Assumption based planning

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.

The position of ABP in the Business Planning process

Most business planning methods or books about “how to write a business plan� do indicate that you have to write down your financial assumptions at the end of your plan. Few works however actually support you to actively plan and monitor the validation of these assumptions. Assumption planning does just that. Consider the following situation:

Paul and Harvey, two experienced entrepreneurs, are planning to start a new company, which is going to sell a glow-in-the-dark shampoo. During the business planning process they give a description of the potential customer base and the size of the market for their product. They write down the amount of people that could buy their glow-in-the-dark shampoo and the amount of bottles they hope to sell to each customer.

The claims about the market made by Paul and Harvey are assumptions, based on a combination of gut feeling, market research and maybe some information gathered out of past experiences of both entrepreneurs. In order to avoid surprises Paul and Harvey take assumption based planning to hand and start asking themselves the following questions:

    * How are we going to prove that there exists a customer base of more than 2 million people? And what is a clear sign that there actually are more than 2 million people, to whom we could sell our shampoo?

    * What proves that the average customer will use a bottle of glow-in-dark shampoo per 3 months? How are we going to test that? What if the test proves us wrong?

    * What are we going to do if we’re not certain about the size of the market by the end of September next year?

    * We assume that there the product is not very sensitive to the consumer price, how can we show that we’re right?

Sometimes the mere identification of assumptions immediately leads to a change in the business plan. It is for that reason that ABP should be strongly interwoven into the whole business planning process.

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