What if Your Flight is a Few Years Late? – Planning for Investments that Depend on Others

We apologize for the inconvenience. Unfortunately, the Federal Republic of Germany and its capital are unable to complete the country’s most prestigious infrastructure project anywhere near on time. Whoever was planning on doing business around Berlin Brandenburg Airport better has a Plan B somewhere in the drawer.

Unfortunately, as even international media is pointing out by now, such delays are not an unusual problem for large public or semi-public development projects in Germany. More often than not, they come with a hefty extra bill for the taxpayer: Hamburg’s new concert hall, the rebuilding of the Stuttgart central train station, the Cologne subway, even the new headquarters for Germany’s foreign intelligence service are due to open years behind schedule and with a total cost far beyond the original price tag.

Various commentators, including Oxford project planning professor Bent Flyvbjerg, see a method behind the madness: Faced with a public that is generally hostile towards new technology or infrastructure, German politicians tend to be overly optimistic on cost and timeline to get their investments through the political process. The resulting problems will usually be inherited by their successors, while after successful completion, much of the positive aspects of the project will be attributed to the long-retired initial promoter. Positive examples cited often come from the UK, like the 2012 olympics or the extension of Heathrow airport. However, it is quite obviously possible to complete major infrastructure investment according to plan in Germany , as well: The Frankfurt airport operator Fraport has a history of completing projects like the North-West runway or Terminal 2 on time and within a reasonable budget, at least once external political and administrative hurdles have been cleared. Planning is not perfect there, either, as it never will be: Terminal 2 was designed to handle airliners even larger than today’s A380, which are nowhere in sight, while passengers boarding the many much smaller planes there today mostly have to use rather unconvenient bus gates. However, the simple fact that the capacities promised were available at the time they were promised is a key factor for Frankfurt’s continued success.

So, are the delays at Flughafen Berlin Brandenburg a problem of strategic planning? They certainly weren’t caused by mistakes in strategic planning. If professor Flyvbjerg is right, they were caused by a combination of intentionally overambitious aims, supported by the politically elected board members, and unprofessional project management. To a certain extent, the delays of course represent a problem for strategic planning. However, no strategy could have prepared the company to survive maintaining a complete international airport that does not produce revenues for years without getting help from the (public) ownership.

The most interesting strategic planning questions come up outside the airport operator. About 80 tenants were waiting to start their business in the new terminal. Airport shuttles and logistics companies were preparing for the new airport.

For most companies planning to do business with, at or around the new Berlin airport, the fact that there are delays isn’t even the worst part. Many will be growing or migrating from existing businesses, and most will be renting rather than investing in actual real estate, so they should in principle be able to adjust to a change of schedule, given reasonable advance notice. Therefore, the postponement from October 2011 to June 2012, announced in June 2010, should not have been a disaster for most companies affected, as they were still far from operational readyness.

However, until May 8, 2012, the official opening ceremony of the airport was announced for May 24, the beginning of regular flight operations for June 3rd. Less than four weeks before facilities for 70000 passengers a day had to be running, the beginning of operations was postponed to August, then to March 2013, to October 2013, then “until further notice”. Even for tenants and contracting parties of the airport operator, who can at least hope for some degree of compensation, such a process must be a threat to a company’s very existence. At this point, employees have been hired and must be paid, merchandise or material have been ordered and can only be canceled at additional cost, interest on investment must be paid, and equipment starts losing value, even if it isn’t used.

So what can planning contribute to limit the damage from such a timeline change? Is it primarily a matter of operative project planning or does it involve strategic questions?

From the point of view of uncertainty, this is in fact a rather simple planning problem, as there is one dimension of uncertainty dominating the whole process, and with the official dates fixed, the only direction the timeline can change to is backwards. The planning process, therefore, becomes a combination of traditional project planning with uncertainty-based strategic elements. The following points have to be addressed:

  1. Basic Project Plan: Given the official external timeline, what should the own project plan look like? What are the internal deadlines? In the case of a tenant planning to run a retail business at the new terminal, when should the furniture be ordered, when the merchandise, when is the workforce hired and trained, when must the IT be ready?
  2. Resulting Business Plan: What does the financial side of the project plan look like? What investments have to be made, when do running expenses start? When can the first revenues be generated?
  3. Dependencies: At which points could external uncertainties, in this case the timeline of the airport, affect the project plan?
  4. Modeling:

Preparing for an Uncertain Future in a Small Company: Coffee Table Talk at the World Skeptics Congress

After my talk at the World Skeptics Congress, I had an interesting conversation with the owner of a small, technology-driven company. The whole conversation lasted no longer than a cup of coffee. The main question was how a small to mid-size company can leverage the principles for dealing with uncertainty that I had outlined at the end of my conference talk. Here are the results of our talk (plus some explanations) in a few quick points:

  1. Work with the knowledge that exists in your company. If you needed outside experts to tell you how your own market works, you would have probably gone out of business already. Outside help may, however, be useful (and sometimes necessary) to moderate the planning and decision process, to calculate financial impacts and to ask critical questions. The more technical and market expertise a business leader displays, especially if he or she is also the owner or founder of the company, the more hesitant many employees may be to bring up risks they see or feel looming on the horizon.
  2. Make it clear what the purpose of the analysis is. Are there strategic decisions to make – if so, what are the options? If you want to test the viability of an ongoing strategy, what are the areas in which you could make adjustments? In addition, define a reasonable time range you want to plan. If you plan to build a production facility, that time range will be much longer than if you develop mobile phone software.
  3. Look at uncertainties inside-out, going from effects to possible causes. The number of things that can happen in the world around you is infinite. The number of significantly different impacts on your business is rather small. Start with the baseline plan for your business – you have one, explicitly or implicitly. Look systematically what could change, for example in a tree structure: Sales or cost could be impacted. On the sales side, demand or your ability to supply could change. A change in demand could come from the market size or your market share. Market size can change via volume or price level. Get rid of branches in the tree that are (even after critical questions) unrealistic, have negligible impact or would not be affected by the strategic options or adjustments you are evaluating. If you can’t prepare for it, there’s no point in planning it. Also, don’t continue into branches that have identical or very similar impact on your actual business.
  4. Identify key drivers of uncertainty and find possible values. Each branch of the tree gives you a driver of uncertainty. Compare their impact and get rid of the minor ones. You should end up with no more than ten key drivers (or ten for each market you are in, if there are several). Then assign two to five possible values each driver could have in the future. Think of normal as well al unusual developments, but try to avoid the generic base/best/worst assumptions.
  5. Condense possible developments into scenarios. The different values of the drivers open up a cone (see graph below) of possible future developments. Scenarios are roads through that cone. The real future will not be identical to any one scenario, but should be somewhere around or between them. A scenario contains one possible value for each driver. Start out by looking for reasonable combinations of values, then build scenarios around them. There should be at least three scenarios, and more than five or six are rarely necessary. At least one scenario should cover the center of the cone of possible developments mentioned above, but others should lead to the more extreme corners, as well.
    Isolate single factors that don’t fit into the scenario logic, either because they are independent from anything else (oil prices or tax rates sometimes fit in that category) or because there is a feedback (for example, in a local market, competitors may react to the strategy you choose). There should be no more than two or three such factors. Keep them separated and at the end of the whole process, check if varying them within reasonable limits changes the results of your analysis.
  6. Derive the impact on your strategy and options. In a larger company, I would develop an interactive business plan simulation to do this, but in smaller companies, a grid of results with manual calculations or estimates should do. One axis of the grid are your strategic options or your current strategy and possible adjustments. The other axis are the scenarios. Write down (with some basic numbers!) where your company will be at the end of the planning period with each combination of strategies and scenarios. If a strategy looks catastrophic in one scenario or survivable but bad in several scenarios, you may want to stay away from it. If you decide on a strategy and find that it runs into trouble in one of the scenarios, derive which of the scenario’s values in the key drivers could function as an early warning indicator.
  7. Do it! Here’s your main advantage over some of the multi-billion-Euro companies out there: Once you have come to a conclusion, actually implement it. Write down which steps you have to take to make it happen and check them off. If you have come up with early warning indicators, hang them on your office wall, put them on your computer desktop or into your calendar at regular intervals and test them. The only bad thing you can do with this analysis is to let it rot in your drawer.

Dr. Holm Gero Hümmler
Uncertainty Managers Consulting GmbH