Assumption-based planning

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 plans, to test these assumptions, and to accommodate to unexpected outcomes.

Overview

Conventional business planning works on the expectation that managers can extrapolate future results from past experience, but for new businesses and projects this way of planning is often not possible. Experience may be lacking or extrapolating from past experience may be misleading.

A solution to this problem is to make assumptions and attempt to predict future outcomes. 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 unimportant. Assumption-based planning identifies and tests the assumptions made in a business plan, the formulation of “hedging actions” and the construction of “what-if” scenarios.

Uncertainties are identified and plans can be prepared for what to do if original predictions prove to be false. Assumption-based planning does not demand accuracy for all assumptions made in a business plan, but builds a reasonable model to assess the assumptions involved.

Assumption-based planning methods include:

• Critical assumption planning (CAP) by D. Dunham & Co.
• Assumption-based planning by RAND : raises the visibility of make-or-break uncertainties common to new ventures by forcing managers to admit what they don’t know.
• Discovery-Driven Planning by Rita Gunther McGrath and Ian C. MacMillan.

Position in business planning process

Most business planning methods or books about “how to write a business plan” indicate that you should write down your financial assumptions at the end of your plan, but assumption-based planning encourages managers to actively plan and monitor the validation of these assumptions.

The identification of assumptions may lead to a change in the business plan, so advocates of assumption-based planning argue that it should be at the core of business planning.

Types of assumption

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.

Implicit and explicit assumptions

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.

Examples of implicit assumptions:

Customers will buy our product because we think it’s a good product Customers will buy our product because it’s technically superior Customers will agree with our perception that the product is “great” The product will sell itself Distributors are desperate to stock and service the product We can develop the product on time and on budget Competitors will respond rationally We will be able to hold down prices while gaining share rapidly We will have no trouble attracting the right staff Customers will run no risk in buying from us instead of continuing to buy from their past suppliers

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.

Derivative assumptions come from the primary assumptions. The numbers in a sales 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. Other derivative assumptions include revenue forecasts, cash flow outlook and the return on investment.

The 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, managers can identify the critical issues of a plan more rationally and design a sound test plan to prepare for the unexpected.

Deriving assumptions out of an explicit statement

“If we are later than 12 months, we will start losing opportunities”. If so… The product will be available The competitors have the capability to close the deals in 12 months There must be an opportunity for us to lose, if so… A customer is identified The customer will feel a need to buy

Process of assumption-based planning

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.

The steps of assumption-based planning are:

• 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.
• 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.
• 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 assumptions: Then an assumption is tested this results in a test outcome, which proves the assumption right or wrong.
• Reassess 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: 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.

Further reading

• Block, Z. & MacMillan, I. C. 1985. Milestones for successful venture planning. Harvard Business Review, 63(5): 84-90.
• 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.
• Dewar, J.A., Builder C.H., et al. (1993) "Assumption-Based Planning: A Planning Tool for Very Uncertain Times", Santa Monica, RAND.
• Dewar, J.A. (2002) "Assumption-Based Planning: A Tool for Reducing Avoidable surprises", Cambridge UK, Cambridge Press.
• McGrath, R. G. & MacMillan, I. C. 1995. Discovery Driven Planning. Harvard Business Review, 73(4): 44-54.
• McGrath, R. G. & MacMillan, I. C. 2009. Discovery Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity. Boston: Harvard Business Publishing.
• 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.