Scenario Planning

Since transformational outsourcing initiatives are likely to last for seven to ten years, planning for the future is an essential part of creating a sustainable relationship. The business landscape will certainly shift during that time. Scenario planning is a powerful planning approach that enables an organization to prepare for these changes.

Scenario planning is not new. Royal Dutch Shell pioneered the method more than 25 years ago.^[3] It entails crafting three to five provocative but plausible scenarios that describe a company’s business environment five to eight years in the future. This is far enough in the future to free planners from the drag of current realities, but not so far that it seems irrelevant. Executives consider the implications of each scenario by ‘‘back casting’’—standing in the future and looking backwards. This turns out to be much easier than standing in the present and trying to predict the future.

Scenario planning recognizes that trying to define a single view of the future is unrealistic. In scenario planning, the object is not to forecast one future, but to identify a range of plausible futures. Good business plans prepare an organization to do its best no matter what shape the future takes.

Scenario planners start by identifying the key uncertainties in the relevant business sectors. These can be political, regulatory, social, technological, and economic questions. Planners then create narratives of the future in which these uncertain factors are resolved differently. For example, one of the key uncertainties in consumer finance is how quickly and in what direction aggregation will develop. Over the past decade, customers have demanded and received consolidated statements—they get one overview statement from each company with which they do business. Now they want to see a complete picture of all their finances—a consolidated statement across all the companies they deal with. How will this happen? One scenario might envision intermediaries like Yodlee, tax preparer H&R Block, or independent financial planners inserting themselves between most consumers and their financial institutions. Another scenario could posit that Microsoft includes this capability in its 2006 release of Windows. The aggregation question is only one uncertainty that a narrative would address. It would also take a position on regulatory changes, new patterns of consumer demand, technology developments, and other important factors.

Through a systematic process, an organization’s strategy team plants its feet in one future at a time and looks backwards. They ask themselves pointed questions like, ‘‘What did our organization have to do to get here?’’ With the benefit of 20/20 hindsight, they prepare a road map that describes their company’s actions that led it to succeed in this particular scenario. They combine the success pathways that come out of all the scenarios into a comprehensive road map to the future, paying particular attention to forks in the road and critical events that trigger their company to favor one strategic option over another.

By itself, scenario planning is a valuable approach to long-term planning. For transformational outsourcing, it is essential. Executives can use the results of a scenario planning process tactically. They can identify minimum and maximum transaction volumes and business risks, for example, under a more comprehensive range of assumptions about the future.

More important, however, executives can use scenario planning strategically. By inviting the outsourcing provider to participate in this kind of long-range planning process, they can create a rich context for designing a sound joint business model, and a migration plan that sustains value. Most of the private-sector organizations that transform through outsourcing work with a consulting company initially to set the strategy, review the alternative approaches, and frame the initiative. This provides a great start, but it does not go far enough. When they have selected a partner, and at least once a year for the duration of the contract, they should put their strategists and industry experts together to look at where they are going.

^[3]See Peter Schwartz, The Art of the Long View (New York: Currency/ Doubleday), 1991.