Assumption based planning

Assumption based planning

Assumption based planning is a post-planning method that helps companies to deal with uncertainty. It is used to identify the most important assumptions in a company’s business plans, test these assumptions and think of hedging actions and what-if scenarios.

Assumption Based Planning in General

Conventional business planning methods operate on the premise that managers can extrapolate future results from a well-understood base of information from the past. However, for new businesses and projects this way of planning often does not comply. Most of the time there is no past-knowledge and if there’s any past knowledge available, predicting the future out of it is nearly impossible.

The managers’ solution to this problem is to make assumptions; their best try to predict the future. Some of the assumptions made during the planning process are very likely to come true; the outcome of others is very much uncertain, though not less important. Assumption based planning is about the identification and testing of the assumptions made in a business plan, the formulation of “hedging actions” and the construction of “what-if” scenario’s.

In short, this means that uncertainties are identified, a test is designed to make things clear and while waiting for the uncertainty to become certain you think of what (not) to do if the original prediction proves to be false. The point of assumption based planning is therefore not to demand the highest degree of accuracy for all assumptions made in a business plan, but to build a reasonable model to assess the order and magnitude of the challenges a new project or company will face.

There are a couple of different assumption based planning methods available, among others:
* Critical assumption planning (CAP) by D. Dunham & Co.
* Assumption-based planning by RAND and
* Discovery-Driven Planning by McGrath

Each of these methods has a different goal, but they share their intent to prepare managers for surprises and improve the robustness and adaptability of business plans. Table 1 summarizes the goals of the assumption based planning methods listed above.

Once you have identified your derivative and primary assumptions as well as your implicit and explicit assumptions you can start quantifying them. It might sometimes be hard, but in order to determine the criticality of the assumptions you need a way of measuring the financial impact of failing or proving an assumption. Take for example the statement in callout 2 – “If we are later than 12 months, we will lose the opportunity”. You can probably restate this statement, based on the underlying assumptions to “For each month delay in product availability, beyond the 12th month, we will lose a market share of 3%”. This way you can calculate the financial impact of changes in the assumptions and start determining the criticality of the assumptions made.

The Assumption Based Planning Process

In order to provide a general overview of assumption based planning process a simplified process-data diagram is presented. This diagram is based on the “common” aspects of the Critical Assumption Planning, Assumption-based planning by RAND and Discovery-Driven planning methods. It is advisable to check out the separate methods for a more detailed description of the ABP process.

The "blue" part of the figure depicts the process steps of a general assumption based planning method, the "white" part identifies the separate deliverables. Every step is described in the assumption based planning process list displayed below the picture. The modelling method in general is a result from a method engineering approach as proposed by the University of Utrecht in the Method Engineering Encyclopedia

Identify Assumptions

Collect all assumptions implicit, explicit, primary and derivative, out of the (business) plan.

Determine Criticality

Try to quantify the assumptions as much as possible in order to determine which assumptions have the greatest (financial) impact. You can for example restate the statement “If we are later than 12 months, we will lose the opportunity” to “For each month delay in product availability, beyond the 12th month, we will lose a market share of 3%”.

Design Tests

Design a test for every critical assumption. In a test design you state how to test the assumption and what proves the assumption wrong or right.

chedule Test

Every critical assumption needs to be tested, but not all assumptions can be tested in the present. So future assumptions tests are scheduled in a test schedule. Some possible reasons to schedule a test in the future are a lack of information in the present or a dependency on the test outcomes of other tests.

Test Assumption

When an assumption is tested this results in a test outcome, which proves the assumption right or wrong.

Reassess Venture Plan

Based on the test outcomes and the test schedule one might decide to reassess the venture plan and update the business plan with the new insights gathered in the ABP process.

Plan Re-testing of Assumptions

The assumptions need to be re-tested regularly if not constantly. There should be a retest schedule of every critical assumption.

Create or update the Assumption Plan

The assumption plan holds all data gathered during the ABP process.

References

McGrath, R. G. and I. C. MacMillan (1995). Discovery-Driven Planning. Harvard Business Review.

Sykes, H. B. and D. Dunham (1995). "Critical assumption planning: A practical tool for managing business development risk." Journal of Business Venturing 10(6): 413-424.

Dewar, J.A., Builder C.H., et al. (1993) "Assumption-Based Planning: A Planning Tool for Very Uncertain Times", Santa Monica, RAND.Also available as a free download from http://www.rand.org/pubs/monograph_reports/MR114/ (Link checked April 13, 2006)

Dewar, J.A. (2002) "Assumption-Based Planning: A Tool for Reducing Avoidable surprises", Cambridge UK, Cambridge Press.


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