NUTS, BOLTS, AND BALANCE SHEETS

Nov 01, 2000 10:30 PM  By

Don’t let drawing up a business case become a wrenching matter. Nail down the details with this comprehensive guide

When you think of starting a business, what is the first idea that comes to mind? Probably an ambitious vision of transforming the economy with your new enterprise. This is an admirable goal, and one that has its place in every business plan. But when you are charged with setting up a customer contact center, and with justifying every dollar you spend on it, there’s no way you can get away with just “vision.” Crafting a viable operating scenario is a gritty, hands-on job, and like any other construction project, it isn’t stable until the last screw is in place and properly tightened. Use the following discussion and sample budget analyses as a step-by-step manual for developing detailed investment forecasts.

Many questions come to mind when contemplating a business case: What are the important considerations in starting a call center? What are the components I need to define? What are realistic time frames to produce a call center business case? What does a winning business case look like?

To establish your operating model, you must strategically examine and define four major domains – your customers, marketplace, company, and competition. Important factors to consider in these areas include customer expectations, market positioning, available resources, corporate goals, product or service pricing, and service capabilities. Defining each of these components will in turn provide the blueprint to establish and drive your operational processes. Don’t forget that industry associations such as the Incoming Call Management Institute, the Help Desk Institute, or local telecommunications groups can be of great help in these early planning stages.

Once you have established your vision and goals, you can focus on the nuts and bolts of their implementation. Turn your strategic analysis into tactical analysis by defining the three major components of every enterprise: people, processes, and technology. These are best mapped using cross-functional focus groups that contain representatives from various departments, as well as supervisors, managers, trainers, and business owners.

Setting the scene Great business cases present three scenarios: best case, middle case, and worst case. They are built this way to allow flexibility regarding your assumptions and to allow you to pick the one that best fits your business needs based on the amount of risk your company is willing to assume. At a summary level, these business case scenarios – which typically take about three months to create – consist of five components: (1) projected cost savings; (2) project investment; (3) project return; (4) project cash flow; and (5) net present value (NPV) or return on investment (ROI) estimate.

Each scenario is supported by a separate budget summary page that contains the high-level numbers supporting the business case by category. In turn, each scenario and budget summary sheet is supported by an assumption overview for the project and operating costs. Each budget summary is then supported by a detailed project cost and operating cost sheet broken down by fiscal or calendar year.

These detailed sheets are in turn supported by appendices for each of the categories in the budget, and are the lowest level of detail. They are built as a matrix that includes items such as a horizontal time line and a vertical component inventory and identifies when components come online or people are hired.

Now let us examine each component of a typical business case in detail. Consider figure 1 on page 23 (some numbers in the figures in this article may not add up because of rounding). This page shows the investment analysis you perform for your three scenarios, and it is the one that most executives will focus on.

First, make sure that your investment analysis page shows the number of years necessary to forecast a proper return on investment. In my experience, most contact center start-ups require two to three years to break even. Therefore I look five to seven years ahead.

Second, include incremental operating costs by year as well as any projected increase in revenue to forecast return on investment. Figure 3 exemplifies the building of a single facility to consolidate customer service, sales, and collection functions for a company that has these functions currently scattered across its enterprise.

Third, include your project investment (capital costs) by year. Your project investment minus your project return will forecast your cash flow for the business.

Fourth, include your preferred investment analysis method. In my example I used NPV because it is the most widely used method in corporate America. NPV calculates the net present value of an investment by using a discount rate and a series of future payments (negative values) and income (positive values). A positive outcome usually leads to a “go” decision and a negative number equates to a “no go” decision.

Tip: Microsoft Excel has a NPV calculation built into a standard formula.

Syntax: NPV(rate, value1, value2)

Rate = the rate of discount over the length of one period. Typically your CFO will provide this number. It represents the percentage of return your company expects on an investment; 13% to 17% is common. In my example I used 15%.

Value1 = negative numbers or payments that represent the capital costs of your start-up. These are called “project investment” in the example.

Value2 = income values or returns that represent the payback for implementing a contact center. These are called “total return” in the example.

Last, calculate break even. Simply determine your project investment versus your project return by month to figure out when the balance is break even or zero. This is important to know because start-ups run into the millions of dollars and can take several years to break even. Your CFO can guide you to acceptable break-even time frames for a “go” boardroom decision.

Go by assumptions After the investment analysis, you should present your assumptions overview pages (figure 2 on page 24). These pages define the quantitative data you used and how you built your business case. I suggest that you include, at the minimum, costs for the following categories:

Project Case Assumptions Operating Costs Assumptions Hardware/software by phase Staff by position Severance (if needed) Relocation Training Yearly maintenance Consulting Overhead Internal staff Facility lease/depreciation One-time facility costs

Over the years I have developed the following as some rules of thumb for building a business case when precise statistics are not available:

n Hardware and software costs are specific to the infrastructure and requirements of the situation and are very difficult to ballpark. Be prepared to do extensive research in this area.

n Severance costs typically run in the neighborhood of 35% to 50% of annual salary. In my example I used 50%. You will also need to make an assumption as to the number or people at each level who will receive severance.

n Recruiting costs are broken down by different organizational levels and are assumed to be 5% to 7% of the annual salary for each position.

n Training costs vary by position and skill level and are broken down the same way as recruiting costs.

Tip: There are five types of training you will need to budget for: developer, agent, supervisor, administrative, and support. Each has a specific time frame and different cost.

n Consultants certainly can play a valuable role in offering expertise. It is always wise to factor in some consulting, as well as determine what your internal costs are for labor.

Tip: Do not underestimate the amount of time that your internal staff will be required to dedicate to building your contact center from the ground up.

n One-time facility costs should be itemized by the cost of building the facility as well as the cost for furniture. One area that is most often overlooked is the price of each agent’s modular furniture. I always estimate between $5,000 and $6,000 per agent cubicle when developing a business case.

n Staffing costs are estimated by levels and include the ratio of agents to supervisors, supervisors to managers, managers to directors, and directors to vice presidents, as well as the assumptions of their annual salaries fully loaded with benefits.

n Relocation costs vary from company to company and from level to level.

n Maintenance is a function of both hardware and software, depending upon your technology, and can range anywhere from 10% to 25%. I typically use 18% for annual software maintenance and 15% for hardware maintenance.

n For overhead expenses, which include utilities, mail services, and other variable staff-related costs, I recommend using 20% of total salaries in your facility to calculate an annual figure.

n Facility depreciation costs are fairly straightforward, depending on the number of years your company or the Internal Revenue Service allows for the useful life of the facility. This is a straightforward calculation and your CFO is the best person to determine the number of years to use in your case.

Fixed and variable costs Moving along, the next important document within your business case is the “as is” fiscal budget (figure 3 on page 26). It’s time to get those profit and loss reports that are routinely sent to you on a monthly basis. The two important categories you’re looking for in these reports are average variable expenses and average fixed expenses.

Average variable expenses include rent or lease, repair and maintenance, telecommunications, and utilities; average fixed expenses include human resources broken down by level and title. As you look at figure 3, note that under average fixed expenses, human resources starts with administrative assistant and ends with the work-in-progress clerk. Next, the budget defines four regional areas within the company because its P&L reports are also structured by region. Salaries are listed the same way.

Forecast your “as is” budget for five to seven years, taking into account increases in average variable expenses (like increases in rent, lease, or utility costs) and average fixed expenses (salary increases). These increases should include business growth and new products or services you anticipate providing. The point is that it is critical to set a baseline for your business if you didn’t establish a contact center so that you can clearly demonstrate the need for building one.

Logically, the next item that follows, figure 4 on page 26, is the “to be” budget summary, which differs from the “as is” fiscal budget because of the capital expenditures required to develop and build the facility. The “to be” budget includes the following items:

Project Costs Operating Costs Hardware/software Staff Recruiting Relocation Training Maintenance Consultants Overhead Internal staff Lease/depreciation Real estate One-time facility costs

The detail that feeds the “to be” budget summary is the detailed or line item proposed “to be” fiscal budget (figure 5 on page 28). Here is where the rubber meets the road. This balance sheet details each of the categories outlined in the budget summary by month for each fiscal year. Your team of people, process, technology, and facilities experts should be responsible for developing and providing sanity to the detail budget.

Supporting cast The “to be” proposed budget is supported in turn by several appendices that I will explain briefly. They are the costs of technology (figure 6, page 29), training (figure 7, page 29), one-time facility building (figure 8, right), and staffing (figure 9, right).

Technology costs are generally calculated by defining the required technologies by type, vendor, cost, and average cost per agent, and spreading the numbers across a monthly time line.

Tip: Always demand that vendors tell you the exact fees for hardware, software, installation, integration, maintenance, and training, and specify warranty periods.

Remember to throw in taxes. Understand the concept of chunky capital, or the critical point at which adding another unit to technology significantly increases your capital requirements.

By demanding these details, it is much easier to negotiate with vendors who tend to hide or lump costs together. It will also position you to build next year’s operating budget by defining maintenance costs and warranty periods. I always include a contingency buffer in the technology costs of between 10% and 15% to allow for surprises or forgotten items. Usually something surfaces regarding technology that wasn’t planned for or couldn’t be foreseen until the project was well under way.

Areas to watch when building your training costs appendix are the total amount of training required per agent, the number of training days per week, and the number of training hours per day. From here it is a simple calculation to determine your training costs. I generally use between $125 and $150 an hour for an instructor to train up to 10 agents at a time. If you require more agents to be trained simultaneously, just extrapolate these numbers to determine the number of trainers and corresponding cost.

One-time facility costs should be listed in another support appendix. It should include the total square footage, building cost per square foot, furniture cost per agent, rent or lease price per square foot, any improvement allowance, and total number of years of the lease or depreciation. Some companies have a charge-back fee from their real estate division.

Just as with residential real estate, prices vary according to the location and grade of commercial property. Your real estate department should guide you in developing appropriate projections. Changing your assumptions about your one-time facility costs can help you vary your scenarios.

The appendix on staffing costs is the last important document necessary to support your business case. It is a reflection of the process and personnel work you completed earlier. It will show the results of the traffic engineering you completed to determine the number of calls, the type of work on and off the phone that your agents require, their percentage of availability every day, and allowances for training, projects, vacation, and sick time.

Important attributes to document are the positions, number of people required in each phase, and costs per year, plus the assumptions made to determine these numbers. This one appendix feeds all the other documents in the business case.