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Contingency planning

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Contingency planning

U.S. Defense Secretary Robert Gates has written a memo criticizing the lack of a back-up plan to deal with Iran in the event that it produces a nuclear weapon. His criticism seems to be well based since it does not appear as if the Obama Administration has a sound strategy that it is willing to pursue to stop Iran from going nuclear.

The apparent lack of a contingency plan is not a problem specific to government, although in this case the stakes are likely much greater than they are when companies do not have contingency plans. Contingency plans tend to be much more uncommon than we would expect.

Did GM have any plans in place in 2006-07 in case oil prices spiked sharply and tilted demand away from SUVs, trucks and other gas guzzlers? Did Nortel and other telecom equipment manufacturers have any plans to deal with the possibility of over-investment in telecom infrastructure in the latter half of the 1990s? Did Lehman have any plan to deal with the possibility of a real estate and mortgage market meltdown? For that matter, did the U.S. Federal Reserve have any plans for such an eventuality? Did newspapers have any plans for dealing with younger generations acquiring their news from other sources? Did Greece plan for a major recession? I could go on and on with more examples.

All decisions are forward looking. As such, they are made with incomplete information. Hence, they are fraught with risk. Thus, every decision maker should plan for things to go wrong because they most likely will. Events rarely play out as anticipated, and some times the dreaded “Black Swan” event occurs placing companies and/or governments at great risk.

Introductory game theory introduces the concept of decision trees. That is, one starts with several possibilities, and various decisions for each of the possibilities lead to more possibilities. So as one follows through the decision-making exercise and the numerous possibilities, one creates on paper what looks like a tree – actually an inverted tree.

Game theory also teaches us to follow through to the many possible end games in order to choose the most favorable outcome and path, and then play the game in reverse to find the decisions that are most likely to produce the most advantageous outcome. However, we also must expect that reality will not necessarily play out as mapped by the decision tree.

Unexpected events occur. Therefore, it seems like a no-brainer that all decision makers should develop their plans B, C, etc. – contingency plans to deal with different scenarios. They should develop milestones in order to gauge quickly whether their original strategies are still appropriate, or whether it is time to change course and switch to one of the contingency plans.

But why does the obvious happen much too infrequently?

There are at least three possible explanations. Timing – how long before it becomes clear that something is really amiss and a change of direction is required? By how much can a milestone be missed before action is required? Given the inherent uncertainty in all decisions, there are no simple answers to these questions. Switching to a contingency plan might be the wrong decision, or the wrong contingency plan might be chosen. Errs are inevitable. Nevertheless, decision makers should continually monitor developments and be prepared to act.

A second possible explanation is that there might be too many contingencies, and the decision making process might be too complex. It is conceivable that every possibility cannot be considered, and decision makers can be blind-sided. Can anyone really prepare for a true Black Swan event? Can anyone afford not to be prepared or such an event? Difficult questions with no simple answers.

Finally, hubris –  decision makers can be over-confident in their abilities and decision-making prowess, so as to downplay the possibility that they might be wrong. Even when milestones are not met, over-confidence might lead people to stick to their original strategies because they cannot admit that might have been wrong. Given the timing problem, who is to say when they are wrong?

Contingency planning is very important, but at the same time, it is very difficult to decide when to switch course and follow a contingency plan.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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