With the clean up from Hurricane Sandy now underway in the eastern United States, it is a good time to once again reflect on the discipline of risk management. Though I have not heard any first hand accounts as of yet, those firms in Sandy’s path that had engaged in some form of risk management planning were likely much better prepared for the effects of the storm and likely reestablished their business operations in a much shorter timeframe than those caught unprepared. While a full risk management program is multi faceted and includes a wide range of planning activities, there are some basic tools that firm managers can utilize to begin the process of planning for unforeseen circumstances. One such tool is scenario planning.
The term scenario planning refers to a strategic planning process that calls on managers to create several possible future realities and then analyze these realities to develop and refine appropriate strategic responses. The establishment of the modern process of scenario planning is widely credited to the RAND Corporation, where in the 1950’s researchers developed a process of story development to assist the United States government in crafting Cold War strategies. Since that time, adoption of scenario planning techniques has been widespread and scenario planning is now employed by a wide range of government, academic and business organizations. Practical use of scenario planning in a business context is most famously advocated by the Royal Dutch Shell group of companies who have integrated scenario planning techniques into their planning process since the 1970’s.
The exact process employed for scenario planning may differ depending on the unique needs of the organization. Engaging in the exercise can range from simple “what if, what then” contingency type planning to a complex multi factor process. At its core, a typical process involves the setting of the scope of the planning exercise, the identification of driving forces, building out the scenarios, examining the results and finally developing strategy based on the outcomes. While seemingly straightforward, effective scenario planning relies on proper process design and good facilitation to deliver practical value.
The value that a properly executed scenario planning exercise delivers is not in an attempt to predict the best or most likely future but instead it is meant to uncover a wide range of possible situations and develop a range of associated strategic responses. Perhaps even more valuable however, is the development of a sense of risk awareness and disaster readiness within an organization that is established during the planning process. Despite widespread use of scenario planning and my personal belief in its effectiveness, there are those who criticize the method. These criticisms mostly challenge the subjective nature of the process and the inability to quantitatively measure its effectiveness. Additionally, critics often point the variation in the process and execution of scenario planning as a foundational weakness that leads to inconsistent results.
While recognizing the validity of these concerns, I believe that scenario planning is a valuable tool in the risk manager’s tool kit and that these weaknesses can be managed and in fact turned to strength through three simple rules. First, any scenario planning must be just one component of an overall risk management planning process that includes other more structured activities, some which will necessarily focus on qualitative data. Second, scenario planning should only be conducted on a solid foundation of research and discussion to ensure that the variables considered are realistic and relevant to the organization. Finally, scenario planning exercises should be viewed as an opportunity to step away from overly structured linear thinking and should be embraced for a focus on imagination and creativity. With these simple rules in mind, law firms can use scenario planning as a powerful tool to ensure that they are prepared for potentially disruptive events.