Business Case

Business Case

Financial frameworks for investment justification and decision support.

When to Use Each Framework

Decision Tree

Is the investment multi-year?
  YES → Use NPV (+ IRR to compare alternatives)
  NO  → ROI is sufficient

Is this a build vs. buy decision?
  YES → TCO comparison across all three options
  NO  → Skip TCO, use NPV/ROI

Are assumptions uncertain?
  YES → Add sensitivity analysis (3 scenarios)
  NO  → Base case only

Quick Reference Formulas

ROI = (Net Benefits - Total Costs) / Total Costs × 100%

NPV = Sum(Cash Flow_t / (1 + r)^t) - Initial Investment
  r = discount rate (10% enterprise, 15-20% growth, 25-40% startup)
  Decision: Accept if NPV > 0

IRR = discount rate where NPV = 0
  Decision: Accept if IRR > hurdle rate

Payback Period = Initial Investment / Annual Cash Flow
  Benchmarks: SaaS 6-12 mo, Enterprise platform 12-24 mo, Infra 24-36 mo

TCO = CAPEX + (OPEX × years) + Opportunity Cost + Hidden Costs

Business Case Template

# Business Case: [Project Name]

## Executive Summary
[2-3 sentences: what we're investing in and expected return]

## Financial Analysis

### Investment Required
| Item | One-Time | Annual |
|------|----------|--------|
| Development | $X | |
| License / SaaS | | $X |
| Implementation | $X | |
| Training | $X | |
| Maintenance | | $X |
| **Total** | **$X** | **$X** |

### Expected Benefits
| Benefit | Annual Value | Confidence |
|---------|--------------|------------|
| Time savings (X hrs × $Y/hr) | $X | High |
| Error reduction | $X | Medium |
| Revenue uplift | $X | Low |
| **Total** | **$X** | |

### Key Metrics
| Metric | Value |
|--------|-------|
| 3-Year TCO | $X |
| NPV (10% discount) | $X |
| IRR | X% |
| Payback Period | X months |
| ROI | X% |

## Sensitivity Analysis
| Scenario | Discount Rate | Year 1 Benefits | NPV |
|----------|---------------|-----------------|-----|
| Base case | 10% | $X | $X |
| Conservative | 15% | $X × 0.75 | $X |
| Optimistic | 8% | $X × 1.25 | $X |

## Risk Analysis
| Risk | Probability | Impact | Mitigation |
|------|-------------|--------|------------|
| | | | |

## Recommendation
[GO / NO-GO] — [one-sentence rationale]

TCO: Build vs. Buy vs. Partner

See rules/business-cost-benefit.md for the full 3-year TCO template and hidden cost checklist.

Key hidden costs to never omit:

Common Pitfalls

References

• ROI & Financial Metrics — NPV, IRR, payback period formulas with code examples
• Cost-Benefit & TCO — Build vs. buy TCO template, hidden costs, sensitivity analysis
• ROI Calculation Guide — Detailed cost breakdown (CAPEX/OPEX/opportunity cost)
• Build-Buy-Partner Decision — Scoring matrix across 5 dimensions

Related Skills

• ork:market-sizing — Size the opportunity before building the business case
• ork:competitive-analysis — Assess competitive context and moat for the investment
• ork:product-frameworks — Full product strategy toolkit (prioritization, OKRs, personas)

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Version: 1.0.0

Build vs Buy vs Partner Decision Framework

Systematic approach for evaluating capability acquisition options.

Decision Matrix

Scoring Template

## Build vs Buy vs Partner: [Capability Name]

### Scoring (1-5 each dimension)

| Dimension | BUILD | BUY | PARTNER |
|-----------|-------|-----|---------|
| Strategic Importance | | | |
| Capability Maturity | | | |
| Time to Value | | | |
| Total Cost (3yr) | | | |
| Risk Level | | | |
| **TOTAL** | | | |

### Recommendation: [BUILD/BUY/PARTNER]

### Rationale:
[Explain the decision]

### Conditions:
- [ ] [Condition 1]
- [ ] [Condition 2]

Cost Considerations

BUILD Costs

• Development (engineering time)
• Opportunity cost (what else could be built)
• Maintenance (10-20% annual)
• Infrastructure
• Hiring/training

BUY Costs

• License/subscription fees
• Integration development
• Vendor lock-in risk
• Customization limitations
• Annual price increases

PARTNER Costs

• Revenue share
• Dependency risk
• Integration complexity
• Coordination overhead
• Brand association risk

Decision Tree

Is this a core differentiator?
├── YES → BUILD (protects competitive advantage)
└── NO → Is there a mature solution available?
         ├── YES → BUY (fastest time to value)
         └── NO → Is there a strategic partner?
                  ├── YES → PARTNER (shared risk/reward)
                  └── NO → BUILD (must create capability)

Red Flags by Option

BUILD Red Flags

• No in-house expertise
• Underestimated complexity
• "We can do it better"
• Core expertise elsewhere

BUY Red Flags

• Heavy customization needed
• Vendor lock-in concerns
• Poor vendor track record
• Integration nightmares

PARTNER Red Flags

• Misaligned incentives
• Competitor partnerships
• Unclear value split
• Dependency on partner roadmap

2026 Best Practices

• Revisit decisions quarterly (market changes fast)
• Consider AI/ML tool availability before building
• Evaluate open-source alternatives
• Factor in security/compliance requirements
• Include exit strategy in evaluation

ROI Calculation Guide

Comprehensive guide for calculating Return on Investment for product decisions.

Basic ROI Formula

ROI = ((Net Benefit) / Total Investment) × 100%

Net Benefit = Total Benefits - Total Costs

Detailed Cost Breakdown

One-Time Costs (CAPEX)

Development Costs
├── Engineering hours × hourly rate
├── Design/UX hours × hourly rate
├── QA/Testing hours × hourly rate
├── Project management overhead (15-20%)
└── Infrastructure setup

Example:
- 4 engineers × 40 hrs/week × 4 weeks × $100/hr = $64,000
- 1 designer × 40 hrs/week × 2 weeks × $90/hr = $7,200
- QA (20% of eng) = $12,800
- PM overhead (15%) = $12,600
Total Development: $96,600

Recurring Costs (OPEX)

Operational Costs (Annual)
├── Infrastructure (hosting, compute)
├── Maintenance (10-20% of dev cost)
├── Support (tickets × cost/ticket)
├── Monitoring/observability
└── Security/compliance

Example:
- Infrastructure: $12,000/year
- Maintenance (15%): $14,490/year
- Support: 50 tickets/month × $20 = $12,000/year
Total Annual: $38,490

Opportunity Costs

What else could we do with these resources?

• Delayed features (revenue impact)
• Team context switching
• Technical debt not addressed
• Market timing missed

Benefit Categories

Quantifiable Revenue Benefits

Revenue Benefits
├── New customer acquisition
│   └── New customers × ARPU × 12 months
├── Upsell/expansion
│   └── Existing customers × upsell rate × additional ARPU
├── Reduced churn
│   └── Customers retained × ARPU × months retained
└── Price increase enablement
    └── Customers × price increase

Quantifiable Cost Savings

Cost Savings
├── Reduced support tickets
│   └── Tickets reduced × cost/ticket
├── Faster onboarding
│   └── Time saved × support hourly rate
├── Automation savings
│   └── Hours automated × employee hourly rate
└── Infrastructure efficiency
    └── Resources freed × cost

Intangible Benefits

Document but don't include in ROI calculation:

• Market positioning
• Developer experience
• Brand/reputation
• Technical foundation for future features

Example ROI Calculation

## Investment: Search Feature Improvement

### Costs (3-Year Total)
| Category | Year 1 | Year 2 | Year 3 | Total |
|----------|--------|--------|--------|-------|
| Development | $96,600 | $0 | $0 | $96,600 |
| Infrastructure | $12,000 | $12,600 | $13,230 | $37,830 |
| Maintenance | $14,490 | $15,215 | $15,975 | $45,680 |
| **Total Costs** | $123,090 | $27,815 | $29,205 | **$180,110** |

### Benefits (3-Year Total)
| Category | Year 1 | Year 2 | Year 3 | Total |
|----------|--------|--------|--------|-------|
| New Revenue | $120,000 | $180,000 | $240,000 | $540,000 |
| Cost Savings | $36,000 | $42,000 | $48,000 | $126,000 |
| **Total Benefits** | $156,000 | $222,000 | $288,000 | **$666,000** |

### ROI Calculation
- Total Investment: $180,110
- Total Benefits: $666,000
- Net Benefit: $485,890
- ROI: (485,890 / 180,110) × 100% = **270%**
- Payback Period: $180,110 / ($666,000/36 months) = **9.7 months**

Payback Period

Payback Period = Total Investment / Monthly Net Benefit

Good: < 12 months
Acceptable: 12-24 months
Risky: > 24 months

Sensitivity Analysis

Always calculate three scenarios:

Common Mistakes

Rule Categories

1. ROI & Investment Analysis (business) — HIGH — 1 rule

ROI, NPV, IRR, payback period calculations with Python examples.

• business-roi.md — Financial return calculations and investment analysis frameworks

2. Cost-Benefit & TCO (business) — HIGH — 1 rule

TCO analysis, build vs buy comparison, sensitivity analysis.

• business-cost-benefit.md — Total cost of ownership and build/buy/partner decision frameworks

Cost-Benefit & Total Cost of Ownership

Build vs. Buy TCO Comparison

## Build Option (3-Year TCO)

### Year 1
| Category | Cost |
|----------|------|
| Development team (4 FTEs x $150K) | $600,000 |
| Infrastructure setup | $50,000 |
| Tools & licenses | $20,000 |
| **Year 1 Total** | **$670,000** |

### Year 2-3 (Maintenance)
| Category | Annual Cost |
|----------|-------------|
| Maintenance team (2 FTEs) | $300,000 |
| Infrastructure | $60,000 |
| Technical debt | $50,000 |
| **Annual Total** | **$410,000** |

### 3-Year Build TCO: $1,490,000

---

## Buy Option (3-Year TCO)

| Category | Annual Cost |
|----------|-------------|
| SaaS license (100 users x $500) | $50,000 |
| Implementation (Year 1 only) | $100,000 |
| Training | $20,000 |
| Integration maintenance | $30,000 |
| **Year 1** | **$200,000** |
| **Year 2-3** | **$100,000/year** |

### 3-Year Buy TCO: $400,000

Hidden Costs to Include

Business Case Template

# Business Case: [Project Name]

## Executive Summary
[2-3 sentence summary of investment and expected return]

## Financial Analysis

### Investment Required
| Item | One-Time | Annual |
|------|----------|--------|
| Software license | | $X |
| Implementation | $X | |
| Training | $X | |
| Integration | $X | $X |
| **Total** | **$X** | **$X** |

### Expected Benefits
| Benefit | Annual Value | Confidence |
|---------|--------------|------------|
| Time savings (X hrs x $Y/hr) | $X | High |
| Error reduction | $X | Medium |
| Revenue increase | $X | Low |
| **Total** | **$X** | |

### Key Metrics
| Metric | Value |
|--------|-------|
| 3-Year TCO | $X |
| 3-Year Benefits | $X |
| NPV (10% discount) | $X |
| IRR | X% |
| Payback Period | X months |
| ROI | X% |

## Risk Analysis
| Risk | Probability | Impact | Mitigation |
|------|-------------|--------|------------|
| | | | |

## Recommendation
[GO / NO-GO with rationale]

Sensitivity Analysis

Test how results change with different assumptions.

Cost Breakdown Framework

One-Time Costs (CAPEX)

Development Costs
+-- Engineering hours x hourly rate
+-- Design/UX hours x hourly rate
+-- QA/Testing hours x hourly rate
+-- Project management overhead (15-20%)
+-- Infrastructure setup

Recurring Costs (OPEX)

Operational Costs (Annual)
+-- Infrastructure (hosting, compute)
+-- Maintenance (10-20% of dev cost)
+-- Support (tickets x cost/ticket)
+-- Monitoring/observability
+-- Security/compliance

Incorrect — Ignoring hidden costs and opportunity cost:

## Cost Analysis
Total development cost: $500,000
Expected benefit: $1M over 3 years
ROI: 100% - APPROVED

Correct — Comprehensive TCO with hidden costs:

## 3-Year TCO Analysis
Development: $500,000
Maintenance (Years 2-3): $300,000/year = $600,000
Opportunity cost (team could build $800K revenue feature): $800,000
Total TCO: $1,900,000

Benefits: $1,000,000
Net: -$900,000 - REJECTED

ROI & Financial Metrics

Financial frameworks for justifying investments and evaluating projects.

Return on Investment (ROI)

ROI = (Net Benefits - Total Costs) / Total Costs x 100%

Example:

Project cost: $500,000
Annual benefits: $200,000 over 5 years

Total benefits: $1,000,000
ROI = ($1,000,000 - $500,000) / $500,000 x 100% = 100%

Limitation: Does not account for time value of money.

Net Present Value (NPV)

Gold standard for project evaluation -- discounts future cash flows to present value.

NPV = Sum(Cash Flow_t / (1 + r)^t) - Initial Investment

def calculate_npv(
    initial_investment: float,
    cash_flows: list[float],
    discount_rate: float = 0.10  # 10% typical
) -> float:
    npv = -initial_investment
    for t, cf in enumerate(cash_flows, start=1):
        npv += cf / ((1 + discount_rate) ** t)
    return npv

# Example: $500K investment, $200K/year for 5 years
npv = calculate_npv(500_000, [200_000] * 5, 0.10)
# NPV = $258,157 (positive = good investment)

Decision Rule:

• NPV > 0: Accept (creates value)
• NPV < 0: Reject (destroys value)
• NPV = 0: Indifferent

Internal Rate of Return (IRR)

The discount rate at which NPV equals zero.

def calculate_irr(cash_flows: list[float]) -> float:
    """cash_flows[0] is initial investment (negative)"""
    from scipy.optimize import brentq

    def npv_at_rate(r):
        return sum(cf / (1 + r) ** t for t, cf in enumerate(cash_flows))

    return brentq(npv_at_rate, -0.99, 10.0)

# Example: -$500K initial, then $200K/year for 5 years
irr = calculate_irr([-500_000, 200_000, 200_000, 200_000, 200_000, 200_000])
# IRR ~ 28.6%

Decision Rule:

• IRR > hurdle rate: Accept
• IRR < hurdle rate: Reject

Typical Hurdle Rates:

• Conservative enterprise: 10-12%
• Growth company: 15-20%
• Startup: 25-40%

Payback Period

Payback Period = Initial Investment / Annual Cash Flow

Typical Expectations:

• SaaS investments: 6-12 months
• Enterprise platforms: 12-24 months
• Infrastructure: 24-36 months

Common Pitfalls

Incorrect — Using simple ROI without time value of money:

Investment: $500,000
Total benefits over 5 years: $1,000,000
ROI = ($1M - $500K) / $500K = 100% - APPROVED

Correct — Using NPV to account for time value:

npv = calculate_npv(
    initial_investment=500_000,
    cash_flows=[200_000] * 5,
    discount_rate=0.10
)
# NPV = $258,157 (positive, but much less than naive ROI)
# Accept if NPV > 0 and meets hurdle rate