Writing a Business Case for Service Concepts

Writing a Business Case
for Service Concepts
Richard Ekelman

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2
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Richard
Ekelman
Founder of SERV/
Service Designer at Aetna and Walgreens
Service Design Consultant at Slalom & Accenture
MFA Service Design, SCAD
Military Veteran
BA in Psychology

3© SERV/ 2018. All rights reserved. 3
Economic literacy is a growing requirement to
practice Service Design.
Our work is akin to that of an attorney.
The future of SD is entrepreneurial.
Adapt this content to how your organization works.
Premises

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One Band
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4© SERV/ 2018. All rights reserved.
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quid eumquo blacium cusdae pero
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cusanda muscima comnis ressinto
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aut autectium sitatioreste es
dus, consed ma endem vellabo.
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dolumqu aersper eprae. Et pre labo.
One Band
One Sound
I have taught myself what I am about to cover. I encourage
you to do your own exploration.
Once you get beyond the intimidation it is awesome.
Full Disclosure

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Why this matters
Core aspects of a business case
An example case
Some helpful resources
Program
photo by Sven Scheueirmer

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According to the Bureau of Economic
Statistics, at the end of 2017 services
accounted for over $15.51 B or 80.2% of the
US Gross Domestic Product.
Service Economy

My Progression
Accenture Slalom Walgreens Aetna SERV/
Startup
Community
Total view of cost
& KPIs
Cost of
inefficiency
Cost of a phone
call

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QUOTE
My work spoke to value from the consumer and
employee perspectives but failed to address the
costs, risks, and financial projections decision
makers consider when evaluating value.

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Our systematic view of large
service systems puts us in
a unique position inform
organizational decisions. We
work end-to-end crossing
organizational divisions of labor.
Enabling
Decisions

Individuals continue a behavior or endeavor
as a result of previously invested resources.
We believe we can control outcomes more
than we actually can.
We prefer the status quo in the absence of
pressure to change it.
Sunk Cost Controlability Bias Status Quo Bias
People’s tendency to prefer avoiding losses to
acquiring equivalent gains: it’s better to not
lose $5 than to find $5.
Things are worth more because you own
them. This is also referred to as divestiture
aversion.
We root our decisions in an initial value and
fail to sufficiently adjust our thinking away
from that value.
Loss Aversion Endowment Effect Anchoring
Behavioral Economics

11
CLAYTON CHRISTENSEN
“Good innovations solve problems that
had poor solutions—or none at all.”

12© SERV/ 2018. All rights reserved. 12© SERV/ 2018. All rights reserved.
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Et pre labo.
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Work together as one
Work together as one Work together as one
Quantify
Intangibility
Translate opportunities into the
language of our business counterparts
to meet their version of value.
S&P 500 Market Value
Libert 2015
1975
0%
20
40
60
80
100
1985 1995 2005 2015
Intangible
Assets
Tangible
Assets

Consider service concepts in terms of
modules instead of all or nothing concepts
this was helpful but not as having more
comprehensive numbers.
Service
Modules
A B C
Inspired by Kyle Vice, 2017

The
Risk Gap
I had to learn how to address the
way decision makers assign risk.
CEB/Gartner, 2015
2% Financial Reporting
3% Legal & Compliance
9% Operating
86% Strategic
39% Financial Reporting
13% Legal & Compliance
42% Operating
6% Strategic
Market Losses Audit Time

LoremWriting a Case

16© SERV/ 2018. All rights reserved. 16© SERV/ 2018. All rights reserved.
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The Holy
Trinity of SD
Desirability
Valuable for employees
and consumers
Viability
Realistic for the
organization
Repeatability
Consistent performance
over time

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is a story of how your organization’s
services will meet and, or, exceed needs
and market opportunities.
Business Case

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18© SERV/ 2018. All rights reserved.© SERV/ 2018. All rights reserved.© SERV/ 2018. All rights reserved.
• Executive Summary
• Business Needs
• Operational Costs
• Quantifiable Impact
• Risks
• Financials
Key
Parts
photo by Olu Eltu

• Describe the benefits to revenue/savings
• Include benefits that you can quantify
• Consider adding market metrics
• Explain what might not go as planned
• State the competitive risks
• Speak to the costs and schedule risks
• Talk about costs
• Project an appropriate ROI
• Share the team’s rationale
Impact Risks Financials
• Briefly state the problem or opportunity
• Describe how you plan to address it
• Preview the benefits
• State the return on investment (ROI)
• Concisely explain the situation
• Talk about why they should care
• Articulate the problem it solves
• How the course of action enables growth
• Talk about costs you can find
• Describe the resources needed
• Detail any equipment purchases needed
Executive Summary Business Needs Operations
Business Case

Explicitly connect the need to the company’s
strategic goals.
Whenever possible, list specific goals using the
company’s agreed-upon language.
Strategic
Fit
Describe why you’re proposing the project.
What is the business need?
Share data that conveys urgency.
If the case is focused on a problem/opportunity
have data ready for backup.
Opportunity
Statement

Financial Terms
a financial metric used to assess
financial health and is equal to
revenue less cost of goods sold as
a percent of total revenue.
Gross Profit Margin
is earnings before interest, taxes,
depreciation, and amortization. It
strips out the cost of debt capital
and its tax effects by adding back
interest and taxes to earnings.
EBITDA
is equal to net income or profits
divided by total revenue and
represents how much profit each
dollar of sales generates.
Net profit Margin
the direct costs attributable to
the production of the goods sold
in a company.
COGS
Funds devoted to acquiring,
upgrades or repairs to physical
assets such as equipment or
other property. If it benefits the
company for longer than one tax
year, it is likely to be included
with CAPEX.
CAPEX
are an ongoing cost of goods sold,
selling, general & administrative
expenses, and research and
development. These expenditures
are incurred through normal
business operations
OPEX
The positive cost or efficiency
benefits created by taking a given
course of action. This aspect of
the financial section is a chance
to highlight some of the hidden
financial benefits. .
Project Benefits
The organization’s internal
standard used in reference to the
future value and the comparison
of present value with the future
value of capital. Ask the finance
department for the rate.
Discount Rate

is the ratio between the net profit
and cost of investment resulting
from an investment of time,
resources, or capital.
Return On
Investment
Measured in sales units. How many
units will need to be sold to over
fixed costs.
Measured in percentages. What
is the rate of growth a project is
expected to generate.
Break-Even Analysis Internal Rate of Return
Expressed in dollars. What is the
project worth to the company in
current cash flow.
Measured in time. How long until
the organization can recoup
investments?
Net Present Value Payback Period

`WWW
23
StarBeans is a national coffee retailer that has become a dominant player but the brand
needs a way to grow their reach without the expense of a physical store. One concept is to
create a bicycle based cart.
StarBeans projects 2500 cups each week with a average net profit margin of $2.25 per cup.
StarBeans Coffee Cart
Total Capital Expenditures
Overview
StarBeans pays a premium for prime retail spaces. Additionally, the branding of
a on-the-go kiosk, cafe, and mobile truck erodes their margins.
Creating a lite way to reach our consumers in new ways is paramount to growing
our total addressable market by 2,000 people per cart.
Strategic Fit
Cart security, limited cart options, fast followers, the impact of
bad weather, shrinkage.
Risks
Total Project Expenses
Total Operating Costs
Total Benefit
Total Costs
Annual Total
Cumulative
*All figure are in thousands
**All figures are EBITDA
$130,000.00 / 2.25 = 57,778 cups
Break-Even Analysis
Return On Investment
$655,015.40 (2% Discount Rate)
Net Present Value
54 weeks
Payback Period
23
2018 2019 2020 2021 Total
20 3 1.5 1 $25,500
80 30 15 10 $135,000
30 35 38 42 $145,000
130 69 54.5 53 $305,554.50
100 200 250 300 $850,000
-30 131 195.5 247
-30 101 296.5 543.5
***No concept will ever be this simple. This is example is a gross over
simplification of an actual business case.

Calculation
100000
90,039.21
90,039.21
192,233.75
192,233.75
235,580.58
235,580.58
277,161.86
277,161.86
200000 250000 300000
-130,000
-130,000
-130,000
1 + .02
Formula
NPV = -C0
NPV
NPV
$655,015.40
1 + r (1 + r)2
(1 + r)3
+
+
+
+
=
=
=
+
+
+
+
+
+
+
+
+
+
+
Net Present Value : Coffee Cart
C1 C2 C3
( )2
1 + .02 ( )3
1 + .02 ( )4
1 + .02

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SERV/ Descriptive Name / MMM YYYY
26
KEY
PRINCIPLES
Lifetime Value : Coffee Shop
Customer Expenditure Per Visit (s)
4.25(s)
Number of Visits per week “Service Cycle” (c)
4.20(c)
29.66 (a)
Avg. Customer Value Per Week (Expenditures x Visits)
Step 1. Set Variables
C1
3.50
C1
3
C1
10.50
C2
6.50
C2
4
C2
26.00
C3
3.25
C3
5
C3
16.25
C4
6.23
C4
6
C4
37.38
C5
7.16
C5
3
C5
21.48

Simple Traditional
52(a) x t
# of Annual Cycles x Avg. Cycle Value(a) x Years of Relationship Average Profit Margin(m)
($30846 x .22)
6787.12
6787.12 $13,395.63
1 + Rate of Discount(i) - r
1 + .10 - .72
.38
1.97
Retention Rate(r)
.72
.7252(29.66) x 20 years
1,542.32 x 20 = $30,846.40
Step 2. Calculations
Most organizations calculate LTV a few different
ways and then average them.
Lifetime Value : Coffee Shop
)
)
)
)
)
)
)
)

This ratio is not hard to calculate
and it gives a fairly clear look at if
your service is giving people the value
it could. Addressing the impact of
a concept on this ratio might help
build allies in marketing
LTV:CAC
Ratio
This is a great spot to reach. this
means the service generating value
Consider investing in R&D or
assess if your Total Addressable
Market is accurate.
3:1 +4:1
Essentially this means an
organization is paying people to be
their customer.
Breaking even is not an option.
When this ratio is even the org is
losing money.
Less than 1:1 1:1

The Process
Launch and
learn stories
Find what you
might solve
Make to learn &
gain evidence
Find solutions
and tell stories
Make friends to
write the case
Form a Posse don’t try
to be a hero.
Gage buy-in and
listen for risk
factors.
Any market projection
needs evidence and the
team needs direction.
Trust your process

a group of people temporarily
organized to make a search
Make friends in finance, human
resources, operations, product,
business analysis, and anywhere else
you need.
Be prepared for organizational
skepticism and be patient in
explaining yourself.
Form a
Posse
photo by rawpixl

“Itium nullest, sinciumqui inulpa voluptam aut id
quodiation cum quid eumquo blacium cusdae pero
esserna muscium. Hicit, etusae cusanda muscima comnis
ressinto odis et idus doleseque velliquas aut autectium
sitatioreste es dus, consed ma endem vellabo. Nequissin
nullacc uptatendebis dolumqu aersper eprae. Et pre labo.”
QUOTE
“I guess you win some you lose
some. As long as the outcome is
income.”
DRAKE

• Harvard Business Review Case studies
• Investopedia Academy
• My service economics workshop in July
Learning
Resources
• Bloomberg’s P&L Pod cast
• CB Insights Newsletter
• Print subscription to the WSJ
• Investopedia’s word of the day
Habit Forming
Resources

Thank You
rich@servinnovation.com
servinnovation.com/services
@serv724

Writing a Business Case for Service Concepts

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