired and if it aligns with current systems.
• Does the technology for a potential solution exist in the organization?
• If not, is it feasible to acquire it?
• Does the organization have the technical expertise to install or operate the potential solution?
Before performing a comprehensive cost-benefit analysis, it's crucial to conduct a high-level financial feasibility assessment of potential solutions This cost-effectiveness evaluation serves as an initial estimate, focusing on the costs and benefits without delving into complete analysis A detailed cost-benefit analysis will follow for the most viable options during the business case preparation phase Key questions to consider during this assessment include evaluating the potential return on investment.
• What are the up-front and ongoing costs for the proposed solutions?
• Are the potential solutions affordable in view of the expected benefits?
• Can the funding be obtained for the investment needed?
A potential solution will be feasible if it can be delivered within time constraints Potential questions to ask include:
• Can a given solution option be delivered to meet the organization’s time frame?
• How reasonable is a proposed option’s timetable?
• When a potential solution cannot be completely delivered by a certain deadline, is it acceptable to deliver it in stages and still meet business needs?
The business analyst evaluates the feasibility of potential solutions by assessing how effectively they align with established goals and objectives This analysis serves as a criterion for determining the viability of each option in addressing the identified problem Collaborating with stakeholders is crucial, as their insights and judgments enhance the analysis and contribute to more informed decision-making.
In the context of an insurance company, a crucial capability involves utilizing technology to document damages incurred by policyholders To implement this capability, the company has several options: they can either install a commercial off-the-shelf (COTS) solution, develop the necessary software internally, or outsource the development process Each of these alternatives presents viable and feasible paths for enhancement.
Recommend the Most Viable Option
After evaluating various options to meet a business need, the business analyst must recommend the most viable choice If multiple options are deemed feasible, the analyst should select the best one In cases where only one option is feasible, that option is typically recommended Conversely, if no viable solutions exist, the analyst may suggest that no action be taken.
When evaluating multiple viable solutions, organizations can rank their options based on effectiveness in addressing business needs For instance, when considering whether to reengineer operations or outsource them, these alternatives can be prioritized according to their ability to resolve business challenges and support overall objectives.
To effectively rank multiple options, employing a weighted ranking matrix is a practical approach This method integrates pair-matching with weighted criteria, allowing for a comprehensive evaluation of choices.
Pair-matching involves comparing each option individually against all other options to determine the most preferred choice through voting or ranking This method, along with weighted ranking, helps validate an initial or intuitive selection by assessing it against alternative options The ranking criteria must align with the goals and objectives established during the needs assessment to ensure objectivity in the recommendation process.
To effectively rank options, begin by establishing weighted criteria for each item Each alternative is evaluated through a pairwise voting process against every other option The scores assigned to each alternative are then multiplied by their respective weights, and these weighted scores are summed to determine the overall ranking for each option Adhering to these guidelines will enhance the construction and utilization of a weighted ranking table.
When evaluating options, it is advisable to use between three to nine criteria for a practical analysis Utilizing fewer than three criteria typically eliminates the need for a weighted ranking matrix, while exceeding nine criteria may complicate the decision-making process for stakeholders, making it challenging to effectively judge and compare alternatives.
Additionally, the problem may be overly complex and may need to be broken into subsets to properly analyze it.
Assigning weights using percentages or decimals is essential, ideally totaling 100% or 1.0 Stakeholders involved in the ranking process often favor assigning each criterion a weight ranging from 1 to a specified maximum.
When conducting voting for paired alternatives, organizations can choose between a simple majority rules approach or a method that counts individual stakeholder votes for each pairing The latter allows for a more nuanced representation of opinions, granting one vote per person rather than just for the winning option Additionally, teams may opt to allocate more voting power to stakeholders with greater authority, such as giving sponsors two votes while others receive one, ensuring that influential voices are adequately represented in the decision-making process.
• Check to ensure that the results make sense to the voters, since unrealistic results will not be helpful
High or low scoring options may suggest either biased results or a strong preference for one choice It's essential to gather stakeholders' subjective feedback on the voting results If the team lacks trust in the outcomes, it typically indicates a need to refine the criteria, weights, or voting methodology.
Example—One of the goals of the insurance company is to raise revenues One criterion would be to compare alternatives against how well each option helps to increase revenue.
See Table 2-5 for an example of a weighted ranking matrix.
Table 2-5 Weighted-Ranking Matrix Example
Cost (Weight 0.1) Total Votes Final Rank
Develop smartphone interfaces in-house 2 × 0.3 = 0.6 2 × 0.4 = 0.8 1.4 1
When creating a weighted-ranking matrix, business analysts must collaborate with the needs assessment sponsor to identify the appropriate stakeholders for the voting process It's essential to engage these stakeholders in discussions about the criteria and weights to be used, ensuring their input is considered in decisions regarding the weighting system.
Conduct Cost-Benefit Analysis for Recommended Option
Before selecting a preferred option, it is essential to conduct a thorough cost-benefit analysis, which provides a more detailed articulation of expected project benefits and costs compared to a feasibility analysis The initial estimates from the feasibility phase are refined into rough order-of-magnitude estimates for both benefits and costs If the business case is approved and the project is launched, these estimates will serve as the foundation during the project initiation phase.
Organizations typically establish standards for conducting cost-benefit analyses, outlining the timing, methodology, and financial valuation techniques to be used It is advisable to consult with a financial analyst or finance representative to prepare a thorough cost-benefit analysis that bolsters the business case The most widely used valuation methods are summarized below, and it is recommended that at least one of these techniques be included in the analysis.
The payback period (PBP) refers to the duration required to recoup an investment in a project, typically measured in months or years A longer PBP indicates a higher level of risk associated with the investment Many organizations establish a benchmark that mandates payback periods to be within a specified timeframe to mitigate potential risks.
Return on investment (ROI) measures the percentage return on an initial project investment by dividing the projected average of net benefits by the initial project cost Although this method does not account for ongoing costs associated with new products or services, it remains a commonly used metric Many organizations establish "hurdle rates" that the expected ROI must surpass for a project to be considered for selection.
2.5.6.3 Internal Rate of Return (IRR)
The internal rate of return (IRR) represents the anticipated annual yield of an investment project, factoring in both initial and ongoing expenses It indicates the expected growth rate percentage that the project aims to achieve To assess the viability of an investment, hurdle rates, including a projected IRR, are set and must surpass a specific threshold for the project to be deemed worthwhile.
Net Present Value (NPV) represents the future value of anticipated project benefits, adjusted to reflect their worth at the time of investment By considering both current and future benefits, as well as inflation, NPV provides a comprehensive assessment of a project's financial viability.
Investing in financial instruments can yield a higher return compared to project investments A net present value (NPV) greater than zero indicates a favorable investment opportunity, while a project with a negative NPV may still receive approval if it aligns with government mandates or initiatives.
The anticipated advantages outlined in the cost-benefit analysis serve as essential criteria for assessing the outcomes of a program or project During the needs assessment phase, the business analyst may identify crucial evaluation metrics to include in their recommendations If these metrics are overlooked during the needs assessment, they will be recorded in the business analysis planning phase, as detailed in Section 3.
In the process of estimating benefits and costs, collaboration between business analysts and project managers with estimating expertise is essential Additionally, business analysts should engage financial analysts within the organization to effectively apply valuation methods to various alternatives.