Double Bottom Line Business Case model (Bernardez)

What is the business of business? How can planners and investors anticipate the true chances of failure and success of a business idea? This article describes a rationale for developing successful new business based on a simple, sensible idea: the business of any business is to make its clients successful enough as to continue purchasing and recommending its products and services and continue to add value to all stakeholders. Using a double-bottom line, triple top line business case and a wealth creation flowchart, the author shows how to demonstrate measurable benefit as the core of a business proposition and engineer the creation and delivery of value based on a carefully designed client experience. This new technology, illustrated with examples of multiple business incubated at the Sonora Institute of Technology (ITSON) , combines Roger Kaufman’s Organizational Elements Model –OEM- with Dale Brethower’s and Geary Rummler’s Anatomy Of Performance –AOP- models in a simple, straightforward process and is supported by an extensive research bibliography.

Following Roger Kaufman’s Organizational Elements Methodology –OEM- (Kaufman, 2006), we start developing our double-bottom line business case by identifying three levels of results: we must first define and quantify the benefits of their project for the client, market and community (Mega level), then define products and services (Micro level) that our organization –and its allies in the value chain[1] and the business ecosystem[2]- must deliver to its clients in order produce those benefits for them and finally define how the organization will, in turn, capture a part of those benefits as revenues (Macro level), thus establishing a solid revenue stream for the new business.

In helping entrepreneurs and investors to plan new business at the “seed” stage or to define performance improvement projects for existing ones at the Sonora Institute of Technology (ITSON) business incubation program[3], we use a three-layered business case  tool.

To illustrate the methodology, we will use as an example an actual three-level, double bottom line business case we developed for a business intelligence center in Mexico.

Trans-Pacific Center –TPC- is a spinoff of the Sonora Institute of Technology that enables Sonoran companies to export to Asian and Pacific coast markets –included the West Coast of the United States- by providing market research and reports, professional assistance on export-import procedures, coordinating support from other specialized Sonoran centers –such as laboratories specialized in food and animal health testing to meet international standards- and –last but not least- by helping local businesses find international clients that are the “right match” to each exporting company’s competences and competitive advantage.

The TPC seeks not only to maximize each client company’s Macro-level results –revenues, profit, market positioning, market share- but also to produce positive Mega-level results, measured as benefits for the local communities –jobs, market growth, tax revenue -, as shown in Table 1, Mega “top line” section.

 Table 1: Double bottom-line business case (Bernardez, Presupuesto Mega, 2007)

By measuring the social and market impact of the Trans-Pacific business intelligence center over a five-year period, this three-level business case helps entrepreneurs make their case in order to obtain government and community support, attract angel investors, inspire staff and align all that the new organization produces and delivers with external, value-adding results.

The “top line” presents three different and related tiers:

A Mega “top line” –shown in Table 2-, reflects benefits and revenue generated by Trans Pacific business intelligence center to its clients, market and community in Sonora, Mexico: direct and indirect jobs created, direct and indirect jobs “ripple effect[4]” revenue for the local market, exports revenue for the local companies assisted by the TPC and tax revenue for government and community derived from TPC’s clients increased business.

Table 2: Mega “top line”

This “social” top line serves two critical purposes: it indicates, in the first place, whether TPC clients will be able to pay for TPC services, providing a realistic estimate of its actual “market size”, based not on “wishful thinking” or projecting generic demographics, but on the level of business to be generated by specific, targeted TPC clients’ thanks to TPC’s products and services.

Additionally, this “Mega” top line shows local investors –“profit” (such as angel or venture capital) or “nonprofit” (such as local and state government)- the specific return on their investment in the TPC project.

A Micro “top line” –shown in Table 3-, reflects the products and services that both Trans Pacific Center and its allies[5] plan to deliver to its clients in order to produce the impacts and benefits described in the previous Mega-level top line results tier.

 Table 3: Micro results “top line”

The Micro top line helps planners to define products and services as means to help clients achieve specific results –one of the key requirements for building a solid value proposition for the client- (Anderson, Narus, & van Rossum, March 2006).

Relating products and services targets shown in the Micro “top line” to client’s success and performance indicators –shown in the Mega “top line”- sets the basis for realistic, competitive bidding and pricing –because measuring our company’s products or services’ benefits in terms of clients’ specific results is critical to demonstrate the Return to our clients on their Investment in our products and services.

The Micro top line not only reflects products and services produced or delivered by TPC, but also those provided by allies, facilitating synergies, partnerships and alliances.

The Micro top line is expressed in product and services units –to be valued at the Macro “top line” level according to its ROI-based pricing[6]

 A Macro “top line” –shown in Table 4- calculates the benefits for each company –in this case Trans-Pacific Center (TPC)- of providing products and services to the customers and clients identified in the Mega “top line” part of the chart.

Table 4: Macro “top line”

Although most of these Macro-level benefits for TPC are monetized as revenues from products and services –or other forms of revenue such as licenses, franchise fees, copyrights, rent and other forms of intellectual, financial or structural capital rent – our Macro “top line” might include qualitative indicators of TLC’s benefits, such as market share, market share growth, returns on investment (ROI), equity (ROE) or assets (ROA), client satisfaction and others.

Finally, following the aggregated costs column, a double bottom-line –shown in Table 5- reflects the net Social result (Mega + Macro-Costs) and the net Business result (Macro-Costs), thus allowing us to calculate the Social Return on Investment (Social ROI) and the Conventional Return on Investment (Conventional ROI), determining the “break even” points for the organization and for its clients and market.

Table 5: Double bottom line

The relation between Mega results –benefits for the client and its clients’ clients, market and community- and these Macro results –benefits for our organization (in this case TPC)- reflect business long-term viability: if the Mega results –return to clients, market and community- are equal or below (≤) the Macro results –benefits for the organization- it is likely that we have a non-sustainable business proposition[7].

Macro results (organization’s ROI) are a function of Mega results (clients, clients’ clients, market and environment ROI)[8]

Conversely, a non-profit organization –such as TPC in this case- might find useful setting Macro-revenue goals that ensure it will be able to self-finance its continuing value adding to clients and community. In our example, TPC managers must “return to the drawing board” to improve their Macro results –either through increasing revenues or by increasing public funding –government or angel capital- based on its proven social ROI.

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[1] We combined Geary Rummler’s concept of “value creation chain” that with Kaufman’s OEM to clarify how products and services from different organizations better coordinate and synergize to effectively add value to clients, clients’ clients, investors and the market in general. We explain the basics of such methodology ahead in this article. A more thorough description can be found in Rummler’s two books (Rummler & Brache, Improving performance: how to manage the white space in the organization chart, 1995) and (Rummler, Serious performance consulting, 2004) as well as in Brethower’s Performance Analysis (Brethower, 2007), Maria Mallott’s Paradox of Organizational Change (Mallott, 2003), Adam Afuah’s Business Models (Afuah, 2004) and my last book, Capital Intelectual (Bernardez, Capital Intelectual: creacion de valor en la sociedad del conocimiento, 2008)

[2] A business ecosystem can be defined as a systemic integration of different organizations that support each other playing complementary roles in order to serve a market or community. (Iansiti & Levien, 2004). According to Bernardez, business ecosystems can –and must- be assessed as social capital and cooperatively engineered among multiple partnering organizations using this business case methodology and Geary Rummler’s and Dale Brethower’s Anatomy Of Performance –AOP- design tools . (Bernardez, Capital Intelectual: creacion de valor en la sociedad del conocimiento, 2008)

[3] More information about this unique PhD program at the Sonora Institute of Technology (ITSON) that graduates business instead of individuals can be found at www.piionline.org and in (ITSON - Sonora Institute of Technology, 2007) and (Rodriguez Villanueva & Guerra-Lopez, 2005)

[4] Based on previous research, we estimate “ripple effect” ratios on the local economy as a function of direct and indirect jobs’ spending and of spending (and revenue) done by other business supplying the new ventures.

[5] Such as animal and food health labs and other providers of specific services for TPC –as tech support, languages, foreign service, etc.-

[6] ROI-based pricing defines price as a function of the Return on Investment for the client shown by the relation Measurable Benefit for the Client (revenues, costs reduction) –Mega level- minus production and delivery Costs minus Profit Margin for the company. A ROI-based pricing revenue model helps TPC to focus in maximizing the actual value delivered as the key to maximize its own long-term (five year) revenue growth and profitability. (Bernardez, Tecnologia del desempeño humano, 2006) (Afuah, 2004)

[7] Imagine factoring the costs of healthcare created by a tobacco company to its clients and consumers, in terms of emphysema, cancer treatment, chronic illness and loss of quality of life –beside of life itself-. All those costs –ignored by conventional business cases- should be reflected in our Mega “top line” as losses or social costs, warning investors about the level of risk of such a business. Sooner or later, Mega (client) losses become Macro (business) losses, in the form of class action suits, compensations for damages, higher insurance. Take a look a the cases of tobacco, construction (asbestos), oil drilling (spillovers) and you might get a glimpse of what conventional business cases ignore at investors’ own peril.

[8] That “nested”, reciprocal ROI at the core of value creation is the “good” we talk about when we talk about “doing well by doing good”. The same Adam Smith’s “self-interest” principle that guides “creative destruction” at the macroeconomic level must guide the “double bottom line” at the microeconomic level. Reciprocal ROIs operate as a compass to survive.