Quiz time. Just to see if you learned anything from the last go around. The “V”, by the way, could stand for “volatile”, as in the 2008-09 global economic meltdown, or perhaps “volcano”, as in the 2010 eruptions of Iceland’s Eyjafjallajökull volcano. Did you have a Plan V for the recent unrest in Tunisia and Egypt? That situation appears to be stabilizing as of the time of this post, but the truth is, of course, that it’s far from over, with further rumors of changes in Jordan, Syria and the Sudan as well.
So did you? Did you have a plan in place, ready to take down off the shelf and implement on short notice? This is the essence of a scenario planning approach to financial management, an approach that incorporates strategy as well as changing conditions and forecasts into resource reallocation decisions, as opposed to being simply reactionary with across the board cuts or freezes. It didn’t need to be labeled “Egypt”, and specifically predicting that Tunisia would become the flash point was not a necessary component, but please tell me that you at least had a scenario called OIL$100 or FUELSPIKE already prepared for the more general situation of a political or natural disruption of global oil supplies, and maybe a second scenario called SUEZ or LOGISTICS2.0 that covered supply chain disruptions.
If you did, then great, you’re ready for the second question: do you have pre-determined triggers associated with those scenarios? In the case of OIL$100 the trigger might be obvious, though not yet reached but being monitored closely with all units on yellow alert. But what if instead your operation is heavily dependent on shipping traffic through the Suez Canal (either vendor supplies or customer orders), or alternatively, through the Mediterranean, or along the Somali coast of Africa, or even through the Timor Sea and the Torres Straits, where there is not only the chance of another volcano but where just last week lurked a CAT 5 cyclone (for that matter, are you at least currently brainstorming a scenario called “Climate Change” and how far reaching those impacts could be?). How do you know when to pull the trigger in those cases? Just having the scenario is not enough if the organization is going to sit paralyzed until someone makes a decision, by which time things have gotten so bad that you probably need to move to Plan W anyhow.
It doesn’t all have to be bad news either. Not that good news dropping in unexpectedly out of the blue is a regular occurrence, but it does happen, coming in several different flavors that you need to be prepared to exploit just as quickly as you need to react to bad news. Often it’s a competitor’s misfortune - a product recall, a lost major contract, or a patent infringement case. Other times it involves binary outcomes inside your own business, such as a drug approval, a mineral discovery, or a satellite launch. More likely though, it will be a disruptive technology that is not immediately good or bad for your business, but it all depends on how you react to it. Is the iPhone good or bad for your business? How about recent breakthroughs in battery technology or LED lighting? What if Castro suddenly dies or Will Ferrell wins Best Actor? Not all or even many of these might affect your business, but there are bound to be a dozen issues specific to your position in your industry that you need to have both optimistic and pessimistic scenarios ready-to-hand.
The five key components of any Plan V would be:
- The definition and description; of the scenario itself, sufficiently developed so that everyone can recognize it when it occurs and can easily rule out any near misses that it might be confused with.
- The budget; the reallocation of resources or priorities, associated with the scenario.
- The trigger; what measurable quantity must attain to engage the new scenario.
- The implementation plan; is it all or nothing/ all at once, or are there logical stages or steps.
- The incentives; the management bonus schemes and metrics that replace the old regime and will now reinforce the new behaviors.
That last one, the incentives, is perhaps the most overlooked. You cannot possibly react reasonably swiftly to a volcano if you’ve got to renegotiate all the targets and bonuses before the scenario can be implemented, which leads nicely to my concluding comment, that these scenarios should not be treated as state secrets, but instead need to be communicated and understood by all parties well BEFORE the scenario goes into effect. Everyone needs to know what events are being monitored, what actions will be taken, what resources will be reallocated, in what order, AND, what impact will this have on my compensation. If you don’t like it you can leave now, but once the trigger is pulled, it’s a new world and everyone needs to be on board, no questions asked.
Plan V - because something is going to happen.