Looking for a single 'right' answer is often not the answer at all. But with scenario planning, writes Jay Horton, companies can predict where their successes and failures might lie.

by Jay Horton

More than ever, today’s outsourcing initiatives have to be designed and delivered in an environment of uncertainty which is driven by shifting business or political imperatives, rapid technological and global economic change, and diverse stakeholder interests. Successful adaptation to an emerging future is the core business issue facing all strategic sourcing initiatives. Both long-term commitment and adaptability are vital.

In my experience, what’s needed is an approach for evaluating the strategic risks, anticipating key moments of change and identifying trade-offs between short-run or narrower needs and longer-term or broader goals.

This is precisely where conventional planning techniques are not up to scratch.

The problem with conventional business planning is that it tends to extrapolate past trends and to conceal risk. Thus, it often leads executives to under-estimate uncertainty.

Since foresight is the key to better strategic decisions, companies must include the tools of scenario planning in their planning processes. In essence, scenario planning is the art of thinking the unthinkable. “What could bite us?” A scenario expresses how and why the business succeeds or fails. A good scenario is derived from the underlying driving forces, and calls upon the organisation to dig deeper, work with scarce resources, make difficult decisions and take action despite risks.

Scenario planning involves testing strategies and business decisions against a series of alternative futures. Scenarios explore how things might pan out. The emphasis is important: scenarios don’t predict events, they provide a framework for making sound decisions in the face of unexpected developments.

The traditional sourcing planning process is often a spreadsheet-based, data-intensive exercise, in which the parameters describing the business and its sourcing environment are fed into a model so that the best options for the future may be computed.

In many real-world outsourcing situations, however, it is the pervasiveness of risk and uncertainty that is the critical issue, on the back of new and complex developments such as:

• the increasing role that outsourcing and other strategic alliances are playing in companies’ overall corporate strategies;
• the trend towards more complex, multi-vendor environments;
• the risks and opportunities of offshoring in the enterprise sourcing portfolio;
• the fast pace of technology change;
• the emergence of business process outsourcing as the next wave, and the new risks of business process interdependencies, labor unions, market reaction and service integration; and
• the unrelenting pressure to reduce cost and improve service simultaneously.

Scenario Planning Process

The process covers the following major activities:

• Reaching agreement among the management team on the focal question, and organising the key participants, to the company.
• Conducting interviews, workshops and information gathering.
• Identifying the key factors and driving forces.
• Identifying critical uncertainties.
• Developing the scenarios.
• Exploring the implications.

Organisational Action

When developing scenarios, begin with a specific decision or issue. Top management will need to think hard about this. For example:

• Which enterprise sourcing strategy and structure is best suited for efficiency and adaptation?
• Which capabilities/core competencies should we be developing?
• How can we augment and leverage our critical capabilities through our partners?
• How can outsourcing best help to position the business to deal with the competitive forces?
• What are the priorities for enterprise sourcing: access to new resources, markets and technologies; or cost advantages from scale and scope economies?

Key Factors

It is important to be clear both on what decisionmakers will want to know when making key choices, and on how success or failure will be viewed. Key factors might include:

• achieving success in cost containment, productivity growth, and service improvement;
• building the organisation’s capacity to absorb change;
• redesigning the future corporate structure and business configuration;
• building trust between buyer and suppliers;
• integrating the outsourcing effort with other items on the corporate agenda;
• ensuring the availability of capable suppliers for potential processes to be outsourced; and
• understanding the cost structure of the business accurately.

Driving Forces

These are the ‘causes of causes’, and include:

• The motivations and expectations of the sponsors and stakeholders.
• The ongoing demand to simultaneously reduce cost and improve service.
• Technology – an increasing focus on security, reliability and innovation in IT.
• Standards as the market-creating mechanism.
• The industry business cycle.
• Changing workforce demographics.
• Disruptive forces impacting the outsourcing marketplace.
• Sustaining innovations that bring better performance.
• Low-end disruptions that provide ‘over-served’ customers with ‘good enough’ performance at lower prices.

Uncertainties

The next step is to identify the most uncertain forces and factors. For example:

• Can the financial targets for the outsourcing solution be achieved?
• Can the organisation make the necessary changes?
• Can the supplier(s) deliver on their strategy?
• Will the execution of the outsourcing strategy impede the business’s ability to meet current or evolving customer requirements?
• Could the outsourcing solution fall out of alignment with the strategy of the business?
• What events might transpire to put the relationship out of legal conformity?

Creating Scenarios

Next comes the ranking of key factors and driving forces on the basis of their importance to the success of the focal decision – that is, the degree of uncertainty that surrounds those factors and forces. The point is to identify those factors and forces that are most important and most uncertain. These are used to construct the scenario logics which are then weaved together in the form of a scenario narrative. Once the narratives have been drafted, the implications can be explored using the following questions:

• What should the organisation be doing under each scenario?
• Which elements of the sourcing strategy work under all scenarios – the ‘no regrets’ solution set?
• What works under one scenario but is very risky under another?
• Can the organisation afford to be wrong in one particular scenario?

The test of a good scenario is that it is both plausible and surprising. Most importantly, it leads to better decisions. In contrast, the measure of failure is that, as a business, “we followed the wrong sourcing strategy”.

Meaningful Insights

An outsourcing scenario-planning project extends over several months, and the task of creating insightful scenarios demands rigorous research. Scenario planning workshops are used to identify areas where we don’t know enough about the present or past, let alone about the future. For buyers and suppliers of outsourcing services, scenario planning opens up a range of possibilities, much broader and wider than traditional tools that strive for a single right answer.

	The challenge is to stimulate ‘out of the box’ thinking, helping people to imagine the unexpected and overcome entrenched and outmoded viewpoints.

Scenario planning can help entertain worst-case scenarios, as responsible managers must. It also encourages thinking about a divergent range of possibilities rather than a consensus forecast. Upside scenarios can raise the sights of the parties to new opportunities. As a result, both buyer and supplier can benefit in the following ways:

• The critical scenarios describing possible futures are identified, and the long-term uncertainties impacting outsourcing success are uncovered.
• The structured and rigorous approach ensures the confidence and support of top management.
• The process guides the views of participants and effectively draws on their wide-ranging ideas. Innovation is fostered and new outsourcing options can be developed with greater confidence.
• A forum for ongoing strategic discussion across the buyer and supplier organisations is created.

Understanding the ways in which long-term outsourcing arrangements can best deal with uncertainty is crucial to success. The challenge then is to stimulate ‘out of the box’ thinking, helping people to imagine the unexpected and overcome entrenched and outmoded viewpoints. Your shareholders demand nothing less.

Reprinted with permission from ABIE publication