Feasibility Study – A Step-by-Step Guide

What is a Feasibility Study?

A feasibility study serves two purposes. First, you can determine if a single project idea is technically, financially and operationally feasible. Second, you can use the study to select the project that best offers overall value. You do this by comparing the results of different project ideas. Feasibility studies are an essential part of an organisation’s capital budgeting process.

What Initiates a Feasibility Study?

We do a feasibility study very early in the life of a proposed project. This is the pre-project phase – the project only exists as an idea. Usually, an executive team member, or a senior manager, requests a feasibility study to assist with their decision making. This request could be to address a current business problem, or it could flow directly from the organisation’s strategic planning process.

In many organisations, the executive team hold a formal strategic planning session at least once a year. During this session the executive team review current strategy, strengths, weaknesses, opportunities and threats. After this review, they formulate new strategies to create and deliver value for customers, shareholders and other stakeholders.

Strategies are achieved by setting goals and goals are achieved by converting them into one or more strategic objectives. Each strategic objective is achieved through one or more projects. A project is, therefore, a system for creating and delivering value. It is the creation of value that determines a project’s success.

Unfortunately organisations do not have unlimited financial resources. As a result, the executive management’s prime responsibility is to invest in those projects that deliver the most value. Capital budgeting is the process of deciding which projects to invest in, and then making the necessary funds available . Executives need information to make investment decisions and they get this information from two very important pre-project activities: feasibility studies and business cases.

Who Conducts a Feasibility Study?

A feasibility study requires competencies in business analysis, project management and technical report writing. Some organisations employ in-house business analysts to do the study. In other organisations someone from the project department may assume that responsibility. The study may also be outsourced if skills are not available in-house.

While not all projects require a full feasibility study, all projects must have a business case. The feasibility study recommends the project that is technically, financially and operationally feasible, and which provides the greatest value. The business case justifies the investment in the proposed project.

How Accurate is a Feasibility Study?

Because you do a feasibility study very early in the life of the project, you may not have all the detailed data or information you need. As a result, your estimates of cost and time are not going to be that accurate.

However, because the objective of a feasibility study is only to give the decision makers’ a rough idea of whether a project is worth pursuing or not, a high degree of accuracy is really not that important at this stage. The idea is to get a ‘ball park’ figure of how much the project could cost, and how long it could take to complete.

Typically feasibility studies are based on rough order of magnitude (ROM) estimates. This type of estimate has an accuracy range of -25% to + 75%. For example, a $100 000 project could cost between $75 000 and $175 000 using ROM estimates.

Business cases typically have an accuracy range of -10% to +25%. While at the project budget control level, we aim for an accuracy of +/- 5%. This means that our project should cost between $95000 to $105000 when it is completed.

The Feasibility Study Process

The feasibility study is a project comprising seven steps. Each step produces one or more deliverables that provide the input into the following step.

• Determine the requirements of the study.
• Determine the objectives, scope and approach.
• Conduct a current state ‘As-Is’ assessment.
• Identify potential options.
• Determine the feasibility of each option.
• Document the results of the study, recommend the best option, and
• Obtain approval to develop the business case for the recommended option.

Step 1: Determine the Requirements of the Study

The first step is to determine the requirements of the study. You need to understand why you are doing the study in the first place. The feasibility study assesses the technical, operational and financial feasibility of a project idea. You will have to determine requirements for each of the key areas of the study. These include technical specifications, financial measures and targets, and operational conditions and constraints. The deliverable at the end of this phase of the study is a document detailing verified business requirements, verified stakeholder requirements and identified stakeholder issues.

According to the Business Analysis Body of Knowledge (BABOK 2.0), a requirement is essentially a condition or capability that a proposed solution must possess in order to meet both business and stakeholders’ needs. You develop requirements by eliciting information from key stakeholders to identify and understand exactly what their needs are, and what they expect from the project. However, not all requirements deliver the same value to the organization, or to individual stakeholders, and as a result you will have to prioritize the requirements in some way. You could, for example, prioritize them in terms of urgency, risk, cost to deliver, benefits produced, time to deliver, or resource constraints. All stakeholders must understand how how you have prioritised requirements, and why you have chosen that particular method.

Step 2. Determine Objectives Scope and Approach

After identifying study requirements, you now determine the objectives, scope, and approach you intend to follow in the study. This is the planning phase of the feasibility study project. You assemble your study team, and plan the project using traditional project management tools and techniques. You establish specific, measurable objectives the recommended solution must meet. I use the SMARTWAY approach when crafting objectives. SMARTWAY is an acronym which stands for specific, measurable, achievable, realistic, time-related, worthwhile, assignable/accountable and yield. A well-written objective is specific with at least one measurable outcome, it is achievable, realistic, and has a deadline for its attainment. It is worth the investment in time, effort, and money. An individual is accountable for achieving the objective, and finally, it yields the desired result.

You define the scope of work and the activities that will take place during the study. This is your action plan containing a work breakdown structure, work packages, activities and tasks, assumptions, dependencies, constraints, and milestones. Next you develop your budget by estimating duration and cost for each activity using definitive bottom-up estimates.

After deciding on the methodology and approach you intend to follow during the study, you develop or adapt the template you are going to use to write the final feasibility study report. The template serves as a guide during the study. Finally, you review your plan with the executive sponsor to validate objectives, scope and approach. After your plan and budget is approved, you can begin the actual feasibility study work.

Step 3. Conduct Current State ‘As-Is’ Analysis

In this phase of the feasibility study project you, together with your study team, conduct an internal analysis of the current, or ‘as-is’, situation that exists in the organization.

First you start off by reviewing the organization’s purpose, vision, mission, strategy, goals, objectives, targets and measures. Second, you define the business area impacted by the study; identify the physical location of the business unit involved; Identify the major types of business information required and where this information is located.

Then you identify and document current infrastructure, operating technology, and information technology systems. After this you list and describe each of the existing business processes relevant to the study, and describe the current business environment within which the organization operates. You analyse the market, competition, products and services. in addition, you also identify any emerging technologies or market trends that may have an impact on the study. Finally, you identify any regulatory or legislative requirements that any proposed solution must meet.

At the end of this phase you will have a comprehensive set of documents and a complete understanding of the current state of the organization, including strengths, weaknesses, opportunities and threats.

Step 4: Identify Potential Solution Options

This is the creative idea generation stage where you identify all the potential options that are capable of meeting the study requirements identified in Step 1.

One option you should always include in the list is the option of ‘doing nothing.’ At the end of the ideation stage you should have a number of possible solution options which you now analyse to determine if they are feasible.

Step 5: Determine Feasibility of Each Option

No two feasibility studies are exactly the same, and there is no prescribed format for the study. The content of the study and format of the report is your choice. There are however, certain elements one would expect to see in each study. In the past, the absolute minimum would be to assess the technological, economic and operational feasibility of each identified option. Today, other elements such environmental impact, sustainability, risk and legal and regulatory compliance are essential inclusions in any feasibility study.

5.1 Technical Feasibility

Start off by evaluating the proposed solution’s technical feasibility first, because if it fails on this point, there is absolutely no sense in considering the option.

The purpose of conducting a technical feasibility is to answer the following questions:

• “Can we do it technically?”
• “Can we turn the proposed solution into physical reality?”
• “Is the technology appropriate for our needs?”
• “Is the proposed technology compatible with our existing technology?”
• “Is the technical risk worth it?”

An organisations risk appetite strongly influences the choice of technology. Leading edge technology is more risky than tried-and-tested technology. If your organization has a low risk appetite, a solution using leading edge technology will probably not be acceptable.

You compare the technical specifications and requirements of both the minimal acceptable solution and the optimal desired solution, with the specifications and technical features of each of the proposed solutions.

Because the technical characteristics of the various options often differ quite considerably, it may be difficult to make direct comparisons between the alternatives. Subject matter experts and technical specialists may also have contrasting views, and so your technical evaluation will be based on assessing a combination of both objective, and subjective criteria. Best practice is to document your technical evaluations in the form of a matrix, or table that allows visual comparison between alternatives.

5.2 Economic Feasibility

After the technical evaluation, you now assess the economic impact of each option . You want to determine if the benefits to be gained from the proposed solution will exceed the cost of implementing the solution. Basically you want to find out if the proposed project will create value. This is possibly the most difficult part of the study because the economic feasibility is based on estimates and forecasts. The study addresses the following questions:

• “Can we afford to do it financially?”
• “Is the financial risk worth it?”
• “Will the proposed solution deliver the value we require?”
• “Will this project make money?”

All of the tools and techniques you can use to evaluate economic feasibility depend on an estimate, or forecast of some sort. You will have to estimate production, sales, revenues and expenses over a specified period of time, known as the ‘relevant range’.

There are two basic approaches you can use to estimate and forecast demand and revenues. The first approach uses qualitative estimates, and the second uses quantitative techniques.

Qualitative estimating

When you use qualitative estimating techniques you are basing your forecasts on emotion, feelings and opinions instead of numbers. Typical qualitative estimating methods include: subject matter experts, executive judgment, market surveys, panel consensus and analogous estimates. Qualitative estimates are quick and easy, but they are risky because they are subjective and are prone to bias. You can reduce this risk, subjectivity and bias, by converting them into more objective data. Techniques such as Monte Carlo analysis, rating schemes and three-point weighted average can be applied for this purpose.

Quantitative estimating

Quantitative estimating techniques are more objective because they are number-driven, but they are also more expensive and time-consuming to use. There are two basic types of qualitative models: time-series and causal. Both types use historical data gathered over a period of time to identify trends and seasonal, or cyclical, patterns. You use the information gained from this analysis to forecast quantities revenues and expenses into the future. Typical time-series models include moving averages, weighted moving averages and exponential smoothing. Causal models include correlation and regression analysis among others.

As I mentioned previously in this post, forecasts at the feasibility study stage, are by their very nature, high-level and therefore are not that accurate. However, it is important to remember that the objective is to make decisions between alternatives, and so the focus is on comparing one alternative with another. Absolute accuracy is not that important. If you apply the same estimating techniques to all the options, you can make an objective assessment even though the estimate may not be all that accurate. If you use the same measures for each proposed solution, you can compare the different options equally.

Quantitative Techniques

Economic feasibility typically includes determining some or all of the following:

• Cost-Benefit Analysis (CBA),
• Benefit-Cost Ratio (BCR),
• Break even Analysis (BE),
• Payback Period (PBP),
• Net Present Value (NPV),
• Internal Rate of Return (IRR), and
• Return on Investment (ROI).

You calculate the results, analyse and compare your findings, and identify the most economically viable option based on objective comparison. Documenting the results of your analysis in the form of a matrix is one of the best ways to present the data for easy comparison.

If the project must meet specific targets, you include these targets in the matrix. You can immediately see which options have met or exceeded the targets, and which have not.

5.3 Operational Feasibility

At this stage of the study you know which options are technically feasible, and which of those options are economically feasible. You now determine if the option can be implemented operationally within your organisation. You evaluate each proposed solution in terms of its operational and social implications. When conducting operational feasibility, you are primarily concerned with getting answers to the following questions:

• “Can we implement the option operationally in the organization?”
• “What impact will the proposed solution have on established working practices and processes?”
• “What impact, if any, will the proposed solution have on existing employees?”
• “What changes will we have to make in order to implement the proposed solution?”

You investigate how easy, or how difficult it will be to integrate the proposed solution into current operations. What changes, if any, you will have to make to current processes and systems, and what resistance can you expect from people in the organisation.

People tend to resist change. If the change is significant, if there is too much disruption to the way people do things, or if there is going to be a negative impact on workers and employees, you can expect significant resistance to your recommendation. The best way to overcome resistance is to plan for it. You develop a change-management plan, which includes actions to manage the transition as the project is implemented.

5.4 Environmental Impact and Sustainability

In addition to assessing technical, economic and operational feasibility, you also assess each option in terms of its environmental impact and sustainability. You determine what impact the project will have on the environment and on natural resources. You also determine to what extent the project will use sustainable materials.

Projects, by their very nature, bring about changes that may have unanticipated or unwanted consequences. You carefully evaluate the impact each option will have on the environment. Environmental awareness has become a key project management principle, and the proposed solution must not have a negative impact economically, socially and environmentally.

5.5 Legal and Regulatory Compliance

Any solution you propose must comply with applicable local and national laws and regulations. This includes health and safety.

5.6 Risk Assessment

Finally, you need conduct a high-level qualitative risk assessment for each proposed solution. You identify and list any significant risks associated with each alternative. A risk is any event that may negatively or positively affect the ability of the solution to meet the business need. A negative risk is a threat and a positive risk is an opportunity. Risks may be strategic, environmental, financial, operational, technical, industrial, competitive, or customer-related.

The purpose of identifying risks is for you to determine the significance of the risk in terms of its probability of occurring, and the consequence or severity if it does occur. You categorize and rate the risk using a risk matrix, this is also known as a risk heat map. How the organisation perceives and addresses the risk depends on risk attitude, risk appetite and risk threshold.

Step 6: Document Results of the Study and Make a Recommendation

You have now come to the stage of the feasibility study where you have collected as much information as you need about each option to make a decision on which option is the most technically and operationally feasible, and the most economically viable. You now write a technical report in which you make your recommendation.

Format of a Feasibility Study Report

While there is no standardized format, your report should include the following elements:

• Executive Summary
• Statement of Business Problem or opportunity to be addressed
• Terms of Reference
• Evaluation of Options (Repeated for each identified option)
• Name of Option
• Complete description of the option
• Description of the overall result for the option
• Description of the assessment process
• Risk assessment for option
• Issues
• Assumptions
• Constraints
• Technical Feasibility
• Economic Feasibility
• Operational Feasibility
• Environmental Impact and Sustainability of option
• Legal and regulatory compliance
• Ranking of Alternative Solutions (Options)
• Ranking Criteria
• Ranking Scores for all options
• Recommended Solution
• Appendix (containing all supporting data and analysis)

Step 7: Obtain Approval for Development of a Business Case

After writing your report, your final task is to get the key stakeholders to agree to the next phase, which is to develop the business case for your recommended option.