We are applying business value development to my current project. We are now in a good place to start development driven by business value. This was not always the case. The business value statement for the project is now on its third version. This blog is the story to date of the business value.
The project is to replace the current credit management systems with a state of the art solution.
The first version was created by the project rather than the business users. Its premise was that there had been 6 substantial bankrupcies in the previous year including Enron. These amount to X million pounds. The argument was that if the new system was in place, the losses would be reduced by 20%. The 20% number was randomly selected based on discussions with senior management. The business value of the project would be X / 5 million per year. The main idea of the business case was that the new system would reduce losses due to defaults.
Sanela Hodzic and I were working on the project. We were uncomfortable with the business case because it assumed significant defaults every year. However, defaults tend to cluster in bad years such as a couple of years ago when the economy was in a poor state. We suggested a second model. This was based on a monte carlo model to calculate the possible losses developed by Sanela as part of her masters degree. I will cover the detail of the model in another blog. The model gave a distribution of possible losses rather than a single value.
Sanela then worked with the head of credit to develop the current model. This argument was very different. Currently the credit limits in use are very conservative which restricts the growth of the business. This is because the credit managers do not fully trudt the accuracy of their system. The new system will give more confidence in the exposures calculated. This will mean that higher limits will be given and result in more business growth. The model suggests a 10% growth in revenues will result. This translates to an $ Y million increase in profit. However, the higher credit limits will result in a $ Z million increase in losses due to counterpart defaults. The business case is that $ Y – Z million additional profit will be generated each year. This is directly opposed to the original business case because the introduction of the new system will actually lead to higher, not lower losses. The difference will be that management will be able to make strategic decisions on where those potential losses will occur. This model is owned by the business users and they are presenting it to senior management to justify the investment in the new solution. I will cover the model in detail in another blog.
Posted by chrismatts at March 7, 2004 12:47 PM