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on December 16, 2020 in Contingency Planning

Contingency Planning for Uncertain Times – Choose People over Projects

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What a year, 2020 will be remembered for generations to come!  Businesses of all sizes have had their fair share of impact and when businesses are impacted, so are its people.  We commend all business leaders that made the tough decision to retain their employees amid pressures to cut staff and reduce costs.  People are our most important asset and doing the right thing to keep and support them through these difficult times will surely bring loyalty we haven’t seen before.  At Inpensa, we have fostered this thought process and want to help companies look at all alternatives to reduce cost before considering any headcount reduction.

So, how do business leaders develop a contingency planning strategy that ensures putting employees first but still impacting the bottom line? 

In this article, we share a simple contingency planning framework that focuses on Project Prioritization. This framework has been implemented across our customer base to help them prioritize investments that are most impactful to their business as well as dis-invest in initiatives that are least impactful.  This process can be implemented at any point in time, for example, during a planning cycle or in the middle of the year.  Timing, however, is very important because you will need to identify investments that will no longer be funded. Keep in mind that you are funding these initiatives through this process of prioritization and selection.  Also, this framework is flexible enough to be applied to a business unit, support function or the entire company.

Step 1: Identify Discretionary vs. Non-discretionary spend by programmatically capturing all initiative spend in a standard format

Start by capturing each business unit’s current and planned initiatives in a simple format.  Identify each initiative as non-discretionary vs. discretionary.  Non-discretionary initiatives are projects that need to be fully funded and completed because they can significantly impact the business if they are not.  For example, regulatory or compliance initiatives are mandatory and considered non-discretionary.  Discretionary spend is basically what is left over after identifying all the non-discretionary spend.  These are initiatives that can be delayed, slowed down or stopped all together.  By identifying discretionary spend, you now have visibility into the portion of the portfolio that you can actually control and make near-term decisions on that will impact the bottom line.  Data capture for this step should include high-level financials, revenues, financial benefits, CapEx, OpEx, and estimated start date of CapEx (this data will be used later to run scenario analysis on the impact to the annual budget, income statement and earnings).

Step 2: Identify the portion of Discretionary spend that is not committed

 Once step one is complete and you have all initiatives split into two buckets, you can now analyze the discretionary spend.  This is the spend that you will conduct your scenario analysis and make near-term decisions on.  For example, if you have $100 million dollars of total spend, chances are 60-70% of it will be discretionary.  This 60-70 million dollars is what you will be analyzing through this process.  Next, you will want to know the company’s level of commitment to these initiatives.  If it is mid-year, chances are, you have already committed to at least half of these initiatives.  Commitment can mean different things to different companies but from our perspective, we view commitment as spend that you are contractually committed to spend and cannot pull back under normal circumstances (i.e. vendor commitment).  Internal commitments and budget allocations do not apply here.  Once the committed vs. non-committed spend is identified, you are then ready to move to the next step.

Step 3: Identify initiatives as high, medium, low using a simple scorecard method

Before you can run scenario analysis, you will need to use a simple scorecard method to identify these initiatives as high, medium, and low (note that the “critical” rating is reserved for non-discretionary investments).  Simplicity is important here as you do not want to bog down the process with a complicated scoring methodology.  We suggest using two parameters with four to six questions each.  The first parameter is “Strategic Value” and the second is the “Ability to Execute”.  Here are some examples:

Strategic Value

    1. Impact on revenues
    2. Impact on customers

Ability to Execute

    1. Duration of the project
    2. Key resource availability

With this approach, you are measuring the strategic value of the initiative against the risk of executing it (we will provide more sample questions for each in a separate blog).  Using a weighted scoring method, you can then assign a high, medium, low ratings to each initiative.

At this point you should have completed the following:

  1. Identified all of your active and planned initiatives
  2. Bifurcated initiatives into non-discretionary and discretionary buckets
  3. Further identified the discretionary spend as committed vs. non-committed
  4. Rated them as high, medium, or low

Step 4: Run a scenario analysis and view the impact on earnings over a defined period of time (months, quarter, or years)

 Once the initiatives have been carefully evaluated and ranked as high, medium, or low, you are now ready to run the scenario and impact analysis.  This is the easiest part of the analysis.  Simply remove any combination of initiatives and analyze the impact on the overall budget and earnings.  Financials captured in step one is critical to this part of the analysis.  For example, you can remove all low initiatives and half of the medium rated initiatives and see how the financials flow through to your budget and annual spend.  If you have a target budget for CapEx, OpEx, or both, you can set the budget and run various scenarios until you reach your desired target.  To take this a step further you can take the quarterly financial impact and divide it by the number of outstanding shares to calculate the impact on EPS.

Step 5: Implement the desired scenario and track results

Once the desired scenario has been reached in the above step you must communicate, implement, and track results as soon as possible.  Central coordination is key to managing this process efficiently and effectively.  We recommend communicating swiftly and begin implementing the new portfolio strategy immediately.  This includes stopping and slowing down any initiatives identified in the accepted scenario and resetting annual budgets.  If you stop here you have accomplished a lot and are on your way to delivering better results for your company.  We recommend taking this a step further and setting up a process for tracking the results to ensure there is no slippage in spend.  The tracking process should not only include financials but also benefits realization and business outcomes.

Final Thoughts

This process can be as simple or as complex as you make it.  With time being a key factor, we recommend a simplistic approach.  Use spreadsheets if you have to capture data and run an analysis for a one-time approach.  Alternatively, Inpensa’s solution can be used out of the box to run this process, making it repeatable, providing transparency, objectivity, and help drive accountability.  Whether you use our solution, spreadsheets, or napkins, it is important that a process is used to produce useful analysis that drives bottom-line impact.

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