Back in 1995, a research feature in MIT Sloan Management Review recommended that businesses turn to scenario planning to remove tunnel vision and over confidence in their decision making. And that to do this, they should identify basic trends and uncertainties and use these to build potential future scenarios. Writing a quarter of a century later, this sounds quite quaint and charming, and, as it was no doubt intended, reassuring. But also, almost laughable in today’s world, where once-in-a-lifetime, outlier incidents seem to be occurring on a weekly basis.
Take Australia, as one example of many. From the second half of last year, continuing to March 2020, it experienced one of its worst bushfire seasons in history, with 186,000 square kilometres burnt, 34 fatalities, animal species now extinct, and an estimated A$ 103 billion price tag. In any year, that would be have been devastating enough. But the country went straight into a COVID-19 state-of-emergency, with a second wave of infections in May and June, which is still ongoing. Combined, these two events pushed the Australian economy into its first recession in 30 years. The economy shrank by 7% in April, May and June, and while it is expected to emerge from recession this quarter, concerns remain over unemployment levels. And although Australia avoided a recession in 2008 during the global financial crisis, for many other countries, the pandemic-related recession is the second “once-in-a-lifetime” recession in 12 years.
How can any company feasibly scenario plan for all that has happened in 2020 alone? Scenario planning and forecasting, even driven by the power of artificial intelligence, predicts trends based on history, what has gone before, and how leaders have reacted before. With the number and complexities of anomalies—those once-in-a-lifetime events—hitting the world today, can any trending tool accurately and automatically predict the future?
And even if an organisation can pull off military intelligence magnitude scenario planning, or tap into insight from one of the heavy-weight think tanks that did predict the current pandemic, which scenario do you plan for? For instance, the think tank that forecast COVID-19 also considered the threat of cyberattacks, artificial intelligence being deployed for military use, and disinformation. And then which version of each scenario do you consider most likely? In what combination and at what magnitude? Should Australia have planned for the wildfires, the pandemic, or a recession? And how should resources have been diverted away from other requirements and spread over various likely and less likely but potentially devastating scenarios? What are the opportunity costs of each of these decisions?
It’s far from ideal, and it makes running and growing a business extraordinarily challenging. And yet again proves that today the only constant is change. Or, as the quote from Academy Award-winning Forrest Gump, which was released the year before the article quoted at the start of this article, goes: “Life [is] like a box of chocolates. You never know what you’re gonna get.”
How do you plan for the unplannable, and avoid getting trapped between analysis paralysis, too many choices and lack of resources on one hand, and over-confident tunnel vision on the other? You start by acknowledging you’re never going to know which chocolate life is going to deliver you, and instead focus on building the personal and organisational resilience, flexibility and agility to make the most of opportunities, minimise the impact of challenges, and hopefully turn challenges into opportunities. At a practical level this means breaking down each hit, as it arrives, and figuring out which of your core business drivers and assumptions are impacted. How will your projected volumes be impacted? What does this mean for your employee headcount? What is the exchange rate and inflation likely to do?
If you do this, and have enough built in flexibility to adapt and respond, you don’t need to plan and budget for a pandemic, but can cater for its effects. And then, even if you get the coffee crème chocolate (my worst J) that, like a pandemic, no one ever wants, you will survive and hopefully thrive.
As published on AccountingWeb - September 2020