Alternative Development Best Practice 3 – Common Assumptions, Variables, and Calculational Methods

Business planning documents not only seek to communicate the organizational value of a particular ongoing operation, in-progress project, or proposed initiative, they also provide a comparative basis which decision-makers use to determine those activities the organization will pursue. In order to facilitate this comparison, decision-makers must be presented with business cases that not only present costs and benefits in a similar way but that also calculate each activity value statement in a similar manner. To do otherwise yields an apples-to-oranges comparison and leaves decision-makers guessing as to which value proposition truly represents the greatest merit.[wcm_restrict plans=”40731, 25542, 25653″]

Consistently calculating the costs and benefits of a multitude of business opportunities necessitates the clear definition and use of common assumptions, variables, and calculational methods. While business planning managers will certainly seek to make these as accurate as possible, by using the same standards of calculation for all business cases ensures any error introduced is equally applied to all propositions being considered. Therefore, the relative merit of each proposition remains the same.

When identifying the organization’s standard assumptions, variables, and calculational methods to use, business planners should consider the following factors:

• Assumptions should pass a ‘reality check;’ meaning they should be consistent with observables in the marketplace and any assumption that appears ‘too good to be true’ should receive an additional review and will often be discounted
• Variables should be taken from reliable sources, including publicly available data from government agencies, published data from reputable marketplace institutions, and analysis provided by respected academic institutions
• To the extent possible, assumptions and variables should be cross-checked and verified with other equally substantiated, yet independent, sources
• Calculational methods should be consistent with industry practice; often endorsed by industry groups, membership organizations, and respected business schools
• Calculational inaccuracies and modeling omissions/shortfalls should be documented as a part of cost and benefit statements
• The degree of variable accuracy should be documented as a function of the cost and benefit statements and a statement made that indicates of the degree of variability those statements possess as a result of the input data’s accuracy

Assumptions, variables, and calculational methods should be well documented, broadly communicated, and their use reinforced in the alternative development process. These practices serve as the first defense barrier to ensure consistently accurate information is provided to leaders; facilitating the prioritization of future organizational activities.

Note: A second barrier consists of a verification check validating the appropriate use of common assumptions, variables, and calculational methods during the alternative selection process. (See StrategyDriven Alternative Selection Best Practice – Common Assumptions and Variables)

Final Thought…

While no future prediction is completely accurate, the goal of using common assumptions, variables, and calculational methods is to create as highly a comparable set of activity valuations as possible and to eliminate the injection of additional variability within the decision-making process. Thus, these common planning standards help minimize decision risk and ultimately serve to improve the business planning decision process which in-turn improves the organization’s probability of success.[/wcm_restrict][wcm_nonmember plans=”40731, 25542, 25653″]

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