12.10: Contingency Planning and Risk

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Suppose you are developing a green or environmentally friendly product line that is particularly attractive because of a government tax credit. What if the government rolls back the tax credit? Or what would happen if a key member of the management team leaves the company? What if interest rates sky rocket? What if a key employee deletes the design specifications of a new product? What if a disgruntled employee destroys the social networking application and backup files? It is impossible to have a fall-back plan for every situation. But if there are key people and key assumptions that will determine business success, then a contingency plan is essential.

Risk is the probability that some adverse event will happen that will have a negative impact on the start-up’s ability to survive. Risk management is an attempt to identify the adverse events within a company and in the external organizational environment, and in turn develop strategies to deal with the consequences. Many of the internal risks to the start-up are related to the critical assumptions involving the tenure of the management team, the ability to attract key personnel, the ability to set up key organizational systems such as operations and marketing, the ability to manage cash flows, and the ability to adapt untested technologies. There are also external industry-related risks related to the ability to forecast market growth, and the risks related to unforeseen competitors and unforeseen emerging technologies that might affect profitability. There are also external risks related to economic downturns, interest rates, government intervention, political movements, and even changes related to social norms. Risk assessment also has to be made in terms of the impact of adverse weather conditions, earthquakes, and other natural disasters.

As noted earlier, there is some danger in pointing out weaknesses and threats, but they need to be addressed in a surreptitious manner. This can be accomplished by presenting alternative scenarios and focusing on the probability of their occurrence. Contingency planning and risk assessment should be addressed in the business plan or at least informally documented and communicated among the founders of the business and key management employees.