During the life of any project, there is a point where the logic of the project is challenged. Successfully passing this point (or gate) is a signal for going onto the next step in the process. This step is called feasibility analysis.

Although important as the feasibility analysis step is, it is fraught with uncertainty as the data gathered to make decisions is usually approximated and quite preliminary. Engineers in particular used to refer to this point as the “back of an envelope” check. By analogy, accountants will utilize a model in the form of a trial balance before committing the numbers to public scrutiny.

As apparent as this seems, the step is repeatedly ignored or done in a peripheral manner. Skipping this step can adversely affect the probability of success of the overall project. The risk of this exclusion by telling is shown in the story of the Smart Bottle project at Children’s Hospital in Boston (CHB).

I was a consultant to the technology transfer office at CHB. One project they had underway before I arrived was a “bottle” that enabled feeding for certain neonates whose ability to breathe and suck fluids simultaneously (something “mature” systems can do) was compromised. Because of this condition, they were at risk of malnutrition or apnea. The current practice was to have a nurse cajole the child into doing both. The technology solution was a “smart bottle” that was a complex solution of pumps, valves, and computers. It worked, but its cost was about $5,000 per bottle and took over a million dollars to develop. The floor nurse who did the manual feeding had an incremental cost of $100. Had they done a feasibility check, they might have seen that the final product was 50 times more expensive than the current solution and likely more than many customers could afford.

Classical Perspective

In most feasibility analyses, there is a broad set of factors embraced in the term TELOS. The components are Technical, Economic, Legal, Operational, and Scheduling (capacity). I believe the categories fall into three areas. They include:

• Are they ready? Are there customers with identified needs and do we have the product (or services) and features at a cost that will attract their purchase?
• Are we ready? Do we have the secured technology, product, people, and information to supply those customer needs (and wants)?
• What happens if neither of those two conditions are met?

In preparation for this writing of this chapter, the model was exercised in several settings. In addition to providing a go/no-go option, it revealed the need for a third set of alternatives, entitled Hold and Abandon. More on that follows.

Figure 5-1 shows the model for feasibility analysis.

The Elements

There are six broad categories of the elements embraced that you must take into consideration during feasibility analysis. They can be broadly categorized as follows:

• Economic considerations
• Technical considerations
• Operational considerations
• Risks considerations
• Legal considerations
• Strategic considerations

When should you do a feasibility analysis? Although there is no specific agreement, it is clear that is should be done before major funds and other resources are committed.

Economic Considerations

Economic considerations rise to a high priority in this analysis. The category reveals the underlying cost models that are based on Bill of Materials roll ups in the case of tangible products and, in the case of services, Work Flow Models. They are certainly estimates but even as first order checks they help identify the feasibility of going ahead.

Materials considerations are usually bracketed by low and higher quantities. In established organizations, models of Standard Costs help normalize the accuracy of the estimates. Labor components also benefit from Standard Cost elements. In this modern world, the traditional make/buy considerations are highlighted as many products are outsourced globally.

There are also multiple external economic considerations such as the cost of money, Return on Investment (ROI) calculations, and of course the availability of capital as defined on the balance sheet or through the external capacity to borrow or raise capital through equity offerings. ROI is a simple calculation of gains realized by an investment. The formula is:

Beyond showing what gains are made from a particular investment, ROI allows you to compare possible returns between investments.

In combination, these considerations gate the decisions to go forward with the project. You need to consider capital expenditures, referred to as CAPEX, early as they usually have the additional component of requiring long lead items. An example is the need to acquire plant capacity and large manufacturing (or handling) equipment.

Money alone is not the final arbiter for testing feasibility. Market considerations, technical obsolescence, and aging plants and equipment are also combined to help rationalize the commitment to finance a project.

Technical Considerations

Of all issues confronting the progress of new projects, the dynamics of technological contributions seem most intriguing. Today, the rate of change of technological adoption is faster than any historical benchmarks before. Product lifecycles that were measured in yearly time constants are now presented in metrics measured in months. Enabling tools and processes are now so readily available. A classic example is rapid prototyping of parts. Historically, creating a physical prototype required months of drawings, and elaborate hand-crafted machining of metals and plastics. Today, a rapid prototyping machine directly converts a 3D AutoCAD (or SolidWorks) level rendering into parts in minutes. Even more significant is that the machines that accomplish this have seen an order of magnitude reduction in cost. Machines that cost $100,000 are now offered at levels of $1,000 and can sit on a desktop. This means that it is possible to create a working model of an idea or product in almost real time. Rather than wait months for a customer’s reaction, a working model can be presented to them almost at inception. Even the tools that sketch out the part cans render encoded 3D renderings in almost real time (under the trade names of AutoCAD, SolidWorks, and so on)

An analogous ability to rapidly present ideas also exists in the electrical and chemical (materials) domains. Electrical circuits and chemical processes can be simulated on computers and results can be “tried” before expensive (and time-consuming) capital expenditure is made. A new class of “designer” materials can be formulated with specific functions. If all this weren’t daunting enough, the global competitive environment has offered manufacturers the capacity to produce parts quickly. Turnarounds of days for parts from China are commonplace. The rate of change presents new challenges to markets and product development in that the changes can occur before the economic benefits of the product lifecycle occur.

Concurrent to advances in technology come vulnerabilities to the issues of infringement of intellectual property protection, as safeguarding of ideas has emerged. In their inception, patent laws were established to protect the fragility of startups as a platform for realizing the value of ideas for a period of 20 years. They provided a monopoly that protected such companies for the inventions. This model has been significantly challenged by emerging powers like China and India, where the business cultures disregard these laws. This again seems to be changing as those powerful countries emerge into the world stage. They are now trying to form their own basis for IP protection and are launching national initiatives to catch up.

Operational Considerations

The operational readiness of an organization to embark on new projects centers on the current structure’s capacity to absorb the requirements of the new ventures. They fall into two broad categories— plant/equipment and human resources. In common they are both “long-lead” items and require months, if not years, for a company to acquire and absorb. Operational issues include the capacity of the physical plant, equipment, people, and financial balance sheets to support the proposed project(s).

An example of operational feasibility might involve having enough computer capacity to support more customers, additional online features, or simply maintain an appropriate speed of response to operational needs.

As early as the feasibility analysis is, it is common to explore future issues in a time-based format. A common tool is the Gantt chart (Figure 5-2). It was invented in 1910 by Henry Gantt. It sets out tasks to be accomplished in an orderly and time-scheduled manner. It also identifies interdependencies of decisions and places points where feedback is required. In addition to being a scheduling device, it also allows you to track expenses and salaries required during a project. The personal computer added significantly to the usefulness of the tool as it allowed more complex models to be processed more readily. Microsoft has offered a program called Project in its Office Suite that simplifies the development of Gantt charts. There are also alternative tools available to complete these tasks.

Although the project management usefulness of these charts in project management is unquestioned, it performs an important set of tasks for commercial success by requiring the identification and quantification of long- lead items. These generally fall into the category of capital expenditures (CAPEX), which have magnitude and exhibit long-time constants for delivery. Examples include purchasing buildings, hiring people, and buying machine tools. It is important to the overall success of the project that commitments are made for design and implementation even before the project is completely authorized.

Risk: Considerations

Managing risks is an essential element of any modern commercial enterprise. Delineating risks (and offering mitigation alternatives) are markers for a well-presented business plan. At minimum, they suggest that management of the project risks have been thought through. It is also understood that mitigation alternatives that are probabilistic in nature might not work.

In certain financial domains, for example, there is a family of reporting risks. Classic is the Securities and Exchange Commission (SEC), which requires a chapter of any offering prospectus to identify primary risks. In industries where safety is paramount, there is also a requirement of delineating applied risk factors. Accounting firms in their auditing practices identify risk factors in qualifying a business’s ability to be an “ongoing entity.” Medical and aviation are easily identified as areas where the delineated risk issues are important.

Some risks are mitigated by third parties. An example is casualty loss due to fire or natural events (such as floods). Insurance companies that base risk coverage on actuarial models deal with risks as a monetary transaction based on assessed premiums. Other risk categories, such as creditworthiness of customer contracts, are managed by “good’ business practices. Dun & Bradstreet, the financial services company, offers courses in determining creditworthiness of potential creditors. Property mortgage issuers are normally looking at credit histories of the potential mortgagees, and they also utilize technical inspections of the property to their assessment process.

Legal Risk

There are specific risks that fall into this category. Let’s look at several examples.

Contractual. Most commercial transactions are bound by common law contractual instruments. Sales, for example, are normally are captured in standard legal instruments but are bound by the rules of the Uniform Commercial Code. These terms are sometimes printed directly on the back of the purchase order form or transaction slip. Risks are carefully bound but are challenged by non-delivery or other breach terms.

Also in this category are internal contracts such as employment and non-compete issues. Although routine in nature, certain nuances like severance clauses of employment contracts are areas of careful negotiation. At higher levels of employment, compensation committees of the board of directors set guidelines for these discussions.

Intellectual Property (IP) . This area of legal risk is also one of strategic importance. Not only is the crafting of patent and copyright instruments the domain of legal discipline, but the maintenance and defense against the infringement of the IP becomes a key element of external risk of the project. Sometimes the issues in this category challenge the branding image of the product protected by copyright.

Governance. Boards of directors in modern companies have clear fiduciary responsibilities to the shareholders and owners of the company. With the advent of the Sarbanes-Oxley Act and its attention to the roles of the individual board members, it became one more area of litigious activity. Prior to the law, board members could hide behind “not knowing” the issues. Classic was the Enron corporation case where illegal off-balance sheet transactions were used to hide losses and non-performing assets. This defense of “not knowing” is no longer tenable. Broad issues of corporate ethics and integrity also flow through the governance model of the company. Director insurances and internal by law indemnification barriers tend to mitigate the risks, but shareholder suits are still common.

Financial: Risk

Of all areas of risk, managing financial risk rises to the top of any list. Although projects look at several possible channels for this vulnerability, weakness in the balance sheet that results in cash deficiencies tend to trigger maximum exposure to failure. It is likened to an aircraft that exhibits fuel exhaustion. The negative glide slope of descent without the engine’s thrust creates a predictable, although not always successful, landing. Some of the more prevalent forms of financial risk include:

Cash Planning. This can be accomplished with sufficient accuracy in the first years of a project. Allowances for unplanned fluctuations can be mitigated by creating cash reserves early in the company or project history. Acquiring capital infusions from traditional sources such as angel or venture capital firms is a good alternative but can be delayed due the internal decision processes of the source. Exceeding the covenants of bank loans can limit the availability of cash. Slow payments or weak credit from receivables sources can negatively impact the flow of cash in a company. Careless or even unplanned expenditures such as overtime or FedEx expenses (instead of less costly alternatives) can all contribute to insufficient cash.

It’s argued that financial disciplines should be applied early in a project or a company’s existence. Clearly, early new organizations can’t easily prioritize the need for a formal accounting or financial system. An adequate alternative is to engage a part-time Chief Financial Officer (CFO) to support the accounting functions but also to participate in external financial decisions such as negotiating investment capital infusions and CAPEX deliberations.

Commercial and Market Risk

The core of commercial risk evolves from the multiple elements that affect the sales transaction. Clearly, marketing influences such as branding, packaging, design, pricing, and distribution methods enter into this. Each contains an element of risk. Competitive pressures impact the actual purchasing decision. It is an oversimplification to just refer to these elements as competition. It is more complex than that.

In the 1990s, the Miller Heiman company released a concept called Strategic Selling. Central to the concept was the identification of the multiple purchasing influences flowing through a central spokesperson such as a buyer or a procurement specialist, called the Technical Buyer, the Economic Buyer, and many others. Each “type” has a differing set of objectives in the purchasing discussion. Utilizing a “blue sheet” format, each influence was identified and then a specific strategy for confronting them was formulated. Many times individual influences were in conflict and thus needed the selling sources to both delineate and manage them. Through processes like this, the rate of successful closures increases. Of importance is the fact that any buying influence can negate the closure of the sale. Managing that process is the domain of the sales management function.

Beyond examples like the Miller Heiman, which can be implemented through proper organizational resource allocation and training, there exists a range of risks that are beyond the corporate models. Examples include new breakthrough technologies, emergence of new competitors, regulatory mandate changes, and so on. Certainly it is within the scope of management to be aware of the possibilities that can occur (and perhaps offer contingency plans to offset these risks).

Regulatory Risks

Beyond rules imposed on basic industries, the impact of regulatory change becomes even more significant. Five- to ten-year FDA approvals cycles for pharmaceuticals and the financial impact of these processes are almost mind numbing and certainly stand squarely in the face of rapid change and innovation. At a minimum, that leaves significant and disruptive change to the domain of large companies.

Regulatory issues pervade every aspect of modern business and you must pay attention to them. Whether it is OSHA governing workplace safety or Sarbanes-Oxley setting standards for board governance issues, each contains uncertainty of change, and thus risk. Once again it becomes the domain of management to sort that out and to establish the priority of those that will impact future performance. It is interesting to note that when the Sarbanes-Oxley Act was cast, it actually provided for the formality of risk assessment and mitigation to the board.

Many regulatory aspects are complex and seem to be in a constant flux of change. There are a group of specialists in each area who serve as consultants to industry. They offer up-to-date information, as well as broad solutions gleaned from multiple clients.

We live in a world of global competition. Regulatory issues are not consistent and may even be in conflict. An example is the automotive industry where high-end cars like Mercedes and BMW couldn’t be imported into the United States because they didn’t meet basic safety regulations like headlight, bumper, and windshields specifications. This discontinuity also invites opportunity. The U.S. Food and Drug Administration is the most stringent drug regulatory agency in the world. Some companies thus develop early market drugs in other places in the world. The United States is the largest market for most products, so eventually these differences tend to normalize about its standards.

Risks: A Summary

Risk factors are inherent in all aspects of commerce and commercialization. Offsetting these risks at minimum entails weighing the rewards or the larger upside potential. This potential is usually measured by the return on equity (ROE) of funds invested in the equity of the organization. Multiples of 10 are usually the primary thresholds to professional investors like venture capital fund managers.

Agreeing that because a landscape of risk categories confronts any ongoing businesses, it becomes incumbent on the managing forces of company managers to identify those that are relevant and present a plan of mitigation of those risks to potential investors, employees, and customers as a condition of their interest, involvement, and participation.

Additional Elements: Outcomes of the Feasibility Analysis

Successful feasibility analysis occurs early in a project. Its purpose is to flag appropriate projects to invest additional resources on the path to commercialization. It is a crisp decision point made under the uncertainty of less than complete data. It accomplishes additional benefits, discussed next.

Rejection

Feasibility analysis allows you to terminate a project cleanly in comparison to the stated vision or project’s purpose. This allows you to conserve funds and avoid market mistakes. Most important is that you can do this in an orderly and disciplined manner. Feasibility analysis helps you to avoid or at least diminish the use of subjective and non-factual information. As straightforward as this step is, it still becomes a subjective test of management strength to implement.

Hold

In a perfect world, projects would either be a go or no-go result of the feasibility analysis effort. In reality there is a significant amount of ambiguity, some of which can be quantified. For example, a project may contain an electronic circuit comprised of multiple components. In order for the overall product to be considered viable, it requires that the circuit board meet certain cost objectives. In this case, certain components are simply too expensive. It is known that the cost of them is anticipated to drop. It is therefore quite appropriate to put the project on “hold” until that cost objective can be achieved.

All this carries a responsibility, which is to capture the legacy of information that has been generated in the process. Projects that make it to “hold” have met a variety of gates (and expenses) to get to that place. “Hold” is not a rejection step, but rather contains a catalog of projects that are waiting for a specific set of outside conditions to change before they can move forward. The cataloging process has to be more than anecdotal and calls for a librarian’s discipline of catalogs and flags.

An example is a project that contains electronic components that are new or evolving. This makes them expensive and may move a feasible project to one that is not financially feasible. In this example, the price of the electronic components must be monitored on a periodic basis to observe when they drop to a point it would allow the project to be reconsidered. Putting the project into a “hold” position with a marker to track component prices would be an excellent use of the “hold” position.

In some cases, “hold” allows broad outside conditions such as regulatory, market, or even modifications of the corporate vision to change in a manner that sets up a more favorable environment for a project to move forward. Over time, it becomes statistical in that it’s affected by the amount of projects a company allows and thus has the capacity to support. The yield of projects leaving the “hold” area and, combined with the yield of the Opportunity Recognition phase, measures how robust the pipeline for the new projects is. In the end, the corporate entity relies on a stream of new projects to be able to compete in the area of new products and services. Shorter product (and service) lifecycles and global competition make the management of the pipeline dynamics more important than it has been historically.

Summary

Feasibility analysis is not a new discipline. The early craftsmen, marketers, and engineers used primitive indicators such as notes on the back of envelope and other limited tools to help decide whether to move a project ahead. Probably intuition played an important role. Today, the stakes are much higher. The rate of change in technology, the element of global competition and, of course, the Internet leaves less room for error and demands a faster response. The conventional TELOS approach seems to have added a dimension of orderly response to it, but is still falling short of today’s requirements.

In this chapter I proposed that a methodology that not only looks at a) how ready we are and b) how ready and available the markets (and customers) are but also c) provides for an orderly rejection of projects and d) controls the suspension (“hold”) of projects is required. The penalty of not confronting these issues results in loss of markets (and following revenue for growth), and has the potential to squander precious resources of time, people, capital, and company reputation.

Once you have decided to move the project forward, questions how to strategically move forward to commercial reality become the next gate or threshold to overcome.