Momentum case: A critical ingredient for measuring your improvements
What Momentum Cases are, why they are important, what it takes to construct them well and how best to use them
Introduction
It is really hard to measure improvements in your business if you don’t know what your starting point is.
Knowing a starting point is also important because you can then know whether the improvements you’ve been able to achieve a significant or not. For example, a $10 million dollar cost saving off a $100 million base spend is significant. The same $10 million dollar saving off a base of $1 billion dollars of spend is not as impressive.
But establishing your starting point may not be as straightforward as it might seem.
Let’s consider an example here: You are a chemicals plant that produces 10 million tons of product. However, production rate is expected to come down, because some of your existing customers are going to a competitor. It is unclear whether you will be able to replace them with new customers.
What makes matters even more complicated is that there is a shutdown coming up two years from now. In the year when the shut happens, your production capacity will temporarily decrease by 35%. But after the shut is completed, your capacity will increase by 3% in the years that follow (slowing coming down to zero towards the next shutdown in the cycle).
That’s just the production part.
Let’s also think about financials. You expect that your revenues will grow by 2% per year due to inflation allowances built in to most of your contracts. However, you also expect that some of your costs will increase due to that same inflation as well. But inflation is going to hit your costs differently, depending on which part of the cost base is affect - e.g., higher impact on consumables, lower on energy, and something in-between on labor.
So if you tried to answer the question of what your starting point was for measuring business improvements, what would you answer?
Enter the Momentum Case
Momentum Case is something that can help you articulate your starting point in complicated situations like the one described above. It tries to answer the question of where your business would end up if you didn’t undertake any major interventions, and let the business run as it would more or less by itself.
The first thing you’d need to determine when estimating your momentum case is the period of measurement. Because the changes we described above vary over time, their impact on your base level of performance will also vary over time. And the only way to stabilise the estimate is to freeze your time period.
Let’s say you want to estimate your improvements over the course of the next 5 years. That could be a good period of measurement and for establishing a Momentum Case of where the business would end up on autopilot.
So what would you do next?
Begin by extrapolating the changes you already know about and expect forward into the 5-year horizon:
Revenue / Production capacity: Calculate production volumes you can achieve taking into account both the upcoming shut and the increased production capacity following the shut (year by year)
Revenue / Demand: Assume you will lose 12% of volumes because of competition, and only be able to replenish 5% based on your historical success rate
Revenue / Resulting volumes sold: Take the minimum between production capacity and demand for each of the upcoming 5 years
Revenue / Price: Assume linear growth of 2% year over year due to inflation
Cost / Fixed: Apply inflation rates for each of the upcoming 5 years base on your estimated inflation drivers
Cost / Variable: Estimate what it would look like pre-inflation based on resulting volumes sold from above, and overlay expected inflation rates on top
Once you have done this exercise, you can summarise your results in one of two forms - either (i) in a year-by-year format, or (ii) as a sum total of the entire upcoming 5-year period. You will need to judge which format is more intuitive, easier to digest and better suits your context, but otherwise the numbers would of course be the same.
And that is how you can estimate your Momentum Case.
What do you do then?
Once you’ve gotten your Momentum Case, you can move forward more comfortably with measuring your upcoming business improvements.
For example, you can start applying known improvements to the relevant production, price or cost drivers over each of the 5 years, to see how your production and financial performance would look differently compared to the ‘do nothing’ scenario (aka Momentum Case). And if you have more than one improvement project, you can what they do when delivered in aggregate, and which ones give the most movement to your proverbial needle.
Momentum Case can also help you with preparing and assessing business cases for the various improvement projects that might be on the table. As is often the case, many potential improvements would require some investment. And knowing how that project would affect the existing production or financial ‘flight path’ of the business is a critical input for deciding whether the results are worth the investment.
By now you hopefully see all kinds of possibilities that having a robust and well-estimated Momentum Case enables you to have. The rest is up to you and your improvement teams in terms of stretching the Momentum Case and seeing what kinds of creative approaches can be used to generate the best set of improvement projects to move your business forward.