Scenario analysis and wild cards – dealing with ambiguity in projects
Planning and performing projects means always dealing with ambiguity. We need to look forward and predict the future developments, which is quite a difficult tasks as we often do not have a clue about what is coming. Thus, competence in foresight and tools such as scenario techniques and wild cards are supporting us in our tasks. Image you were a car manufacturer investing quite a significant amount of money in a plant in Mexico. Suddenly you read on Twitter from the President-elect of the USA that you better stop your project and invest in the USA, otherwise you have to pay high taxes and tolls on your products being imported. For sure, this has a significant impact on your project and you need to respond to this new challenge in an appropriate manner. The question is, could have this situation been avoided? Or more general, can we predict the future and anticipate the impact of certain events on our projects? The truth is, yes we can, but not all developments can be foreseen, the future remains ambiguous!
Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes. It does not try to show one exact picture of the future. Instead, it presents several alternative future developments. Consequently, a scope of possible future outcomes is observable. Not only are the outcomes observable, also the development paths leading to the outcomes. In contrast to prognoses, the scenario analysis is not based on extrapolation of the past or the extension of past trends. It does not rely on historical data and does not expect past observations to remain valid in the future. Instead, it tries to consider possible developments and turning points, which may only be connected to the past. In short, several scenarios are fleshed out in a scenario analysis to show possible future outcomes. Each scenario normally combines optimistic, pessimistic, and more and less probable developments.
Now, in our case of investing in Mexico, one might have foreseen, that building-up the industry in Mexico increased the pressure on the Government in the North to do something about it and protect its own industry. The question is, when does the “tipping point” occur and how to plan something like that in. The second development of getting a new President in the USA, that is simply the opposite of the previous President may also seem to be pretty likely. Maybe none of us wanted to see that to happen, but it is more likely than continuing on the same path. Maybe we are biased in our way of thinking and are only seeing the optimistic scenarios to happen, but for projects we need to consciously evaluate optimistic, pessimistic and neutral scenarios.
Wild cards are a tool to deal with low-probability, high-impact events. Some address these events as “Black Swans”. The concept may be introduced into anticipatory decision-making activity in order to increase the ability of organizations and governments to adapt to surprises arising in a turbulent context. Such sudden and unique incidents might constitute turning points in the evolution of a project. Wild cards sometimes are linked to certain weak signals, which are incomplete and fragmented data from which foresight information might be inferred. So polls in the USA, information from social media and other sources may have indicated a change in administration in the USA, much earlier than during the election and could have been used for decision making. What if? The question is not rhetorical but has real impact on decisions far before the event actually occurs. Before starting into projects, we do not only need to analyse the risks, based on previous experiences and with a known likelihood and impact, yet we need to analyse the “unkown unknown” by using wild cards and analysing their impacts on our project and the decisions related to that.