Sometimes things just don't go to plan. And while disappointing, how you recover is typically half the battle. Having good contingency planning skills can save you a lot of headaches.
No matter how carefully you plan something, there’s always a possibility of something going wrong. There’s even a Murphy’s Law that says:
“If anything can go wrong, it will”.
And in the business setting, there are plenty of things that can go wrong:
- Your website might crash right at the moment you announce your big sale of the year.
- Your sales team could get sick.
- One of your biggest suppliers could decide to close down shop.
The list goes on and on.
But just because there are things that can go wrong, that doesn’t mean you should resign yourself to that fate and make peace with it. That’s where contingency planning comes in.
In this post, we’ll explain what contingency planning is, what your contingency plan should cover, and how to develop and maintain your contingency plan.
What Is Contingency Planning?
A contingency plan refers to a course of action or steps your business would take if something unexpected happens. An unexpected event can be a good one: such as surpassing your sales goals or booking more clients than you originally planned for.
Those are good problems to have but as always, there’s the other side of the coin. There are also negative events that can happen that can impact your business operations. And the probably of encountering some risk factors is increasing. According to Dun & Bradstreet's Global Business Risk Report for 2022:
"Our latest GBI score increased to 297 in Q1 2022, following a deterioration in the risk environment, indicating that the outlook for doing cross-border business remains relatively challenging."
The report goes on to list the top risk factors including global inflation, COVID19, and supply chain issues.
But even if you're running a small, local business you could face significant risks.
For example, the building where your business offices are located might catch on fire. Or maybe your entire organization is a victim of a data breach. Or maybe, a natural disaster such as a flood or an earthquake leaves you without power or without an office for a while.
In that case, your contingency plan should outline how your business will continue to operate until things return back to normal.
A contingency plan ensures that your business is ready for anything. In essence, you’re future-proofing your business with some proactive planning.
But before you develop a contingency plan, conduct a risk assessment.
How to Conduct a Risk Assessment
Conducting a risk assessment may seem daunting. But it’s a necessary step that'll help you determine how to best prepare for worst-case scenarios.
Start by identifying the processes and operations without which you couldn’t run your business. For example, if your business operates only online, then having a reliable internet connection is a business-critical operation.
Similarly, if you manufacture furniture, then your supply chain is another business-critical operation. Or maybe you work in the healthcare industry and it’s imperative that your business is HIPAA compliant.
Once you know what your critical, essential operations are identify the risks associated with them. For example, your main wood supplier might go out of business. Or, inclement weather could damage the power grid and you lose internet access.
In some cases, you might end up with a very short list of threats. In other cases, you might end up with a long risk of threats. It all depends on the type of business you've got. But keep in mind that it might be impossible to create a contingency threat for all the risks you’ve identified.
When that happens, you’ll need to prioritize and decide which threat to tackle first. You can use a probability chart to analyze the impact each risk would have on your business and the likelihood of it happening. Risks that have a significant impact on your cash flow are usually the ones you’d want to create the contingency plan for first.
For more details on risk management, review our series on Managing Risk in Your Business.
What Should Your Contingency Plan Include?
As mentioned earlier, a contingency plan allows your business to continue operating even in the event of unexpected circumstances. As such, there are a few vital parts that every contingency plan should include:
1. Different Scenarios
The first things your contingency plan should include are the different scenarios that could negatively impact your business. For this part, you’ll want to refer to your risk assessment. Choose the risks that are most likely to happen or those that would cause the most disruption.
Keep in mind the five types of business risk:
- strategic risk
- compliance risk
- operational risk
- financial risk
- reputational risk
To learn more about the varies types of business risk, review this tutorial:
Once you've got those scenarios, plan the steps that should be taken for each scenario. A few examples of scenarios include:
- If you live in an area with frequent storms, what steps can you take to prevent your business from being unable to operate until the power is restored? (Operational Risk)
- What would you do in case of someone hacking your computer? (Operational Risk)
- How would your business deal with a major lawsuit? (Reputational Risk)
- What happens if the laws and regulations governing your business change? (Compliance Risk)
Contingency plans should be developed for each scenario you identify. For a detailed list of some potential disasters and emergencies, as well as tips on what to do for each one, study the emergency preparedness website, Ready.
Once you've got those scenarios mapped out, you need to know when your contingency plan kicks into action. For example, if you plan for internet disruption, is your plan triggered when the Internet goes out or when you get a severe weather warning which could disrupt it?
Keep in mind that some events may have many triggers. Those could trigger different parts of the plan or even need separate contingency plans altogether.
3. Response Strategy
Your contingency plan should also include how you’ll respond to the circumstances that triggered your contingency plan. This justifies the actions you’ll take and ask your employees to take.
For a detailed discussion on how to plan responses, study our tutorial:
4. Who to Inform
Make a list of who needs to be informed immediately about what's happening. This list can include:
- your customers and clients
- even your local community
In some cases, you might even have to notify the legal authorities so including them on this list as well as their contact information is crucial.
5. Key Responsibilities and Timeline
Identify who handles each part of your contingency plan into motion as well as executing it. Be specific.
You also need to provide a timeline of the events. Specify what tasks need to happen when your plan is put into motion and when each task should be completed.
In some cases, it might be more complicated. For example, what if you need to deliver a large order fairly quickly? You discover that your delivery is running late due to a vehicle malfunction. Your timeline should not only include the estimated repair time, but also the new delivery date and how often you’ll keep your customer or client updated.
How to Develop a Contingency Plan
So now you know what a contingency plan is and what it should include. But how do you actually develop a contingency plan? Let's take a look:
1. Consult People From All Departments
First, it’s a good idea to consult people from all your departments. It’s almost impossible for a single person to think of every possible scenario. That’s why you need to consult managers from each department as they would know first-hand what could go wrong.
You can even ask employees directly as they would be best equipped to tell you what they need to continue to do their job.
Aside from getting their input on potential risks, you should also share your contingency plan with them. They can provide you with direct feedback which in turn allows you to further solidify your plan.
If necessary, schedule regular drills to test the plan and assess how effective it is. This can also show you what needs to be improved in your plan.
2. Make Sure Everyone Agrees
If everything works as it should, it could be difficult to get everyone on board with Plan B. This poses a challenge to both your plan as well as your ability to successfully operate when the unforeseen happens.
The best course of action is to explain the importance of having a Plan B and what happens if there's none. Take charge and complete at least some planning tasks on your own to motivate others and lead by example.
3. Communicate Clearly
Use plain and simple language to write your contingency plan. The last thing you want is ambiguity, which will prevent people from doing what needs to be done. Keep it simple and keep it general. You never know when you’ll need to use the contingency plan. As such, if you use names, your plan will fall apart if that person is no longer employed when disaster strikes.
Another reason why your contingency plan needs to be simple is managing stress. Remember that disasters are always stressful. If your plan is difficult to put it place, it'll only add to the stress which jeopardizes the success of your implementation. Plus, clear communication minimizes the chances of gossip and rumor spreading.
How to Maintain Your Contingency Plan
Once your contingency plan is done, you need to continually maintain it if you want it to be useful and valid.
1. Account for Relevant Changes
First, consider all relevant technological, personnel, and operational changes in your business. Then, reassess the risks and either update the original plan or come up with a new one.
2. Make Sure New Employees Are on Board
Whenever you hire a new employee, make sure they get a copy of the contingency plan. This can be a part of their onboarding packet. It ensures they know what to do in the event a disaster occurs.
3. Schedule Regular Reviews
Needless to say, make it a point to schedule regular reviews of your contingency plans. While you don’t have to review them every month, it’s a good idea to build this process into your annual review.
4. Keep Your Plans Safe
Lastly, keep your plans in a safe and accessible location. People who are responsible for putting the plan into action should have immediate access to your contingency plan. This means there should be no complicated passwords or access rights that could hinder the plan from being put into motion.
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Develop Good Contingency Plans to Future-Proof Your Business
Contingency plans are necessary if you want to reduce and even mitigate risks in your business. The key to a good contingency plan is to conduct a risk assessment first and then create a plan that addresses each of the potential threats. You also need to store your plan in a safe location and update it regularly to ensure it’s always current.
Use the tips outlined in this article to help you create a good contingency plan and future-proof your business.
Editorial Note: This content was originally published in March 2022. We're sharing it again because our editors have determined that this information is still accurate and relevant.