I was recently asked how one decides what the core plan should contain when the outlying scenarios demand radically different responses: so different that there may be no common core.
It’s a solid question, and one that’s likely to come up in the next few years as the gyrations that are occurring in the world economy cause dislocations while a new balance in struck.
Businesses today seldom deal well with the notion that something may have to be thrown away and written off.
Almost every company we visit has an unwritten rule that “no errors or omissions are allowed”. As a result, when such a firm starts to do scenario planning, there is a quest to ensure that nothing needs to be abandoned and written off, just relative importance changed.
This is flawed thinking, unfortunately, for many companies.
Certainly when one deals in twenty year exploration, permission and development cycles, as are found in raw material extraction businesses, suspending a project for years is a normal course of affairs. Likewise, with the retail trade, if a fashion cycle is missed, the goods are marked down and cleared, and the next cycle entered into with gusto to try and make up the losses: with six to eight fashion cycles each year there are times when the colour or look chosen just doesn’t sell.
It is those of us in the middle, however, who have two to five year investment projects and ten or twenty year useful lives — a manufacturing plant, say, or a major IT portfolio renovation effort — that can neither profit by mothballing a project (the resources are still in the ground and still valuable years later for extractions businesses, but a plant left half-constructed, or a portfolio half-renovated, is more likely to be a liability (and far more costly to pick up at a future date) than if nothing had been done in the first place.
It becomes, in other words, a fairly big “error”.
Some techniques we see being used, therefore, are:
- If it must be done (or should never have been started), then once the decision to start is made the whole project is outside the scenario: it will proceed through to completion.
- If rearranging the order or intensity allows for less exposure under certain scenarios, then that is the scenario path.
- If completing it creates a danger under a scenario, then the business finds a different way forward until the likelihood of the risk the scenario deals with occurring has been mitigated to some extent (which often happens with investments that are business cycle dependent).
All of these overcome the risk of “error” — and thereby make scenario planning not only acceptable, but palatable.
Treating scenario elements as risk management exercises can help build credence for the scenario process as well. Start, perhaps, with the IT portfolio: it is a lower-risk element and a good ground for building acceptance for scenarios at the business level.