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Ground Floor Partners

A feasibility study should be always completed before launching any major new project, investment or venture. It serves a critical function in independently evaluating a plan or planned course of action, taking a fresh look at the assumptions behind it, the risks it faces and its chances of success. Feasibility studies were invented to avoid bad investment decisions, prevent businesses from targeting non-existent markets and to flag risks and pitfalls in even the most well thought-out investment or strategic plans. Here we outline 10 of the most common feasibility study mistakes made by entrepreneurs, business owners, and corporate executives.

1) Just Do It

The first decision --- whether or not to conduct a feasibility study --- is often made without a great deal of thought. This in itself is a huge mistake. Generally the larger the upfront investment, the more complex the project, or the greater the potential consequences of failure, the more important it is to do a feasibility study. A small startup that requires minimal capital is one thing, but any venture that involves large investments, multiple stakeholders or a long term commitment, requires a feasibility study. Not doing one in those circumstances could be considered malpractice.

A feasibility study is critical when:

  • Embarking on a major new business investment
  • Investing in a new market or product segment
  • Changing strategic or market focus of an existing business
  • Opening a new facility, chain of offices or stores
  • Moving from small/start-up phase to expansion with VC or other investment
  • Any greenfield development that does not duplicate existing business functions
  • Investing significant part of personal wealth in own business
  • Investing in new technology or operating approaches
  • Expanding into an unfamiliar market or territory (overseas)
  • Entering an already crowded or highly competitive market segment

When in doubt, the safest course of action is to do the feasibility study. The cost of not doing a feasibility study and failing is far, far higher than the cost of doing the study and deciding not to move forward with a project.

2) (Don't) Do It Yourself

Bias is a funny thing. Designers, engineers, inventors, and CEOs get attached to their own ideas. They discount problems, wish away concerns, and believe in themselves. This is only natural. But it is also why outside investors, bankers, and others insist on getting an independent assessment. When the designer and the investor are one and the same person, the tendency is to try to cut costs by doing their own feasibility study. Often the result is completely useless.

Don't do it yourself; hire an independent professional to do the feasibility study.

3) Project Definition

A feasibility study is only useful if it gives definitive answers to specific questions. "Can we build a resort here?" may be an interesting question, but it is NOT specific enough to justify investing in a feasibility study. Whereas, "Can we build a 30,000 - 50,000 square foot, eco-friendly resort for wealthy couples between the ages of 25 and 50?" is much closer. Before you do the feasibility study, make sure you narrow it down to a reasonable level of detail.

Typically a brief business or project plan is sufficient, but a one sentence description is not.

4) Scope

A proper feasibility study should be limited in scope. Is this a purely technical or engineering feasibility study, or an economic or market feasibility study? Are legal and operational issues considered? What about schedules, resources, cultural factors, and financing? A technical or engineering study focuses on the technical issues and requires specialized technical knowledge such as: Does the land have sufficient drainage? Is the soil suitable for a 30 story building? Are the data center cooling systems large enough to handle peak load during a Presidential election?

A market or economic study is a different beast. Here the focus is much wider, and broad experience and sound methodology are much more important than technical expertise. A market or economic study asks the following types of questions:

  • What market segments are appropriate, and how are these defined?
  • How large are these market segments, in terms of numbers of people and potential revenue per person?
  • Who and where are your competitors? What are their strengths and weaknesses? How can you differentiate yourself to exploit these weaknesses?
  • What regulatory, environmental, social, political, or other trends are there and how will these affect your project in the short and long term?
  • What is the core revenue model for this business, and what additional revenue streams are possible?
  • Is the primary market large enough to make this a profitable venture? What about secondary and tertiary markets?

If technical issues are a major factor in the project, then by all means include them, but it is usually a mistake to limit the feasibility study to purely technical issues. Very few restaurants fail due to faulty engineering; they fail because they did not understand (or pay attention to) their customers.

5) Too Fast

One reason for doing a feasibility study is to get an expert opinion on whether or not it makes sense to move forward with a project. The idea is to reduce risk and identify potential problems, threats (and opportunities) that may only become clear after deeper research and analysis. The project cannot start until the feasibility study is completed. So time is a factor. But if the feasibility study is done too quickly, the odds of missing, or underestimating, one or more important factors is high. Yet many clients want to rush through the feasibility process so they can get on with their project. This usually leads to failure.

Don't rush!

6) Wrong Team

Any professional study is only as good as the team that does the work. Yet there is a tendency to try to find consultants who specialize in just one area, for example, restaurants, medical devices, social media, etc. This might seem to be the safest choice, but it can be overly restrictive and lead to highly formulaic outcomes. Selecting a consultant that specializes in only one area (for example nursing homes) can be particularly problematic if the project crosses traditional specialization boundaries.

Another error is to hire an engineering consultant to do the market and economic analysis. A better approach is to hire a team with a mix of the required skills --- from economic and market analysis to engineering and sustainability.

7) Bigger Is Not Always Better

Many companies hire the largest consulting firm with the highest price structure, just to get brand recognition. Large firms will often market the skills of senior people in the organization, but once they land the contract they delegate the work to junior personnel. Make sure you know how much time each member of a proposed consulting team will actually spend on your feasibility study, and ensure that the senior consultants and experts will be spending adequate time on your project.

The quality of the research and analysis is what matters. So choose a consultant who can deliver a rigorous analysis that leaves you safe in the knowledge that you know whether the investment or project is viable or not.

It is not the badge on a car that matters but what is under the hood.

8) The Price is Right?

In our experience, most feasibility studies end up priced somewhere between 0.5% and 1.0% of the total project cost. For example, a feasibility study for a $5 million national technology rollout might cost somewhere between $25,000 and $50,000, whereas a feasibility study for a $20 million school might cost as much as $200,000 at the high end or $100,000 at the low end. A variety of factors can increase or decrease these numbers, such as regulations (highly regulated or unregulated), competition (high or low), market trends (positive or negative), project scope (narrow or broad), or politics (a new school is usually a highly charged political issue, whereas a new computer technology might be politically neutral).

It is a good idea to get a few cost estimates and proposals, but be wary of going for the lowest cost. It often means the lowest quality. You should balance getting a competitive price with sourcing consultants that have the full range of skills needed to really test the feasibility of your project.

9) Green Light / Red Light

Many projects are assessed to be feasible; in other words the study gives a green light. But even when this is the case, risk factors, areas that need more thinking through by the client, and new options that can improve the project, should be presented to the client. This strengthens the project and improves the chances of its long term success even when the feasibility study gets the green light.

In other words, the project is feasible, but "Here is a list of factors you need to watch out for", or "The following needs to be addressed first".

Sometimes we conclude a project is just not feasible. There are too many obstacles or the risks are too high, so we recommend a "No Go". Sometimes we come to this conclusion fairly early in the process. Once we have made a decision that a project isn't feasible, we immediately tell the client. If this happens early in the project, the client can save 50% or more on the feasibility study. While this situation is rare, it does happen often enough to mention.

Before deciding on a consultant, ask them if they have an "out clause". If they say no, consider looking elsewhere.

10) Yes Men

Finally, don't make the mistake of hiring a firm that tells you what you want to hear from the beginning. A negative finding often uncovers other possible directions that could potentially be much more profitable or successful.

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Andrew Clarke is Chief Executive Officer of Ground Floor Partners. Ground Floor Partners helps early stage, small-, and middle-market businesses grow through design and execution of sound business strategies.

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