Scenario Planning A Tactical Approach Planning for Tomorrow and Beyond Presented by: Kay Sargent, IIDA, CID, LEED® AP Principal, IA Interior Architects [email protected] Peyton Pond, AIA, LEED® AP Senior Project Manager, IA Interior Architects [email protected]

Saturday, November, 2009. The Wall Street Journal reports that a financial firm is returning to its lender the keys to the properties it purchased. The value of the write-down to the financial firm is over $951 million, yet the firm had purchased the properties in 2007 for $6.5 billion. In 2007, did anyone ask the question: “What if the value of these properties falls below the amount of debt we are assuming for the purchase?” What ever happened to that favorite phrase “exit strategy”? One would think that sophisticated investors would look at many scenarios before making a massive investment and would have in mind a scenario or two that would serve as an exit strategy. However, not all scenarios of the future need be limited to exit strategies. Where’s the optimism? In early 2007 there was optimism galore. Many investors in commercial real estate let optimism morph into an exuberance that blinded them. Their unbridled enthusiasm should have led to the necessity of tactical planning and assessing the value of investments around scenarios. These scenarios likely would have signaled the need for caution that was so easily ignored when there seemed no end to the upward moving markets for real estate. Before the economy spiraled downward in 2008, most companies focused on a strategic planning process that entailed determining what a goal and setting a course to get there. Strategic planning is linear thinking that can lead to dead-ends on a straight path. The financial crisis of 2008 and the ensuing Great Recession have prompted businesses to consider scenario planning which is non-linear and tactical in nature. Scenario planning allows for various options to avoid dead ends and allows a firm to: 

achieve a new balance

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provide for flexibility to meet various scenarios

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maximize return-on-investments and minimize risk

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allow for adjustments to employment options

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widen paradigms about how to work

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allow for quicker decision-making

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expand organizational options

Smart Planning for Uncertainty. An organization that wants to be an innovator will look for future scenarios to create opportunities (a proactive and optimistic stance) and to fend off hostile changes (a defensive and pessimistic stance) that affect its core business. Scenario thinking is a methodological approach that defines salient possibilities and permits the assignment of probabilities to those possibilities in order to identify useful courses of action (strategies). “Useful” can be thought of as any organizational action that favorably affects the services and products of an organization in order to enhance its value through profits or increased stakeholder satisfaction. Today there are several forces that are driving change:  Politics 

Economic Volatility

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Changing Demographics

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Integration of Technology

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Need to Be Green

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Evolution of Work

Additionally, there are some key challenges that most companies are facing when making real estate decisions in this market: 

Reducing cost

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Providing effective environments

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Consolidating (or rightsizing) facilities

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Managing risk

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Maintaining and building brand image

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Improving space utilization

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Optimizing real estate portfolios

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Leveraging service and providers

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Creating a sense of place

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Being corporately responsible

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Providing for the future

Scenario Thinking, also called scenario planning, is a structured process of thinking about and anticipating the unknown future, without pretense of being able to predict the future or being able to influence the environment in a major way. Instead, it navigates through the uncertainties and large-scale driving forces that have impact on the future. The objective is to examine possible future developments that could affect individuals, organizations or societies, in order to find directions for decisions that would be most beneficial no matter how the future unfolds. (Definition from Scenario Thinking.Org; http://www.scenariothinking.org/wiki/index.php/What_is_Scenario_Thinking%3F)

Scenario planning responds to current trends and helps anticipate future trends. Within today’s work place, we are already seeing trends that suggest future workspaces and organizations will: 

Provide a variety of spaces to work

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Become less place dependent

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Focus on collaboration and teaming areas

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De-emphasize individual workspace

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Be based on function, not hierarchy

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Emphasize views, not just access to daylight

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Have a higher degree of customization

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Be environmentally conscious

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Provide more equitable, agile space

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Be a branding opportunity

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Make connecting easier

Organizations can respond to these trends through scenario planning. This tactical stance prompts an organization to know itself in terms of its stakeholders’ demands and expectations, its corporate culture, and its need for survival. An organization that wishes to prepare itself with tactical planning will be doing more than “guesstimating” and will be preparing its stakeholders to capture the opportunities that change present. What does the self-aware organization look like? Following are the key initiatives of a self-aware organization—an organization that will be most able to benefit from scenario planning: 

Acknowledge both internal and external stakeholders

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Understand the potential needs and expectations of these stakeholders

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Understand the impact of these needs and expectations on the current marketplace Know who you are and what the existing corporate culture is

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Know what the organization wants to be

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Set goals and objectives

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Know the organization’s strengthens and weaknesses

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Identify potential threats and risk

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Identify opportunities

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Develop planning contingencies

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Incorporate flexibility into the plan

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Rethink, reassess, and refresh

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BE PREPARED TO CHANGE!

Scenario planning not only allows a company to respond more quickly to the changes and challenges of a volatile market, it also helps a firm know how to answer when opportunity knocks. The constant we know of is that change is inevitable, so plan for it. A Quick Case Study A services firm wishes to improve productivity and employee morale and retention. o o o o

Scenario 1: Do more with fewer employees Scenario 2: Maintain current staff levels but manipulate the tools and environment to enhance productivity Scenario 3: Reorganize and add staff to create more productive service processes. Scenario 4: Do nothing and allow improving macro-economics to trickle down through the organization

Assume that the services firm has a self-aware leadership that accepts responsibility for bringing the creative processes into the services model. Also, assume that in the current economy, the firm is just breaking even with its existing staff and work processes. The CEO recognizes that morale is low among current employees and that existing customers are dissatisfied with what appears to be diminishing quality in the firm’s services. The time horizon in which the CEO must act is within one fiscal year. Otherwise, shareholders in the closely held firm will become dissatisfied with the firm’s financial performance and may dismiss the CEO. With these simple facts, the CEO can evaluate the four scenarios: The first will likely impact morale negatively and may reduce further the quality of services (missed deadlines and errors in service, for example). The second will require creative, and perhaps risky, changes to find new tools and a change to the environment. The third may introduce chaos to the current organization and conflict between “old-timers” and newcomers while enforcing new processes that may or may not work. And the fourth, the path of least resistance, may fail if the economy takes an unexpected turn downward. Despite the risks inherent in any one of the scenarios, each scenario could yield benefits. The CEO can develop written descriptions and plans around each scenario. This process will create new potential narratives for the firm, and from these narratives, the CEO can select the narrative (scenario) that has the greatest chance of succeeding in the time frame of one fiscal year. Which scenario would you likely emphasize? All of the scenarios should be treated seriously. For the sake of brevity, let’s assume that the CEO thinks that the second scenario is the most salient for the firm’s situation. This scenario may look like this: The firm’s lease will expire in four years. The CEO exercises an option to lease an adjacent suite at a favorable rental rate. In the new suite, the CEO uses TI money and some cash reserves to build out a new workplace that reflects the wishes of employees who have engaged in a series of surveys and workshops about how they work and how they would like to work in the future. If the new suite design, which incorporates direct daylight views to all employees, hotelling, and flexible, mobile technology works (productivity and service quality improve along with morale), the firm will hopefully see an increase in value produced that leads to higher revenues.

In this instance, we have implied the following which are all essential to effective scenario thinking:   

The leadership is self-aware (things have to change or I may be out of a job). There is a defined time frame (one fiscal year). There are defined goals: improve productivity, improve morale, enhance revenues (each of these can be more tightly defined with metrics such as improving productivity 5%, improve morale by seeing fewer employees leave within a year, and improve revenue by 7%.

The scenario has costs associated with it, and the CEO must evaluate those costs and measure them against the goals that will define success. And finally what is the intrinsic value of this scenario planning exercise? The value of the CEO knowing the risks, potentials, and tactical maneuvers that would be necessary if the environment of the firm changed such that one of the other scenarios becomes the most likely or most desirable to occur. Options, agility, and flexibility. In today’s volatile market, it’s all about knowing what may lie ahead and having options and a well thought out plan to navigate through what ever scenario presents itself. Scenario planning allows a firm to avoid dead-ends, creates a new balance, enables quicker decision-making and ultimately expands the opportunities for organizations to succeed.