Assumption-based planning: Difference between revisions

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'''Assumption -based planning''' in [[project management]] 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 plan]]s, to test these assumptions, and thinkto ofaccommodate hedgingto actions and what-ifunexpected scenariosoutcomes.

== Overview ==

Conventional business planning methods operateworks on the premiseexpectation that managers can extrapolate future results from a well-understood base of information from the past. Howeverexperience, but for new businesses and projects this way of planning is often does not complypossible. MostExperience ofmay thebe timelacking thereor isextrapolating nofrom past-knowledge andexperience ifmay there’sbe any past knowledge available, predicting the future out of it is nearly impossiblemisleading. The dilemma is that corporate planning techniques often presume more knowledge than exists, leading to grave errors in managing innovation projects <ref>Christensen, C., Kaufman, S., & Shih, W. 2008. Innovation killers: how financial tools destroy your capacity to do new things. Harvard Business Review, 86(1): 98-105, 137.</ref>.

The managers’A solution to this problem is to make assumptions; theirand best tryattempt to predict thefuture futureoutcomes. 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 importantunimportant. Assumption -based planning is about the identificationidentifies and testing oftests the assumptions made in a [[business plan]], the formulation of “hedging actions” and the construction of “what-if” scenario’sscenarios.

In short, this means that uncertaintiesUncertainties are identified, aand testplans iscan designedbe to make things clear and while waitingprepared for the uncertainty to become certain you think of what (not) to do if the original predictionpredictions provesprove to be false. The point of assumption Assumption-based planning is thereforedoes not to demand the highest degree of accuracy for all assumptions made in a business plan, but to buildbuilds a reasonable model to assess the order and magnitude of the challenges a new project or company willassumptions faceinvolved.

There are a couple of different assumption Assumption-based planning methods available, among othersinclude:

* [[Critical assumption planning]] (CAP) by D. Dunham & Co : Aims to help managers and entrepreneurs to maximize business development learning at least cost by means of challenging and testing assumptions.

* Assumption-based planning by [[RAND]] : Aims raisingraises the visibility of the make-or-break uncertainties common to new ventures at the lowest possible cost by means of forcing managers to articulateadmit what they don’t know.

* Discovery-Driven Planning by [[Rita Gunther McGrath]] and Ian C. MacMillan: aims to identify the critical assumptions underlying an organization’s thinking and operations, and then to understand which of those assumptions may become vulnerable and how .<ref>McGrath, R. G. & MacMillan, I. C. 1995. Discovery Driven Planning. Harvard Business Review, 73(4): 44-54. </ref><ref>McGrath, R. G. & MacMillan, I. C. 2009. Discovery Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity. Boston: Harvard Business Publishing</ref>

== AssumptionPosition basedin business planning topicsprocess ==

Most business planning methods or books about “how to write a business plan” do indicate that you have toshould write down your financial assumptions at the end of your plan., Fewbut worksassumption-based howeverplanning actuallyencourages support youmanagers to actively plan and monitor the validation of these assumptions. Assumption planning does just that. Consider the following situation:

=== Position in 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:

Sometimes the mereThe identification of assumptions immediatelymay leadslead to a change in the business plan., Itso isadvocates forof thatassumption-based planning reasonargue that ABPit should be stronglyat interwoventhe intocore the wholeof business planning process.

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 number of people that could buy their glow-in-the-dark shampoo and the number of bottles they hope to sell to each customer.

==Types of assumption==

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:

[[RAND]] defines an assumption as “an assertion about some characteristic of the future that underlies the current operations or plans of an organization.” There are several types of assumption. Include implicit and explicit assumptions, and primary and secondary assumptions, an important aspect of [[Critical assumption planning]]. The two classifications are not mutually exclusive; an assumption can be both explicit and primary.

* 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.

=== Implicit and explicit assumptions ===

[[RAND]] defines an assumption as “an assertion about some characteristic of the future that underlies the current operations or plans of an organization.” There are several types of assumption. Include implicit and explicit assumptions, and primary and secondary assumptions, an important aspect of [[Critical assumption planning]]. The two classifications are not mutually exclusive; an assumption can be both explicit and primary.

Explicit assumptions are assumptions of which the intention that is fully revealed or expressed without vagueness, implication or ambiguity. However, explicit statements in a plan often have hidden implicit assumptions. Implicit assumptions are assumptions that are not expressed and may go undetected. If implicit assumptions prove to be wrong, this can damage projects.

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=== Primary and derivative assumptions ===

Primary assumptions are assumptions about who the customer is, what they want, how dense the customer population is, what they need and what the customer sees as the alternatives to your product. The primary assumptions define the foundation of a company.

Besides the distinction between implicit and explicit assumption the Critical Assumption Planning method distinguishes two other types of assumptions: primary and derivative assumptions.

PrimaryDerivative assumptions arecome assumptionsfrom aboutthe whomprimary theassumptions. customerThe is,numbers whatin hea orsales sheforecast wants,are howbased denseon theassumptions about customer population isdemand, whatthe theynumber needof andclients whata thesales customerperson seescan asvisit in a week, the alternativesavailability toof yourthe product. TheOther primaryderivative assumptions defineinclude therevenue foundationforecasts, ofcash aflow company.outlook and the return on investment.

ByThe hypothesis in CAP is that knowing primary assumptions helps a business better test their assumptions; by searching for the primary roots of the derivative assumptions or statements, youmanagers can identify the critical issues of a plan more rationally and design a sound test plan to prepare yourself for the unexpected.

Derivative assumptions are derived from the primary assumptions. Take for example a sales forecast. The numbers in the forecast are based on assumptions about customer demand, the number of clients a sales person can visit in a week, the availability of the product and so on. Other examples of derivative assumptions are: the revenue forecasts, cash flow outlook and the return on investment.

The hypothesis in CAP is that knowing your primary assumptions will help you to better test your assumptions. CAP furthermore states that lots of strong statements stated in a business plan can be split up into primary and derivative assumptions; see callout 2 for an example.

By searching for the primary roots of the derivative assumptions or statements, you can identify the critical issues of a plan more rationally and design a sound test plan to prepare yourself for the unexpected.

{|

|+ Callout 2 - Deriving assumptions out of an explicit statement

|-

| style="background-color: #CCC; border: 2px solid black" |

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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 ==

[[File:ABP process.gif|thumb|320px|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.

== Process of assumption-based planning==

[[File:ABP process.gif|thumb|320px|Assumption-based planning. 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.<ref>The modelling method in general is a result from a method engineering approach as proposed by the [[University of Utrecht]] in it's "Method Engineering Encyclopedia"</ref> The steps are:]]

The steps of assumption-based planning are:

* Identify Assumptions 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%”.

* Determine criticality: Try to quantify the assumptions as much as possible in order to determine which assumptions have the greatest (financial) impact.

* 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.

* ScheduleDesign Testtests: 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.
* Schedule tests: 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 assumptions: Then an assumption is tested this results in a test outcome, which proves the assumption right or wrong.

* Reassess Venture Plan 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 Rere-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 Planassumption plan: The assumption plan holds all data gathered during the ABP process.

== References ==