Thomas Watson Jr., the man responsible for transforming IBM into a computer giant, famously declared that “good design is good business.” Like most maxims, Watson’s observation is both widely cited and widely ignored. Traditionally, investing in design has been considered both costly and risky. Thankfully, this attitude is changing. Over the last few years, more and more people have begun to recognize that design can be a vital component of strategy as well as a driver of business value. You only have to mention successes such as the iPod, Netflix and Target to generate near-universal agreement that design creates business value. Unfortunately, citing examples oft-used in traditional business magazines isn’t enough. Although an entire industry has grown by applying design methods to business, many practitioners in the field lag in their ability to communicate business cases for design initiatives, perhaps subscribing to the notion that such efforts are beyond their domain of expertise. They are mistaken.
Business case modeling, conducted by design teams, can yield powerful results. Like rapid prototyping, business case modeling enables designers to effectively assess and communicate the viability of products and concepts.
A simple model can:
- illustrate potential project outcomes
- provide rules of thumb for further development by illuminating tradeoffs between development speed, product cost, product performance and development program expense
- help manage the risk inherent in any development project
Once incorporated into the concept development process, a business case model adds depth and rigor to a design team’s work. Using simple techniques, it improves both design and business strategies by rationally focusing on the potential outcomes of a project. The ability to understand and use these very simple tools can dramatically increase any designer/developer/engineer’s value to an organization. And constructing a model isn’t even all that hard to do.
Modeling can begin just as soon as the initial concept development phase is complete.
The first step is to set up a base case that estimates the costs and benefits of the project. Think of this as the design prototype that assembles the most basic components in a way that is structurally similar to the final product. The business case model will do the same. It combines the project budget, sales volume forecasts (or some proxy for the desired outcome — site visits, for example) and estimated production costs. It isn’t necessary to go into great detail, but there should be enough information to keep things realistic. The most basic variables you need to take into account include:
- development cost (the cost of your time)
- ramp-up cost (the cost of starting production)
- marketing and support cost (the cost of promoting the product and supporting its users)
- production cost (the cost of building or maintaining the product)
- sales revenues (how much it will cost the end customer multiplied by the number of units sold)
The factors listed above are a good starting point. Once you have numbers for these factors, you can build a base case to estimate the return on investment. You can do this in a number of ways: through Net Present Value, Internal Rate of Return or Economic Value Added. Net Present Value is the most commonly used technique. To give you an idea of how it’s implemented, here is an example: Project X PDF (PDF: 652KB), Project X Spreadsheet (Excel: 24KB).
The sophistication of your model is based on the number of variables that it takes into account. Like design prototypes, the fidelity can vary, but the aim is the same: test the concept.
There are thee things to keep in mind when constructing the base case:
- Keep things simple and direct. Unnecessary detail can ruin both a design prototype and a base case. Focus on the basic numbers. You aren’t building the final business case for the project, just an approximation of it. Like your design, it will be revised and expanded as it is tested and refined.
- Make careful assumptions. The assumptions you make about the costs of development, marketing, production and so on should be simple and direct, but they also need to be as accurate as possible. These numbers will affect the accuracy of your whole model. So if your results seem off, be prepared to revisit your assumptions at any time throughout the modeling process.
- Get everyone on board. Make sure that all the people involved in the construction of the model understand both the variables and the assumptions that are being used. This is a group effort. If you don’t have the information you need, get it from other members of the design team, or go elsewhere (product managers, marketing department, etc.). The input of others will help you hone in on the numbers that are most important, which in turn will validate your assumptions.
Once you have completed the base case, put your model through a sensitivity analysis to explore potential outcomes. Manipulate the different variables to see how single events or combinations affect both the risk and reward associated with potential outcomes. See what happens when your development cost goes up 10%. This is the prototype test of your business case. Good models will show what happens when the project meets, exceeds, or falls short of expectations.
By creating multiple scenarios and examining them closely, you can uncover the factors that have the most significant impact on the business performance of a design. You can also get a better idea of the tradeoffs between development speed, product cost, product performance and development program expense. The model can help you understand how sensitive the outcomes are to variable changes, knowledge you can use to inform day-to-day decisions. No design project relies on just one prototype and neither should your business case model.
Perhaps most importantly, a robust model will help you and your team understand and manage risk. Although no model provides enough information to make perfectly rational decisions, it can alert you to the presence of potential risks and help you design solutions to hedge against them.
Rolling the Model Out
While this kind of modeling may be new for designers, it’s virtually the lingua franca of business. It isn’t difficult to learn, so really there’s no excuse for continuing to avoid the implementation of this valuable tool. Business case models help you assess the viability of your concepts in the same way traditional design prototypes do, plus they allow you to make more informed contributions to strategy and business value. We have effectively appropriated tools and methods from the social sciences in the past. Isn’t it time we did the same with the science of business?
To learn more about business case modeling and NPV scenario building, try this sampling of recommended reading:
- Smith, P., Reinertsen, D., “Wrapping It in Numbers,” in Developing Products in Half the Time. Van Nostrand Reinhold, New York, 1991. pp: 17-41.
- Ulrich, K., and Eppinger, S. “Economics of Product Development Projects,” in Product Design & Development, McGraw-Hill, New York, 1995. pp:234-257.
Henning Fischer is a Design Strategist for Adaptive Path, where his principal focus is on on the confluence of business analytics, design and user research. He has done design and strategy consulting for clients in a variety of industries, from health care to fine arts to handheld navigation.