Given the complexity of the business environment, executives need to be careful to avoid overconfidence that can be bred by an expressed or implied “official” view of the future during the risk assessment process. Overconfidence is a powerful source of illusions. It is often driven by the degree of success managers have experienced and the quality and coherence of the storyline they construct regarding the future they envision. Scenario planning is the process of testing management’s “view of the future” by visualizing different future conditions or events, what their consequences or effects would be like, and how the organization can respond to or benefit from them. Scenario planning avoids the risk of a single view of the future by enabling management to identify the likely direction and order of magnitude of the effects of changes that affect the drivers of the enterprise’s revenues, costs, profits and market share.
Scenario planning starts by dividing knowledge into two broad domains:
“Known knowns”: Things we believe we know something about (e.g., established backlog, firm contracts, current demographic shifts, seasonal consumer behavior and other factors that essentially cast the past forward, recognizing that the current environment possesses some level of momentum and continuity).
“Known unknowns”: Things we consider uncertain or unknowable (e.g., true uncertainties such as future interest rates, rates of technological innovation, economic growth, market trends and outcomes of political elections).
The art of scenario planning lies in blending the known with the unknown into small amounts of internally consistent views of the future spanning a wide range of possibilities. Scenario planning helps the enterprise challenge expectations, address “what if” questions, identify sensitive external environment factors that should be monitored, identify the need for contingency plans and exit strategies, and reinforce the need for flexibility and boundaries when executing the strategy. Management must be committed to the exercise to ensure that it is sufficiently robust and discriminates the vital signs on which the company must focus.
It is also important to engage the appropriate process owners to drive expected actionable results during the risk assessment process.
Ask yourself these questions: Does your current risk assessment process provide a clear view as to what should happen upon completion of the assessment? Are the right people asking for the results of the assessment? Is it clear who will drive and own the responses? Do those individuals act on that responsibility? These questions are fundamental to any strategy around integrating risk management into strategy-setting, business planning and performance management.
Companies should assign ownership of the risk assessment process appropriate for specific risks to the managers who are best positioned to ensure that the expected actionable results are achieved in response to the completed assessment. When the appropriate analytical framework is applied to the appropriate risks, the expected actionable results become clearer. For example, for strategic risks, the insights gained from the premortem technique and contrarian analysis described earlier are likely to identify the vital signs for the enterprise to monitor to provide management with the time value of “first mover” options. By continuing to monitor the business environment for changing conditions, the company is better positioned to recognize and prepare for emerging risks and provide input into the strategic management process. The senior executives responsible for the strategic management process are those most likely to drive these actions and ensure the involvement of appropriate managers with a stake when executing the strategy.
You can read more on this topic in Making Your Risk Assessments Count and by exploring these tools on KnowledgeLeader: