When wildcards hit, your contingency planning is tested. Did you have enough of the key equipment or resourcesstockpiled, are you able to switch production fast enough?  The coronavirus outbreak exposed issues in government planning around the availability of critical items – personal protection equipment, ventilators, testing facilities having the required chemicals. But wildcards – by …
How much should you spend on preparing for wildcards?

How much should you spend on preparing for wildcards?

When wildcards hit, your contingency planning is tested. Did you have enough of the key equipment or resourcesstockpiled, are you able to switch production fast enough?  The coronavirus outbreak exposed issues in government planning around the availability of critical items – personal protection equipment, ventilators, testing facilities having the required chemicals.

But wildcards – by definition, low probability events – are difficult to budget for, and shortages are easy to criticise in hindsight. How much should you spend stockpiling items that you may never use?  There are always competing budget needs; spending on today’s concerns will always take priority over remote future possibilities.  And there is a vast range of wildcard possibilities, so preparing thoroughly for all of them would be prohibitively expensive, practically impossible.

One could argue that the pandemic is not really a wildcard, as it has been part of the National Risk Assessment for many years with a fairly high probability score. For true “black swans”, it’s impossible to plan – but there are very few of these. For low probability/high impact events on your risk register it’s still very difficult to decide how much to budget for contingencies.  And it’s tough too when your stockpile goes out of date and needs replenishing.

A start point one might think would be to rank spend according to likelihood multiplied by impact.  The problem with this simple approach is that the likelihood is difficult to estimate to any reasonable accuracy – even calling it “low, medium, or high” is a very subjective exercise. On the impacts, there may be data available to make some sort of plausible assessment of the range of potential economic impacts and casualties.  However, it is important not to rely too heavily on models; and most high impact events also have psychological impacts, for which there are limited assessment tools available.

Part of the answer revolves around timescales. How early can you spot the crisis coming?   Investing in monitoring and horizon scanning will not only identify the early warning signs of your identified risks, but also should help spotting newly emerging risks to add to the risk register. However, it is very difficult to judge the relative weightings to be given to hard data/intelligence and horizon scanning. Having spotted the risk developing, how quickly can you overcome bureaucratic inertia to take the necessary actions?

How quickly can you react to acquire the necessary capabilities?  If you can convert conference centres into hospitals in a week, there’s no need to worry about ICU wards.  But if it takes months to get manufacturers to convert to producing ventilators – crucially, at sufficient scale – then your contingency plan should have thought about stockpiling them.

How fast you can acquire new stocks versus the rate of use tells you how much you need to hold to avoid a “stockout”.  You then have to put a cost on a stockout happening, which is a matter of judgement. If you’re a retail store, can you sell the customer something else, or have you lost that sale completely, or worse have you lost the customer to the competition for life?  It’s a standard business stock control problem with subjectivity thrown in.  If you try to avoid stockout entirely across a range of risks, you will go bankrupt. On the other hand, a stockout of PPE costs lives.

It may be worth looking at resources that will be useful in several different wildcard events. Much of a hospital’s Major Incident Plan will apply whether it’s a natural disaster or a terrorist attack. Both will require similar capabilities and strategies. Postponing elective surgery is a favourite response to any hospital crisis.

This links in with issues around bureaucracy and centralisation. In “normal” times, centralising production and control is often both more cost-efficient and a way of guaranteeing consistent quality. But in times of crisis, the “Dunkirk spirit”, decentralised activity – sewing medical scrubs for example – meeting local demand in a flexible and responsive way without much central control, may be what is called for.  The Indian concept of Jugaad – a non-conventional, frugal innovation, or hack – gives greater responsiveness. Strict centralised business processes may not be what you need in turbulent times – empowering people to be innovative can be more effective.

Another form of contingency investment you can make is in capacity and capability.  Organisations operating at 100% capacity won’t have the flexibility to respond to the unexpected.  Clearly you can’t have expensive resources like doctors sitting around doing nothing, but you can have slack in the system so that when the key people are needed you can backfill their roles.  Can you summon a High Impact Team just when you need it? If military analogies are appropriate, where are your “reservists” who you can call up to free trained resources by taking on the less critical tasks?

Training people in how to respond to shocks is also a sound investment. Just as you have first-aiders and fire marshals, you could have strategic eagles who fly in to tackle business emergencies.  Regardless of the exact nature of the challenge, these people – trained in how to respond, how to implement contingency plans, how to bring together teams and resources – will spearhead your response. Running exercises is also an important tool for training responders and testing the contingency plans – provided you act on the results.

High impact low probability events generally result in high reputational damage. However, how much you spend, how many precautions you take is a judgement call, depending on what you can afford and your risk appetite.

As Clint Eastwood said in the film Dirty Harry,

“You’ve got to ask yourself one question: ‘Do I feel lucky?’  Well do ya, punk?”

Written by Huw Williams, SAMI Principal

The views expressed are those of the author(s) and not necessarily of SAMI Consulting.

SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy.

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