Contingency planning may seem like a doomsday approach to business, but it actually is a forward-thinking strategy that dovetails nicely with risk management.
Further Reading: How to Develop a Business Contingency Plan
Further Reading: How to Write a Contingency Plan for Your Small Business
Contingency planning simply involves “what if” scenarios and the best responses to those scenarios. Unlike SWOT (Strength, Weakness, Opportunity & Threat) analyses, contingency analyses look only at risks to your business operation and how to cope with them effectively. They are the “Threats” element of the SWOT analysis.
While the traditional essence of contingency planning is to examine disaster probabilities and plan how to cope, proper contingency planning involves examining a variety of levels of threats or risks, and how to respond. These events generally are solitary occurrences and not part of normal business operations.
For instance, COVID-19 presented a risk that very few businesses anticipated, while some companies doing business in Russia had contingency plans in place to cope with the war, but most did not.
Rampant inflation was a foreseeable risk that few believed would occur and for which few prepared. On the other hand, Big Oil companies are planning for the inevitability that greener energy options will replace oil, and are investing in those alternatives, while also striving to protect their existing interests and infrastructure.
On a much smaller scale, supply line disruptions or environmental disasters have become a concern for many businesses. Insurance, staffing, distribution, demand and other disruptions are being assessed by forward-looking business, and responses being developed.
On the personal side, unanticipated succession issues, hostile takeovers and health emergencies that impact the business play a significant role in contingency planning.
A contingency plan recognizes that disasters may happen. This is more challenging than ongoing threats of competition, supply management, personnel development, marketing and marketability or other routine business threats.
Disasters are unpredictable, not unanticipated. We do know that key personnel leave businesses routinely, often to move to competitors. But how will we handle such a situation? Death is a very abrupt change, whether it is of key employee or key owner. These contingent events can be anticipated, and even expected.
Fires, floods, earthquakes, power disturbance, hacking of systems, global emergencies and political upheaval, disease (COVID-type events, bird flu, etc.) all are unpredictable, but the level of risk of them occurring can be calculated to a degree.
For instance, in the Canadian prairies, earthquakes are highly unlikely. Floods, in Manitoba, however, are almost routine, varying only in severity and occasionally disrupting shipping. But a localized man-made flood, caused by water main failure or sewer backup, is less predictable, but can be mitigated against.
While the SWOT analysis plans responses to each threat or risk and takes active steps to mitigate or benefit, a contingency plan does not. However, contingency response to a flood may be insurance and a plan to keep assets (files, supplies, inventory, equipment) safe.
To prevent overreacting to a possible risk, it is vital that we measure probability. Investing in an earthquake, fire and flood-proof building for all assets is overkill and costly. Having a training program for staff and how they should respond in various scenarios is reasonable.
So, too, is development of an employee’s handbook and guide that includes roles of each in case of emergency.
Routine training refreshers generally are adequate to keep risk, and cost, to a minimum.
Having off-site storage or duplicate storage (Cloud for files or emergency replacements for equipment and supplies) is another option.
Key components of a good contingency plan are pre-planning and anticipation, protection strategies, detection protocols and a recoverability plan.
The steps to creating a good plan are simple:
- Identify all the potential risks to your business. Include analysis of hardware and equipment failure, vendors or supply line disruptions and causes, core staffing risks, external forces and natural disasters, man-made attacks and problems, and so on.
- Prioritize each risk, looking at probability, impact, cost of protection, prevention and mitigation.
- For each risk, itemize the steps that you can take to handle the situation, versus the justification for those steps, including cost, time, and the end result.
- Share the plan with the proper people, ensuring their buy-in and cooperation.
- Develop the responses for each risk as appropriate.
The contingency plan needs to be reviewed and updated annually, along with your business plan and business position. Brainstorm with key persons and the people likely to be impacted by each disaster or risk. Their input is important, and likely to offer a more intimate view of the actual risk and response warranted,