When you think of Y2K — now more than 20 years after the feared crisis — there’s a good chance you remember it as much of the public does.

A potential problem blown wildly out of proportion. The ridiculousness of people stockpiling water and cans of beans because a computer calendar problem was going to bring down our entire technological infrastructure.

Many said the time and money spent to address Y2K were wasted. After all, things turned out fine.

That’s the trick about scenario analysis. If you’ve done it well, few realize it was necessary.

In a 2019 Time article looking back on Y2K, Paul Saffo, a futurist and adjunct professor at Stanford University said this: “The Y2K crisis didn’t happen precisely because people started preparing for it over a decade in advance. And the general public who was busy stocking up on supplies and stuff just didn’t have a sense that the programmers were on the job.”

What is scenario analysis?

If you’ve ever gone to a coach or a therapist — or even to a friend — with a big concern, they probably asked you this question:

What’s the worst thing that could happen?

If you answered and discussed how you’d respond to that worst case scenario, then guess what. You’ve done scenario analysis.

Of course, when we look at scenario planning for an organization, we’re talking about something much more structured, where the stakes may be significantly higher.

At its most basic level, scenario analysis is planning for an uncertain future. It’s identifying the many paths that might unfold in front of us — those we want, those we don’t want, those that sound too good to be true — and determining how we’ll respond.

Why do you need to do scenario analysis?

Let’s look at a very simple case. When Trajectify coach Chuck Hall and I worked in a startup incubator a few years back, we saw multiple first time entrepreneurs following a very similar pattern.

They would create a six-month plan for their business and then come back to us at that six-month mark. They’d maxed out their budget and hadn’t reached the goals they’d set for themselves.

“I’m really close, though,” they’d say, as they talked about going just a little bit longer.

The problem was that by then, they were operating from a place of emotion. They’d planned for success. Now, after putting a lot of time and energy into their business, they didn’t have a blueprint for what comes next when things don’t go as planned.

As we all know, unexpected bumps into the road aren’t limited to new entrepreneurs. 2020 has taught us that something we could never have anticipated can blow all our plans out of the water.

Our lives and our businesses are affected by dozens (maybe hundreds) of factors that are outside our control. What’s within our control is our ability to respond to those factors.

The better we anticipate potential road bumps and prepare for them, the better equipped we’ll be to take the next steps.

Before we go on, let’s talk about the elephant in the room.

Neither you nor I could have predicted this pandemic. So would a scenario analysis have been of any use to us in 2020?

That depends — how thoughtful was the scenario planning?

For instance, a thorough scenario analysis could have contemplated a number of individual factors, like a reduction in workforce or large number of employees choosing remote work, a loss of certain distribution channels, or a major change in the economy.

The practice of planning and readiness makes you more prepared for whatever comes, even if it’s not exactly one of the scenarios you anticipated.

How do you do scenario analysis?

Lots of organizations know they should do this type of planning and never get around to it, either because it feels too abstract or too daunting.

Here’s your four-step plan for completing a scenario analysis:

Step 1: Identify goals

Every plan starts with goals. What specifically do you want to achieve in a given time frame (for the scenario)?

We’re used to doing annual plans towards annual goals. Knowing what you want to achieve in the next year can be helpful. In the current economic and global climate, external factors can change so dramatically so quickly that annual goals could become outdated.

This year, we’re recommending planning three months, allowing you to be more agile. Use annual — and even three and five-year — goals to guide your thinking, but right now make plans based on shorter-term goals.

Whether you choose quarterly or annual goals, be clear what they are, and make the SMART.

Step 2: Gather data

Once you have your goals, you want to identify key factors, uncertainties, and risks that could affect achieving them. This is the perfect time to pull out your SWOT analysis.

What are the things you don’t know? What are those external factors that could dramatically impact your sales funnel or business development process? What could hit your finances? What could throw a wrench in your hiring process or your ability to get employees in the door?

The pandemic has taught us that we need to spend a bit more time understanding threats.

There are some assumptions in your plan that are safe. For example, if you have a three-year lease on your headquarters, you’ll still have that space in a year. Or perhaps you have existing customers with contracts contributing organic revenue.

There are others that will remain up in the air no matter how much you plan. You can have the most well-managed, streamlined organization in the world. You still have no control over whether there’s a recession or inflation, a change in government policy, or a court decision that impacts your intellectual property.

Step 3: Prioritize

We can’t build an infinite number of scenarios. It’s important to limit our assumptions.

Start with what you assess to be the biggest assumption or risk. Which is the uncertainty that’s least predictable and has the greatest potential to impact your business? Then keep going, from most impact to least.

There are many possible outcomes between success and the worst case. Look at each of the most critical assumptions and figure out how many outcomes you may want to model. It could be binary — something happens or not — or more complex, and perhaps a decision to look at low, medium and high outcomes.

Here’s a simple scenario. I recently sat in on the planning retreat of a client who is anticipating positive responses to two large government contracting bids — projects that each could require doubling the size of their company. So they did the analysis. What happens if we win both bids? What happens if we win this bid and not that one? What happens if we win neither?

Of course, the question that always comes up when we talk about scenario analysis is when to stop. That’s why prioritization is so important.

No one can account for everything. If you try, you’ll run up against the dreaded analysis paralysis. What we try to do is put scenarios into a few buckets, take only the biggest risks and plan for those.

Step 4: Plan for the scenarios

When you build your plan in a spreadsheet, collect all of your assumptions in one sheet for use (by reference) in other sheets. As you adjust assumptions, each plan changes. Your plan may have forecasts or budgets about revenue, staffing levels, sales/marketing, COGS, overhead, capital expenditure.

Perhaps then make copies and then change the assumptions. Now you have plans for more than one scenario.

Tracking assumptions like this is also good because it provides you with greater visibility into what really may be going on in your business. You get very specific learning that will improve your ability to plan — basically, how good your assumptions were.

The more granular you can get with your assumptions, the more visibility you’ll have in your scenarios.

Lastly, begin developing action plans for the scenarios for which you’d like to be prepared.

Don’t guess, and don’t stop at risk assessment. Collect the data and make a plan so that if the unexpected occurs, you’re not operating from a place of panic or emotion.

People plan, too

Let’s talk about people and staffing. Though you will likely spend a lot of time looking at marketing, products, or finances, people are often the biggest single expenditure. And their unknowns can be really difficult to manage.

We use BestWork DATA assessments to move past assumptions about what people can do or will be good at and instead use data to maximize each possible scenario. The data can help us identify which employees won’t handle remote work well and which will perform even better in that setting.

It can help us create a plan for which employees will step into new roles if we experience operational or workforce issues.

Final thoughts

Recently, I have seen entrepreneurs and leaders have a second look Stephen Covey’s time management method of separating tasks into quadrants of urgency and importance. In his method, scenario planning is a Quadrant II exercise. It’s definitely important, but it’s not considered urgent.

Unfortunately, we see so many business owners who spend about 80% of their time in Quadrant I handling things that are important and urgent. They work as if they’re in Crisis and simply don’t have time to spend in Quadrant II. It becomes a self-fulfilling prophecy.

Of course, the trick is that the more time you spend in Quadrant II, the fewer things end up in Quadrant I — because you’ve planned away much of the urgency.

I can think of few times in my life when organizations have needed scenario planning more than they do right now. We can’t make assumptions about the future based on what we know from running our businesses in 2019 or 2020. The businesses that succeed will spend time anticipating a future of unexpected scenarios and planning their responses.

If you’re new to scenario planning or if you just need an outside perspective, contact us to see how we can help.