Planning for alternative outcomes does not have to be a complex statistical exercise
In the nineteenth century, scientists believed that the physical laws that ruled the universe were deterministic. Marquis de Laplace, one of the proponents of determinism, argued that if we knew everything about the starting condition, we could use the laws of physics to predict what the universe would be like at any future point in time. We now know that’s not true. The key realization of quantum theory was that we can never know the condition of our world exactly—not even the exact condition of the tiniest particle. Both the limits of our ability to observe and the very act of observation conspire to introduce uncertainty. In other words, we cannot use the laws of physics to precisely predict any future state. The best we can do is determine the probabilities of a variety of possible future conditions.6
While physicists have abandoned determinism, many business people have not. We manage large complex organizations. Those organizations are staffed with unpredictable human beings, who create highly complex products and sell them to other unpredictable human beings. These transactions take place in an uncertain economic and political climate. Yet, few organizations do scenario planning to understand multiple possible outcomes of their strategies. When they do, scenario planning stops with conservative, expected, and aggressive versions of the financial analyses. It rarely extends into operational planning.
Preparing for alternative outcomes does not have to be a complex statistical exercise. Even identifying likely situations at a qualitative level and discussing the subsequent courses of action will help an executive team manage risk, take greater advantage of opportunities, and stay relevant to customers.
Scenario planning would have helped one enterprise software company (name omitted to protect the guilty), which acquired a much smaller highly successful niche technology vendor in 2004. The new employees received retention packages with vesting in the larger company’s stock. Though parts of the two companies were integrated quickly, the sales groups remained separate. Eighteen months after the acquisition, the larger company made the decision to extend the integration to the sales teams, and announced that the smaller company’s account managers would become product specialists and join the account teams of the larger company the following quarter. At the two-year anniversary of the acquisition and one quarter after the sales reorganization, 65 percent of the smaller company’s sales reps left, taking their expertise and contacts with them. If the company had planned for potential outcomes of the integration, they might have trained additional sales resources on the acquired product or put in place new retention incentives. The result was a huge loss in sales momentum from which the product never completely recovered.
To avoid such surprises, list the three to five most likely outcomes of major initiatives at the time that a budget allocation occurs. Consider how the possible scenarios will affect your objectives for that initiative. Also consider the impact on other corporate objectives and other organizations. Define specific metrics or early warning signs for each outcome and who will detect them and how. Sketch out what might be done now or in the future to mitigate or take maximum advantage of the impact of alternative outcomes.
Some companies address uncertainty by putting in place multiple initiatives to accomplish the same goals. Matt Thompson, then executive vice president of World Wide Sales Operations at Adobe, describes this approach as “placing bets.” “If you have to grow sales faster than sales expense, you have to keep changing the way you do things. I try strategies that may or may not work, but I always try something new.” Matt acknowledges and embraces the uncertainty inherent in business. By trying several new initiatives every year, Matt and his team not only reduce the risk associated with the failure of any one strategy, they also learn new techniques and approaches and become more fexible as an organization.