Act On Warnings
That’s how Bob Jackson, CFO of American Century Cos., an investment managing firm based in Kansas City, Missouri, has used scenarios since 1998. In 1999, scenarios the company built for 2001, and the signposts around them, indicated that the bull market would soon end. Heeding the signs, the company did not staff up as much as some of its competitors did; as a result, it has weathered the recent downturn without layoffs. “We were maybe too conservative in 1999, but in the long run, it really helped us plan our people side,” says Jackson.
American Century also used scenario planning to determine whether to get into new markets and to roll out new products and distribution channels. Today, signposts indicate that conditions are improving, so the company is positioning itself to gain market share. “It has accelerated our decision-making process,” says David Klinginsmith, vice president of strategic planning. “We’ve made investments in parts of our business that we would not have made without this thinking.”
American Century starts its scenario-planning process by deciding on a central question around which the exercise will focus; for example, what the degree of acceptance for new mutual fund packages and services will be. The company then identifies no more than 20 factors that could affect the outcome, says Klinginsmith. (Such factors could include new laws affecting 401(k)s or the rate of Internet adoption for financial services.) Next, it groups these factors into four levels by their degree of uncertainty and likely impact on outcome. Group one factors are certainties. Group two factors are critical uncertainties, meaning most uncertain yet likely to have a big impact on the future. Group three consists of wild cards, which have a low probability of occurring but a high impact on the future. Finally, group four are factors that people agree are likely to happen.
Klinginsmith organizes workshops and “learning journeys” during which key executives visit companies, places, and people from which they hope to gain insights into how the identified uncertainties might play out. For instance, in 1999, when the company was investigating how the Internet would affect customer needs and distribution channels, executives, including CEO Bill Lyons, spent two-and-a-half days visiting businesses in Silicon Valley, interviewing leaders in the field of E-commerce and learning about cutting-edge technology, marketing, and consumer trends. Executive commitment to these trips and to scenario planning is high, because they are crucial parts of corporate planning, which includes a balanced scorecard approach. “It’s about getting everyone on the same page,” says Jackson. “This work even precedes our budgeting efforts.”
Prepare For New Futures
Since the events of September 11 made it plain that the unthinkable can happen, the range of scenarios now on the table is broader than ever. Still, both Ged Davis, vice president of global business environment at Shell International in London, and Klinginsmith say that the basics of their scenario planning haven’t changed substantially as a result. Klinginsmith believes that creating scenarios around such dramatic events lowers the effectiveness of the process. “We view these events as a wild-card concept,” he says. “They don’t happen very often. To spend significant resources to deal with them is to move into a state of paranoia.”