April 20, 2012

Scenario Planning at FSG

Patrick Marren
Partner

Someone who should know better remarked recently that he had no idea what, exactly, we at the Futures Strategy Group did. So I thought I would take a shot at explaining. At FSG, we help excellent organizations make better decisions under conditions of uncertainty. The main way we do this is through a scenario planning approach that assumes as little as possible about the future, while identifying and stress-testing the key assumptions that underlie the organization's future prospects for success.

A lot of consultants and experts spend their time trying to predict what is going to happen in the future. We at FSG are not in the prediction business. What we do is, first, figure out the handful of critical issues that will determine success or failure for our clients; and then we systematically vary that handful of things against one another - WITHOUT ANY ASSUMPTIONS ABOUT PROBABILITY - to see what the ramifications for our client might be. 

The world may assume, and the client's business might depend upon, a continuation of double-digit growth in developing markets. Many other consultancies are devoted to answering the question, "What is the probability that China going to grow at 10% this year, and what is the probability that China is going to grow at only 7%?" We are not that kind of consulting firm. Our first question will be, "How much does your company depend upon growth remaining robust in China?"  If your future prospects are not very dependent on that assumption, then we might move on to something more important to you.  If your future prospects ARE dependent upon that assumption, however, our next question might be, "What is the plausible range of outcomes for growth in China over your planning horizon?" Usually, that range is far wider than Wall Street analysts (who are normally looking at a very short horizon) seem to take seriously. Our next question might be, "What is the impact of Chinese growth hitting 15% on your company?" And the next would be, "What would the impact on your firm be if China suddenly experiences a historic bust of 1930s-USA proportions, its economy shrivels by a third, there is mass unemployment, and the country is riven by political unrest?"

But we don't stop there. Because a unidimensional variance of one issue can never capture the richness of reality. We might ask the further questions, "What if growth slows, but China reforms its politics in a democratic direction, stabilizing the country and setting the entire world up for a global boom?" And "What if China neither crashes nor booms, but goes into a Japanese-style stagnation? What will this do to your company's prospects?"  

Notice, these are not precise mathematical predictions. Remember what your high school teachers said about margins of error and false precision? Eight digits of precision may be required when you are talking particle physics, but when you are talking economic prognostication, even one digit of precision is usually too much. Far better you should invest a little time in examining what the assumptions are on which you are really relying, then simply varying them systematically, and trying to figure out the large-scale, general consequences might be for your firm. 

Scenarios are how we do this. We spend a lot of time figuring out exactly what is important to you; then we vary these things in a systematic way, and we come up with a set of (usually 4 or 5) alternative future operating environments within which you can "live," in order to stimulate creative insights into what Next Big Things all the expert prognosticators, with their 8-digit unidimensional expertise, might be missing. And each "world" has its own distinct logic for how the different parts - economics, politics, technology, culture - interact, which gives each scenario a reality and a power that no graph or spreadsheet could ever possess.

The funny thing is, this stuff actually works. We don't pretend to be able to predict everything (or any one thing in particular, for that matter). But every time we go through this process with a client, just at the point where we are about to throw up our hands in despair that we, in our humble lack of subject-matter expertise, could ever hope to help these accomplished folks do a thing, BAM. Our strategy or insight workshop participants come up with a bunch of insights into future risks, threats and opportunities that surprise every one of us.  

Our clients then proceed to making innovative, superior strategy, plans, decisions, and initiatives based on the insights they generate using our proprietary, unique process.

And that makes it all worthwhile. And some serious fun. Hope we see some of you here in Scenariotopia someday soon. 

Thoughts?