Contingency Planning In Uncertain Times

Strategic planning and budgeting are tough enough to accomplish during stable times. Even with reasonable predictability, planning into the future is a 'best guess' effort. This Fall, the environment we all operate under is brand new. We have not experienced the conditions prevailing today, which makes predicting how they will evolve doubly difficult. Dick Kovacevich, CEO of Wells Fargo, said he is preparing several budgets for next year, since uncertainly is so high. What can a community bank do to handle this situation and be successful in 2002?

First and foremost, we need to remember that the definition of success has not changed. In other words, your goals for this coming year and your strategic position do not necessarily have to change. It's like sailing from Dover to New York: you know your destination and when you plan to arrive, but the precise route to getting there will vary based upon the winds, unexpected traffic etc. Similarly, your brand identity and strategic direction need not change. In fact, having a constant and consistent strategic direction is more valuable today than ever before. In times of instability, the presence of a constant guide post is helpful to focus every team member's attention on the light at the end of the tunnel. It continues to provide context for decision making to your team, management and board.

At the same time, recognizing the unpredictability of today's environment is essential. As you unfold the planning process this year, developing contingency plans and alternative scenarios for reaching your goals is critical to success. We know margins are tougher than ever to predict; we know the economic environment may worsen significantly or may get better by the second quarter. Our job is not to predict the future, but to have the tools necessary to be prepared and to be nimble enough to achieve the goals by thinking through the impact of different scenarios on our balance sheets and income statements way before we need to act.

Consider the major variables that will impact your performance next year: interest rate levels and trends and speed of change; economic environment both nationwide and in your market; consumer behavior; etc. Each of these major variables can evolve this year in a few directions, each of which will have a profound impact on your results. For example, if the economy recovers in the second quarter, it would present a different set of opportunities than if the economy tanks further and sinks into a deep recession. If one happens, aggressive loan growth may be the right thing to do. If the other occurs, tightening credit criteria and hunkering down appears more prudent. Both will have a meaningful impact on the bottom line of the organization. Scenario development will depict the impact of major and divergent variables on the company's results and resource allocation, and will help navigate during these troubled times.

Contingency planning implies preparedness, not accuracy of prediction. It also implies that you maintain maximum flexibility within your organization to capture opportunities as they arise and react very quickly as 2002 unfolds. For example, if loan demand slacks off, would terminating some of your loan officers be the best tactic to succeed in 2002 and beyond, or are you better off retaining the extra cost since things may turn around faster than anticipated and you'll be well prepared to capture the new loan demand?

This and other questions are the ones you need to ask yourself as you engage in contingency planning. It involves not only scenario development, but also resource management and a decision making process that will allow you to nimbly execute tactics responding to changes in the environment that we cannot predict today.

In summary, the following four steps may be helpful as you plan for 2002 and beyond:

1. Clear and consistent definition of success and strategic direction.
2. Effective scenario development for possible different environments.
3. Resource allocation to preserve your options until uncertainly declines.
4. A decision making process that allows you flexibility and maximizes your speed.

We are all struggling with these tumultuous times, and the steps outlined above may be of help in prevailing through this period.