Scenario planning 101 for directors

Is your board prepared for unexpected scenarios? Defence and intelligence expert Cheryl Durrant explains how to shock-proof your business..

At this moment in history the only thing that is no longer unexpected is the use of the word “unprecedented”. Be it bushfires, low interest rates, weird weather, economic shocks or a global pandemic, what the overabundance of this word tells us is that these events have not occurred in this way before, or not within living memory. These events are outliers. They could not easily have been predicted by the use of intelligence or analytical approaches that rely on past trends, nor are they likely to have been picked up by standard risk approaches — which require a good estimate of past probability.

This “new abnormal” is likely to continue in the future. These are properly uncertain times, where the slow-moving existential risks of anthropogenic climate change intersect with rapid technological and digital disruption; over-exploitation of natural resources with increased nationalism and new economic models; hybrid and cyber warfare with “post-truth” social media. Scenario planning is especially relevant now because it can potentially illuminate discontinuities, shocks and tipping points at the intersection of these transitions. It can enable business to expect the unexpected.

Plan to ask questions

At its simplest, scenario planning is being prepared to ask “What if…” with a good dollop of imagination and an open mind. The question is then usually fleshed out as alternate futures in which a strategy or plan can be tested. This can be done by any business, large or small and at any scale; technical, operational, strategic.

The key is to ask the right question(s). This sounds easy, but is often difficult in practice. In early 2018, I convened a group of engineering experts across 11 sectors and posed the question: “What if supply chains to Australia were cut off for one week, one month or three months?” The initial response was “Good question, no-one has asked us this before.” So how can directors ensure their business is considering the right question(s)?

In this type of scenario activity, the aim is to illuminate the unexpected, the disruption, the bump in the long risk tail; the thing that others will not see coming. In military intelligence analysis this is described as looking for weak signals among the noise. This is where divergent and creative thinking helps.

Look for signals in the noise

The first step is to remove the noise. It’s hard to think differently if you are caught up in the detail of day-to-day management. Make sure you or your analysis or business intelligence team create some quiet space and time for reflection on a regular basis. Meditation or other mindfulness approaches can help quieten the mind and enable you to observe without distraction. The use of offsite team retreats or activities —specifically designed as a circuit-breaker from day-to-day work — can also be effective.

The second step is to detect some weak signals. These will probably be found in a place where you do not usually look or listen. So, in the first instance, mix up your information or intelligence feeds. I always ensure that I read news from a variety of sources, regularly embark on learning from different fields of knowledge and spend time with people from diverse backgrounds, age groups and cultures.

At the very minimum, make sure you are listening to both analytical and creative voices. Disruptive ideas often require imagination and data. You could also try a serendipitous search engine such as BananaSlug and see where it takes you. (Resources to help you stay abreast of emerging risks and opportunities are listed below.) As a director, you should also take an interest in where your business intelligence feeds are coming from and take actions to minimise groupthink. Questions to ask before you embark on scenarios include:

• Are your sources really diverse or do they all originate from a single point of origin?
• Are they dominated by a single field of expertise or dominant expert?
• Does your risk- or horizon-scanning process allow for minority viewpoints and factor in uncertainty, or does it all get blended into a coloured traffic-light indicator to make it easy to digest?
• Do you create a productive space for people who raise difficult questions or have alternate viewpoints, or do you reward those who reflect your own views back at you?
• Do you and your key advisers know your own biases and have a practice of explicitly tabling assumptions?

As a director, you are the most important element of whether a scenario activity will work or not. Ask yourself: do you really want to explore the future or are you just going through the motions to meet governance or regulatory requirements? Your scenario team will ultimately deliver to your intent; either genuine business insights or a compliance fig leaf.

Prepare to be challenged

One of my biggest failures as a scenario-planning lead was in developing scenarios for the interdepartmental federal body, the Secretaries Group on Climate Risk. During this process, I was unable to convince the senior executives sponsoring the activity to genuinely explore the existential risk of climate change. For various political reasons they wanted to play it safe; for them, some assumptions were too risky to challenge.

In the end, we came up with a scenario that was sufficiently divergent to start a useful conversation on some preselected topics, while not scaring the punters or upsetting the government of the day — in effect, a mildly inconvenient scenario. Needless to say, while some insights were generated, the process did not help expect the unexpected. To get the best from scenarios, directors must be prepared to have their own views and assumptions challenged and to be taken to places they do not expect to go.

In the military we always included at least two scenarios: the most likely and the most dangerous. I usually try to add a third — or most different — scenario to the mix as well. In my experience, the most dangerous and the most different are the hardest to develop, but they provide the deepest insight. Too often, dangerous ideas are watered down because they’re too confronting. Different ideas, on the other hand, need careful nurturing, as they often challenge an organisation’s dominant mindset and can be discarded too early in the process. Below I discuss how to design participation in a group process to minimise early rejection of difficult and dangerous scenarios.

Thresholds, boundaries, gaps and assumptions

In addition to the obvious test of relevance to the business, to help work out if a scenario is useful or not, I run the early ideas through the lens of “assumptions, gaps, thresholds and boundaries”.

If a question challenges a core business assumption — especially one that has held true for a long period of time — it’s probably worth exploring. If these assumptions are wrong, everything else is probably wrong, too, so this is a high pay-off area for the use of scenarios. Economic growth, for example, has been a dominant business paradigm since the late 16th century, with minor interruptions. With evidence now suggesting that human civilisation consumes more than one Earth of resources a year, can growth on this planet continue indefinitely? A long view can be illuminating to tease out these deeply embedded assumptions. Has this happened before? Could this change in the future?

Gaps and boundaries are another area where there’s value in exploring or teasing out hidden assumptions. In Defence, we had a good handle on our own business, but less of an understanding of the critical services we expected from the national support base or the environment — something we also assumed, without explicitly considering, would always be there.

Given the increasing focus on directors’ responsibilities, including the need to incorporate climate risks into business planning, it’s critical to understand how environmental risks will impact national infrastructure and supply, as well as the flow-on effects to business. For Defence, this enabled us to kill two birds with one stone, as a massive cyber attack (cutting off supply) and regional ecosystem collapse (also cutting off supply) create similar operational dilemmas.

Thresholds are another lens to apply. Use the “Yes, and...” trick from improv drama to find a sensible scenario envelope. Often, the most dangerous scenarios will occur due to a combination of risks: what if this… and that? At a minimum, businesses should now be looking at scenarios that consider a combination of larger-scale natural disasters on top of the current pandemic.

I would also add communications disruptions. Either a cyber attack or extreme space-weather event could cause a short-to-medium-term disruption to communications and both are more likely than you might think. However, factoring in a Volcanic Explosivity Index-8 event, which is extremely unlikely, and beyond the scope of business to address, will probably waste planning effort. Make sure you push your most dangerous scenarios to a logical threshold.

Design for maximum insight

One of the most useful plug-ins to my scenario planning toolkit is design thinking. It makes me shift my emphasis from managing a technical process to paying much more attention to designing who will be part of the scenario activity.

To be effective, the right people need to be in the room. First, you’ll need the key business decision-makers (or influencers), otherwise the scenario outcomes could well be ignored, as most of the insights come from being immersed in the process, not reading the report. Show, don’t tell. Second, you’ll need enough technical experts to cover the breadth of the question/area that you intend to explore. This is because the unexpected often lies at the intersection of business areas, in the gaps between silos, not the highly visible surfaces. Third, you’ll need diversity to help avoid groupthink.

After some trial and error, I settled on a rough “rule of thirds” approach to selecting scenario participants. The first third were drawn from key business decision-makers and influencers; while the second third were drawn from technical experts inside and outside the organisation — risk or hazard experts, key partners, service providers and suppliers are obvious choices. These two groups were invited first, allowing me to see who I needed in the remaining third. I tried to maximise diversity here, both horizontal and vertical. Too many army officers? Invite some airforce and navy officers. Too many gen Xers? Invite some millennials. Too many technical types? Invite some creatives. Too many sellers? Invite some customers.

The final step is to finesse the mix. This is where you add scenario planning expertise, group participation enthusiasts and divergent thinkers. These are the participants familiar with the process who will help with the flow if it gets bogged down, or challenge (constructively) if it’s too orthodox. In Defence, I also included at least one senior retired officer to the group. The presence of a wise, respected elder, positively engaged with the activity, was important in overcoming the doubters and gave less senior participants permission to speak up.

Test for effectiveness

A simple test of effectiveness is to ask yourself and your participants three questions. Did we learn something new? Did this surprise us? Are we able to (going to) do anything about it? I always included these three questions as a minimum in formal activity evaluation, which enabled me to demonstrate the value of the activity.

A focus on asking the right questions and inviting the right people should go a long way towards expecting the unexpected. However, the most important thing for directors is to approach the activity with an open mind and design a space where new insights can emerge.

Cheryl Durrant spent 30 years in the Department of Defence, including 15 years in specialist army intelligence roles. As the department’s former Director of Preparedness and Mobilisation, she led scenario planning activities in Defence and across government for the Secretaries’ Group on Climate Risk. She is a Fellow of the Institute for Integrated Economic Research Australia and a Climate Councillor.

Resources: Future risks and potential disruptive system change

• Existential risks Centre for the Study of Existential Risk
• What Lies Beneath: The Understatement of Existential Climate Risk by David Spratt and Ian Dunlop, Breakthrough – National Centre for Climate Restoration, 2018
• Trajectories of the Earth System in the Anthropocene by Will Steffen et al, Proceedings of the National Academy of Sciences, 14 August 2018
• Global risks The Global Risks Report 2020, World Economic Forum
• Global Catastrophic Risks 2020, Global Challenges Foundation
• Worldwide Threat Assessment of the US Intelligence Community, (US) Office of the Director of National Intelligence, 29 January 2019
• Space Weather Prediction Center
• National Centers for Environmental Information
• The State of Food Security and Nutrition in the World 2020, Food and Agriculture Organization of the United Nations
• Australian Disaster Resilience Knowledge Hub
• The use and abuse of scenarios by Charles Roxburgh, McKinsey & Company, 1 November 2009