What is sensitivity analysis?
| I’ve only recently come across using sensitivity analysis in business cases, but it’s really helpful when you want to test how changes in key assumptions (like costs, timelines, benefits) affect the outcome of a business case. In particular, when you think that you might have over-egged it and you want to de-risk the business case.
Used effectively, it helps identify which variables matter most and how robust your investment case is. Which is want CFOs and finance team decision makers want confidence in, right? When sensitivity analysis is usefulSensitivity analysis as a technique is useful:
OK, so now you want to know how to do it. Here’s how we incorporated it into one of our business cases. Start with a base case (your standard forecast). This is your ‘normal’ business case, the one you prepare before the project gets submitted for approval. Next, vary one key input at a time (e.g. +10% cost, -20% benefits). Look at the impact on outcomes like NPV, ROI, or payback, or whatever financial measures you use. Tip: use ranges or scenarios (best case, worst case, likely case) when you present the results back because at this early stage it’s very unlikely that you have defined and finalised costs and benefits so a range gives more flexibility. What variables can you test?We used risk and applied a blanket: what if we only get 25% of the benefit because of reasons… That de-risked the benefit that we were claiming and brought the number down to something that felt achievable. Because no one minds if you over achieve on your benefits case! But you can be a bit more scientific. Here are some variables you can plug into your model.
We put the data into a slide at the back of the business case to show that even if the benefit was de-risked significantly, the business case still stood up. If you’ve gone through several variables, you can present an overall most likely case, where you combine variables like an increase and cost and a delay in delivery (because that’s realistic, right?). Highlight where small changes make a big impact, these are your critical assumptions and the areas where you really need to focus if you want to hit your original expectations. Does it work?Well, sensitivity analysis is only part of a model where you can show how you got to your workings and why you think your forecasts are accurate. If your base business case is rubbish, any analysis based on that is going to be rubbish too. I like it because it’s easy and simple and you don’t need to run complex scenario modelling or use software. For example, what happens if we are late? Run the costs forwards 3 months and take 3 months of benefits realisation out of the business case and see whether that still gives you a number your exec team could live with. It’s a way to reassure decision makers that you’ve considered variables and know what influences your costs, but also builds confidence that even if there are some challenges on the way or with the end result that you could still get value from the project. What do you think, have you used this before? Let me know if I’m late to the party! |
