The Five Components of Contingency Planning
Updated: 5 days ago
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In my 2009 strategic issues post, I mention that contingency planning is a common theme this year among the businesses I work with.
I have worked with several clients to develop contingency plans. With some, that is a precise set of conditions and instructions; with others it is a general awareness of the issue and intent to communicate about it. Despite the differences based on the companies’ styles and cultures, there are five common components that contingency plans should have:
Information: At the heart of a contingency plan is the ability to identify when a contingency exists. For some companies (including those who have made the jump to Stage 2), the information is a metric or set of metrics. For others (including those who are still operating as Stage 1 businesses), it is a more instinctive feeling about the business.
Boundary conditions: Once a company has the set of information it is going to use to assess the situation, it then must decide under what conditions it will say a “contingency that must be addressed” exists. In other words, what is the “comfort zone” for the metrics, and where are the edges of that zone.
Levers: A contingency plan should also consider what the levers are that the business can use to correct its path. These levers might be cutting administrative spending, increasing sales visits, deferring salary increases, or changing an approval process. Levers should focus either on revenue impact or cost impact. Because it’s unlikely that any one lever will be able to impact both areas, and because the business might face situations that need to manage revenue or cost, it is best to develop a portfolio of levers that you can work with.
Decision process: With information, boundaries, and levers in place, the business should think through how it will actually decide to use the levers if the information indicates that a boundary has been crossed. This will vary from company to company. Some will have a preset decision-making process, so that the rules are clear before the company gets into a contingency. Others are comfortable leaving it loose until they are faced with the situation.
Scenarios: A contingency plan with the four components described above is enough to manage contingencies effectively. To take the preparation up another notch – and enable a management team to feel confident that it is prepared – the team can also create 2-5 higher-probability scenarios, to think through what each of the elements would look like in each scenario, and what potential issues could be. Scenarios could be “We win three big projects at the same time” or “We lose our biggest customer” or “Our bank cancels our line of credit.”
As I mentioned, every company will approach contingency planning differently based on their culture and team. There are some general recommendations that I’d make, though, including:
If you have not actively thought about contingency planning, take at least 30 minutes to think about what yours would look like, and 30 minutes to discuss it as a Management Team. That way, you and your team won’t be starting completely from scratch if you’re faced with a contingency. Preparation is always easier and less costly than repairs.
If you think you might be faced with meaningful contingencies, start to deal with them now. You’ll have more information and more options, and you’ll be doing it with clearer thinking. Chances are it will also help you see ways you can improve your business now. Align your level of effort on planning with the risk to the business.
If you have a contingency that is high probability or high impact (or both!), then you should make sure you have planned for it relatively well. If you are not faced with any significant contingencies, then your planning should be more limited.
The reality is that most people don’t – and won’t – do contingency planning, even though they probably face at least one or two meaningful contingencies. For that reason, contingency planning can be a competitive advantage and can enable a company to use contingencies to strengthen its business rather than throw it off balance.
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