Contingency theory by malikzaka

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									  What is contingency planning?
by Dan Powerimran

Contingency planning is a systematic approach to identifying what can go wrong in a situation. Rather than
hoping that everything will turn out OK or that "fate will be on your side", a planner should try to identify
contingency events and be prepared with plans, strategies and approaches for avoiding, coping or even
exploiting them

Contingencies are relevant events anticipated by a planner, including low-probability events that would have
major impacts. Contingency planning is a "What if?" skill important in all types of planning domains, but
especially in contested and competitive domains. The objective of contingency planning is not to identify and
develop a plan for every possible contingency. That would be impossible and a terrible waste of time.
Rather, the objective is to encourage one to think about major contingencies and possible responses. Few
situations actually unfold according to the assumptions of a plan. However, people who have given thought
to contingencies and possible reponses are more likely to meet major goals and targets successfully. The
following questions can help develop contingency plans:

    1.   What events may occur that require a response?
    2.   What disasters might happen during execution of the plan?
    3.   What is the worst case scenario of events for the situation?
    4.   What scenarios are possible for the situation?
    5.   What event would cause the greatest disruption of current activities and plans?
    6.   What happens if costs of the plan are excessive? what happens if delays occur?
    7.   What if key people leave the organization?
    8.   What are the expected moves of antagonists and competitors?
    9.   Who or what might impede implementation of the plan?



The key elements of a contingency plan are “protection, detection, and

A contingency plan acknowledges that disaster can happen: the
organization must design a plan to accommodate the survival of
organizational operations in the event of flood, fire, earthquake,
electrical disturbance, or other unexpected events that can disrupt the
organization’s systems. Risk analysis should offer guidance on the
likelihood of various contingencies, and in what resources to invest
providing such recovery methods as off-site systems, backups and so
on. Several references discuss contingency planning.

Every effective contingency plan must consider backing up data files.

Most critical to the firm is that a contingency plan:
       exists;
       is communicated to employees; and
       is tested regularly.



A well developed contingency plan has enormous value for the organisation
beyond the obvious – the ability to speedily, smoothly and cost effectively
respond to significant changes in the environment. The development of a
comprehensive contingency plan will:

 Focus the company on identifying what risks exist and the levels of that risk;
 Enable the company to review the overall objectives of the existing plan in the
 light of the risks identified, (especially their impact on company KPI's);
 Assist in creating strategies to manage and mitigate risk (prevention being far
 cheaper than cure);
 Review the existing information system to clarify whether it can both identify
 failure early (early correction is far cheaper and easier than late), correctly
 (taking the right action for the right reasons rather than the wrong actions for
 the wrong reasons), and has the ability to forecast significant changes in the
 risk environment (controlling change rather than reacting to it is always more
 cost effective);
 Establish a set of actions/ policies which are in line with the problem (this is the
 concept of graduated response – as problems grow worse, more severe
 actions need to be considered, but it is often early and small changes that
 prevent larger difficulties occurring in the future);
 Formalise contingency plan actions into standard operating procedures (SOP);
 Provide for the integration of contingency plan actions into company wide
 induction and maintenance training to ensure rapid and effective response, and
 link with outside agencies where necessary;
 Create a framework which can be continuously reviewed and updated, with
 post event analysis incorporated into best practice.

 Software exists to assist the company in the creation and management of
 contingency planning, but an initial manual approach is advisable – otherwise
 the company either over or under plans its responses.


 Two golden rules should be followed in assessing potential risk – What can go
 wrong, will go wrong, and – If it cannot go on, it will not. An initial assessment
of possible risk components should be as broad as possible – the Ibis standard
checklist has over 160 items listed, but within this list there are two important
groups – those that havehigh probability of occurring and those that
have high impact on company performance. These will vary over time and for
specific industries. The worst group is obviously those that have both high
impact and high probability – such as fuel prices in the airline industry.

Six broad types of risk exist for each enterprise, though they obviously
influence each other:

Strategic risk;
Macro environmental risk;
Operational risk;
Competitive risk;
Project risk;
Disaster risk

Strategic risk is concerned with the mixture of strategies that the enterprise
follows with some such as diversification being far more risky than market
penetration, and it is also concerned with portfolio theory and the need to
diversify products, customers, countries, suppliers, finance and personnel.

Macro environmental risk is concerned with the way in which the Political,
Economic, Social, and Technology components will influence the enterprise.

Competitive risk is concerned with the way in which competitors both currently
and in the future will affect enterprise policies.

Operational risk is associated with the ability of the enterprise to implement its
policies, including such problems as quality, delivery, customer satisfaction,
security, fraud, personnel and production/ service delivery failure.

Project risk is focused on the probabilities that certain tasks within a project will
face problems of time, budget or specification achievement.

Disaster risk concerns the planning for “major” events, such as hurricanes,
riots, tidal waves, floods,air crashes and the like.

Impact on objectives

One of the more useful aspects of contingency planning, and one little
discussed, is its relationship to the structure of the overall plan. The creation of
the plan should lead managers to consider the impact of changes in risk on the
probable level of organisation performance. As the level of environmental risk
increases, so will the risk of not achieving the plan objectives. What level of risk
is acceptable to stakeholders? Does a changing level of risk imply the need for
changed objectives? For example, a high probability/ high impact risk would be
a recession for a consumer goods company – should not this imply a changed
set of objectives from perhaps aggressive to conservative?

Managing risk through designing out, mitigating and sharing

As the development of the contingency plan identifies the major risk
components, management can consider each with the following questions:

Can we design it out entirely or partially? (for example, premises design/
location can significantly reduce the impact of fire, flood, access, employee
productivity, health, strategic and operational choices such as multiple
Can we mitigate it through the implementation of the correct disciplines? (for
example, project failure can be mitigated through accurate design and effective
monitoring or customer loss through programmes such as customer
satisfaction audits);
Can we share the risk? (credit insurance for example).

Each of these actions will involve cost. Some of this will be essential – such as
fire doors for example – but much of it will be discretionary. Decisions will have
to made as to the level of investment that the organisation is prepared to make
to control and manage the risk – often not easy when resources are limited. As
contingencies, by their very nature do not occur when expected, the
organisation needs to budget for them – and this obviously relates to the level
of risk inherent in the environment. Where the risk is low, the set aside can be
also low. Where it is high – for example in start up high technology ventures,
the additional resources should be considerable. In the existing company a
review of unexpected expenditures over a three year period will give a good
starting point for setting contingency budgets, while benchmarking and industry
experience will give similar indications for start up companies.

Information systems

A second important impact on the overall business and development efficiency
of the contingency plan is the review of the information system. It will
emphasise the need for information gathering, correlation and review
processes to meet specific company requirements.

Some failure is obvious and easy to identify, but much can be quite complex.
For example, loss of electricity supply is straightforward; employee fraud is
often far more sophisticated. The review of the information system should
initially concentrate on high probability/ high impact areas and ensure that
changes in these criteria can be identified as early and as accurately as
possible. Once this has been achieved it is important to ensure that the data
provides access to the real problem.
For example, a company sales may be in decline. Is the real reason that the
product/ service is uncompetitive? That quality has declined? That sales force/
marketing effectiveness has declined? That the economy has changed? That
there is a problem with a major customer? There is little point in spending
money on sales promotion for example if the real reason is that a major
customer has liquidity problems – that will be resources poorly spent.

Finally the information systems should be reviewed to clarify whether they can
provide reasonable forecast data in key areas that need to be managed. Does
the system provide accurate information on high probability/ high impact
trends? Does it need to be strengthened? What research and/ or additional
systems do we need to carry out? What are the associated costs? Primary
research can be very expensive – is there adequate secondary research

Action policies

The concept of the trigger point is important in establishing action plans and
policies. At what stage should you take action? If sales decline by 2% - is it
within the normal range of variance or does it demand correction? Each
company will have different requirements and different market circumstances.
The contingency plan needs to establish:

a) when the button is pressed;
b) what action should be taken at that particular point;
c) what action is next to be taken should the situation further deteriorate;
d) who is responsible;
e) how they will report ;
f) who they will report to;
g) how the organisation will measure that “success” has been achieved
(however “success” can be measured);
h) What recovery measures then need to be taken.

These must be realistic: the organisation can carry out these actions – unless it
has the resources to do so the plan will be useless.

Standard operating procedures

The important contingency plans need to be formalised and incorporated in
documentation so that staff are aware of the plan demands and what actions
should be followed. The simplest health check within the organisation is to ask
managers a series of simple questions – what do you do if x, y or z happens? If
they cannot answer, it is clear that there is a requirement for the creation
of standard operating procedures available throughout the company to guide
actions and decisions. Where a contingency plan is complex, it is unrealistic to
  expect individuals to remember the detail – but if they know that it is available
  both in written form and ideally on the company Intranet, they will be able to
  rapidly access and use it.
  The other advantage of the standard operating procedure for the contingency
  plan is that it will provide an audit trail to ensure that specific tasks have been
  completed – important both for internal and any external review.

  Contingency planning and training

  Staff forget; when they join an organisation they need to become aware of its
  operating procedures. In both cases, the incorporation of the contingency plans
  into training makes sense, as part of an induction framework or as regular
  reminder or maintenance training.

  Review and update

  Circumstances change, and every organisation can learn from experience.
  Reviewing and updating contingency plans is essential – and where it has been
  used, a post plan review makes obvious sense so that improvements can be
  incorporated while lessons are fresh in the mind. Incorporating the contingency
  plan into the monthly review ensures that changes where necessary are made
  and that the key high probability/ high impact areas receive constant attention.

  The planning platform and contingency planning

  The contingency plan develops as an integrated component of the planning
  platform, which builds on knowledge centres, standard operating procedures on
  risk identification and management, effective business monitoring and project
  management techniques to evaluate performance and identify key risks, both in
  assumptions and in the control of projects.


Contingency planning techniques make big strides, Bain official says
The Globe and Mail 06/02/03
by Gordon Pitts
Spooked by war, terrorism and economic shocks, companies are adopting contingency planning
techniques like never before, says Pierre Lavallée, who helps track management ideas for consulting
firm Bain & Co.

"People have a sense that their planning horizons are getting shorter, and outcomes can swing a
fair bit," said Mr. Lavallée, Canadian managing partner for Bain and part of a global team that
monitors use of management tools.

"Instead of fixing your gaze on one point of the horizon, you have to pick two or three, and say 'I
could end up in any one of those situations.' "

Boston-based Bain's annual survey of more than 700 global companies, called Management Tools &
Trends, offers insight into the hopes and fears of many organizations in the early 21st century.

It shows that contingency planning -- often equated with scenario planning -- is No. 9 in popularity
among management techniques in North America, according to the latest survey done in early
2003, and based on 2002 practices.

That's up from the 12th spot the previous year.

It is not nearly as popular in other regions, but even on a worldwide basis, it ranks No. 11 among
the leading 25 management tools. Two years ago, it didn't even make that list.

Toronto-based Mr. Lavallée said the trend toward contingency planning took off with the dot-com
bubble and its spectacular collapse. It further accelerated with the Sept. 11 terrorist attacks, and
military actions in Afghanistan and Iraq.

Now, he said, it will be increasingly driven by economic phenomena, such as the recent sudden rise
in the Canadian dollar and the financial impact of severe acute respiratory syndrome.

Flexibility is a central theme in the 10th-annual Bain report, which is being released today. About 70
per cent of companies surveyed see an ability to change as a significant corporate advantage,
compared with 38 per cent a decade ago.

The Bain survey also shows that hard-pressed companies, desperate to get growth and profits back
on track, are trying more and more new things. The average number of management tools being
used by surveyed companies is up nearly 60 per cent in two years, with the average firm using
about 16.

The most popular one remains strategic planning, which has been at the top of the charts since
1996, when it first made the list.

Used by 89 per cent of firms, it is followed by benchmarking, and mission and vision statements,
both at 84 per cent. "They are your basic tool kit," Mr. Lavallée says.

But the fastest spreading idea is customer relationship management (CRM), which is the collection
and interpretation of customer data, using specialized software, to improve marketing, sales and

More than 78 per cent of companies worldwide said they were using CRM, compared with 35 per
cent two years earlier. More surprising, Mr. Lavallée says, overall satisfaction with CRM increased in

He says this surge in satisfaction probably reflects the fact that businesses are now seeing concrete
results from CRM, as opposed to three years ago, when they were simply spending money to install
the software.

The survey's laggards are three ideas that require outlays of cash, which companies are reluctant to
make right now: stock buybacks; corporate venturing (corporations investing in early-stage
ventures), and merger integration teams.

The latter idea has cooled down for a couple of reasons: There are far fewer mergers than a few
years back, and integration is acknowledged as a painfully difficult thing to do, Mr. Lavallée says.

Also losing steam is knowledge management, a broad term for systems and processes to capture
and share intellectual assets in a company.

According to Bain director Darrell Rigby -- the founder of the survey -- employees seem less willing
to share knowledge at a time of economic insecurity, because they see their ownership of
knowledge as the best leverage to keep their jobs.

The survey also shows the use of corporate codes of ethics is on the rise, a pattern that was
developing even before the Enron, WorldCom and Tyco scandals hit the headlines.

In an interesting twist, companies in Europe are less likely to have a corporate ethics code. While 69
per cent of European firms have one, that rises to 84 per cent in Asia and 81 per cent in North
America. (The Bain survey does not break out the small Canadian sample, but Mr. Lavallée says
Canadian results reflect North American trends.)

Surprisingly, 84 per cent of companies say they are proud of their codes of ethics, despite society's
growing cynicism about corporate malfeasance.

Mr. Lavallée points out that serious breaches of ethics are still relatively rare. But in many
companies, the fallout from the recent scandals may make it easier for senior executives to go to
their employees and insist that the codes be taken seriously.

The Bain survey also mirrors the fickleness and faddishness of corporations regarding the
management ideas they use. Consider the most widely used tools of 1993: Mission statements were
No. 1, followed by customer satisfaction measurement and total quality management. Also on the
list were re-engineering, No. 8, and self-directed teams, No. 10.

Those ideas have hardly disappeared but they are no longer flavours of the month.

Total quality management has dropped to No. 18, re-engineering to No. 19 and team-building has
dropped right off the top 25 list.



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