Bain’s Brains | Needed: the next best thing to a crystal ball

Bain’s Brains | Needed: the next best thing to a crystal ball

The tragedy of 11 September 2001 still reminds us of the unsettling consequences of the unexpected. And while clairvoyance was not considered a mandatory tool for top management six years ago, today we are in the midst of a serious corporate attempt to create the next best thing—the strategic tool of scenario and contingency planning to better prepare for the unanticipated in an increasingly unpredictable world.

Scenario and contingency planning was only of middling interest to most executives when we ran our first survey of management tools, back in 1993. That’s when we began tracking usage and performance of the 25 most popular management tools, selected by weighting, and rating their appearance in management reviews and business articles in the survey year.

Ominously, 1993 was the same year that terrorists first attempted to destroy New York’s World Trade Center with a bomb in its garage. Back then, only 38% of firms reported using standardized techniques for spinning out “what-if" scenarios around potential crises and disasters. These were also used to create simulation models for business growth, including when an actual crisis occurs.

Despite its uses, satisfaction with the contingency planning tool’s performance ranked only 15th out of the 25 tools tracked, suggesting that even those who were using it weren’t finding it particularly useful.

Among the firms that did embrace a scenario and contingency mindset for catastrophe at the time was the New York Board of Trade (Nybot), which built a second trading floor outside the Trade Center. Eight years later, that foresight kept the organization in business after the terrorists’ attack in 2001. Nybot has since created a third floor.

Natural disasters and political instability are also key considerations for many of India’s leading business process outsourcers and software developers, whose global clients depend on 24/7 reliability. Some of the leaders, including Wipro Ltd, India’s third-largest software services exporter, have well-defined business contingency and disaster recovery plans to cope with unforeseen events and prevent any disruptions in services.

Throughout the rest of the 1990s, our surveys showed scenario and contingency planning usage tracking at approximately the same percentage rate. But as many companies tried to learn the lessons of the 11 September attacks in 2001, it leapt above the mean for all surveyed tools’ use in 2002 to 70%—along with such favoured tools as customer segmentation, outsourcing and benchmarking—and has remained above 50% ever since, with satisfaction climbing steadily.

The adoption has been global: It hit 72% in usage in North and Latin America, 74% in Europe and 64% in Asia-Pacific. Moreover, executives said they were finding the tool more valuable, ranking it eighth in satisfaction this year.

What is behind the growing adoption of scenario and contingency planning? Three factors stand out: experience gained over time through trial and error, an improvement in the tool itself as more companies discovered a need for it, and a broader appreciation of scenario and contingency planning as events like 11 September and Hurricane Katrina made it abundantly clear just why such preparation was vital.

Our data shows that scenario and contingency planning’s use and satisfaction levels are highest among large companies (those with annual revenue exceeding $2 billion, or approx. Rs8,000 crore) and, in particular, among health care, energy and gas and transportation companies.

Enterprise Rent-A-Car’s experience is telling and fits the general pattern. In the aftermath of 11 September, the rental-car company struggled to match customers’ increased demand to rent cars one-way to drive home, or simply away from New York—all in exception to the firm’s then round-trip rental rule.

Four years later, after Hurricane Katrina had roared through New Orleans, Enterprise was better prepared to cope with the urgent need for cars by customers, insurance agents and relief personnel. Despite having 24 facilities severely damaged or underwater, Enterprise began moving some 11,000 vehicles into the devastated area from Mississippi, Alabama and other parts of Louisiana in the south of the US.

Houston became the regional hub for the area’s remaining 45 rental centres, coping with more than 1,000 one-way drop-offs. This clearly showed that Enterprise had learnt the lessons arising out of 11 September and put them to good use in 2005, when Katrina hit.

The experience of Enterprise is likely to resonate with companies in India, where natural disasters like the Asian tsunami in December 2004, as well as disruptions, such as the terrorist attack on Parliament in December 2001, have highlighted the need to be ready for the unanticipated, as a matter of corporate policy. Wipro is one example of how some Indian firms have already geared up.

Not every company can anticipate such a calamity, but they need a working Plan B, C or D. As an increasingly important discipline in turbulent times, scenario and contingency planning enables executives to explore and prepare for several alternative futures.

Perhaps even more important than planning for a catastrophe, such arrangements help executives examine the outcomes a company might expect under a variety of operating strategies and economic conditions. It allows them to move towards a future they have mapped out, reckoning with expected trends, such as the changes wrought by globalization, and having a process in place, at a minimum, to deal with the unexpected.

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Darrell Rigby, a partner in Boston with Bain & Co., founded and directs the firm’s Management Tools & Trends Survey. Ashish Singh is managing director of Bain & Co. India.