When Scenarios Don't Go Far Enough

Scenario planning can take on many forms. In its simplest state, scenario planning may include multiple outcomes, but only under certain circumstances. Because we cannot develop scenarios for the infinite number of possible futures, we need to be able to evaluate our scenarios constantly in order to understand when they are no longer effective.

This circumstance happened to me during the recession of 2007-2010. I had developed a scenario based recession plan for a firm with the foresight to see a downturn coming and to prepare itself for the worst.

We developed a set of leading indicators that were both external (interest rates, capital availability, new housing starts, etc.) and internal (profitability, staff utilization rates, new business won, etc.) A dashboard was created and monthly updates were reported to the board.

Targets: For each leading indicator we had targets. If a particular office was hitting its targets, then it would show as green. If it was below the target, within a range we had specified, then it would show as yellow, and if it was far below the target, then it would show as red. This system allowed managers to see which offices were performing and how the firm was doing overall with just a glance.

Because a good scenario plan should be action oriented, there were actions related to each of the three levels. When yellow ranges were hit, then certain costs such as travel would be cut. When red levels were consistently hit, then staff reductions were recommended. After a certain amount of time, consistent "red" performance led to the closure of an office.

This system worked great during the first portion of the recession. It made sense to limit costs and to reduce staff in order to match resources to workload. After three or four rounds of layoffs, however, the company had closed several offices and lost key people along with their knowledge and business contacts. Within two years the firm was down to half its original size.

You can say that the recession scenario plan worked because the company is still solvent and in business today. The downturn has leveled off and staff are optimistic about new business on the horizon as the economy recovers.

The critical point of view would say that at a certain point, cutting costs was no longer effective. Had the scenario analysis been fully fleshed out, there may have been triggers for taking time out to reinvent the firm. This could entail analyzing the new competitive environment and understanding the changing needs of clients. Studying social, technical, economic, environmental, political and legal trends would have revealed new opportunities and threats. Re-engineering processes in order to be able to do more work for lower costs would have improved the company's competitive position and positioned it to come out of the recession stronger than it was when it went in.

The lesson learned is that scenarios must be continuously reevaluated and redeveloped as situations change. Sometimes drastic innovation is easier in times of crisis than when everything is working well and people have the "if it ain't broke, don't fix it" attitude.