This young project manager was just dumb-founded why I was so hell-bent on having her create at least one contingency plan for each of the major deliverable section of her project plan, before I would sign off on her presentation to the executive team. I explained why, and she reluctantly accepted my logic, but I don’t think my inexperienced young friend was convinced. I highlight young because the value of contingency planning is one of the lessons you learn with age and time on the job. After all, there is a reason there are many young smart people, but not many young wise people!
People who have worked with me for any period of time know I am borderline paranoid about contingency plans. Depending on what I am working on, I sometimes even ask for ideas on contingency plans for our contingency plans. Some think it’s a personality quirk, or leftover paranoia from my days in the military, but those who know better and have lived or heard the stories, understand why. Here are a couple of real life examples that have indelibly seared the need for contingency plans into my operator’s soul. As usual some of the details are slightly altered to protect the guilty along with the innocent and feedback is always welcome.
*** Sometimes people don’t think of risk the right way ***
This executive was standing in my office with a look that, if eyes could kill, would have made my wife an instant widow. He was furious at me because I recommended to his Board not to fund his product development project until he delivered a contingency plan for five different areas. He could not possibly understand why I was “being so negative” about the success of his new product and a “doubting Tom.” He was hot under the collar, so I listened patiently waiting for him to finish until he started quoting a famous positive thinking guru. That’s when I finally stopped his rant. It was time to explain that being positive or negative has nothing to do with the need to have contingency plans. So I asked him how well he understood the formula I used to come up with the risk profile for his project, and why I had selected those five specific areas for contingency plans. He looked puzzled and said “what risk formula?” So I explained to him that I thought his plan, of all the assumptions made, had at least five major ones that all had to come true in order for his project to succeed, and each depended on the previous one. He agreed, so I asked him to rank the probability of success for each assumption. The rankings he gave me were 75%, 90%, 85%, 95%, and 90% respectively and in that order. That was a little high compared to my rankings but I did not quibble. But when I asked him to rank the chances of the overall success of the entire assumption set, he confidently answered 75%; the lowest confidence number in the set. Most people would have made the same mistake or would have picked the average. Unfortunately, the risk calculation for this sequential-dependency scenario is not to select the lowest of each assumption, or the average, but rather to multiply them to each other. Once he did that, the probability of success of the entire set became 49%. Faced with a less than 50% chance of a successful launch, he, wisely, decided to go back to the drawing board and build contingency plans for each of the five assumptions. And – funny how things work out – he had to use a contingency plan on the first assumption, and could not make the third assumption, or its contingency, work, so we stopped the project early, before the company committed more money to it.
The lesson: The presence of risk is a natural phenomenon. It’s everywhere. Not having a contingency plan is ignoring nature.
*** People can be unethical, flaky, or unreliable, which introduces unexpected risks ***
It was a few years ago, and it was a change from my normal approach to taking on turn-around or corporate renewal projects, so it took two months of negotiations before I accepted a project from the owners to help restructure their small company. The idea was that after six months of working together we would jointly consider if I would take on a C-level role to get the company to the next major inflection point in their evolution, or get the company ready and help recruit a CEO once I was done. Somewhere around month five, the two owners (CEO and COO) asked me to dinner on a Wednesday evening. My six month contract was coming up, so I figured it was either a meeting to talk about renewing my engagement, one to thank me for my work and give me the required 30 day notice, or a meeting to discuss a more permanent role.
Based on what I had accomplished, I thought it would be the latter, but I was not sure since the owners seemed to be very tentative about giving away any equity in the company, which was one of the requirements I clearly outlined to them before I started the engagement. Personally, I was comfortable with any way the conversation went because my contingency plan was in place regardless of the decision. If it was the 30 day notice meeting, I was going to take on a role with another client who knew my six months was coming up and had been after me for the last few weeks. This client wanted me to take on the interim CEO role in one of their portfolio companies that needed a growth-stage CEO to help the founder and was offering a significant reward for success.
So I showed up at the dinner fully prepared for anything. It was a great meal and an even greater conversation. The owners were ecstatic about my work, could not stop praising how I helped them pull one of their largest clients out of the ditch, the quality of the people I recruited to build the management team, the discipline I brought to the technology and operation areas, etc., etc., etc. and, more importantly, how they were looking forward to making me a permanent part of “their family.” I have to admit I was a bit uncomfortable with the exuberance of some of their feedback, but, in the end, I knew how much value I brought to the company and how much more I could do to move it forward. Plus, I liked the majority of the people I was going to work with.
So we spent the next three hours discussing the details of an agreement for me to join the company on a full-time basis. It was clearly a tough negotiation, but it was very civilized and pleasant. In the end, we agreed on my objectives for the next three to five years, a specific salary, a bonus calculation plan, the actual percentage of equity stake and the overall vesting timeframe, a title and role, and a few other important details that needed to be agreed to, before I could commit the next five to seven years of my life to growing their company. I thought we had put together a win-win scenario and at the end of the dinner, after hugs and hand-shakes all around, we parted with a commitment to memorialize our agreement in a legal document over the next few days and make the announcement to the rest of the company the following Monday.
The next morning, I pulled together a simple e-mail recapping our conversation and the general terms of our agreement and sent it to the owners, with the request to correct anything I missed before we could send it to the attorney for drafting the final documents. With such a clear agreement and commitment I did not think I needed the contingency anymore and by mid-day that Thursday I called our other client to let him know I would be unavailable for a while and could not take on his project. He was very disappointed but, once I explained what I had agreed to with the owners the evening before, he thought it was the right decision and wished me luck. Always helpful, before we hung up I recommended another interim executive for the role he was looking to fill. Later that day that executive called me to thank me and tell me they had started the engagement process.
But something gnawed at me! I kept telling myself that I had an agreement and I should not be so paranoid, but having not heard back from the owners by Friday morning about my e-mail, I send a follow-up asking for feedback. And then it happened; Mid-afternoon on Friday, I received an e-mail (not even the courtesy of a phone call) from one of the owners with the words “I am not ready for this transition…” Despite our very clear agreement 48 hours earlier, and the knowledge I had just turned down a major project worth significant money to me and my partners, they decided they were not going to honor our agreement. Since I believe my word is as good as a contract and I expect the same from others, it all went downhill from there, and we parted ways. I should have known better, and I did kick myself in a few select places for abandoning my contingency plan before I had a legally binding contract, but such is life. Oh, and yes, my attorney did recommend I sue the owners for breach of contract, but I decided I wouldn’t waste my time trying to litigate lack of business ethics and flakiness.
The lesson: You just can’t make this stuff up and if you don’t experience it, it’s hard to believe it will happen to you.
*** And sometimes it’s just the nature of business for unexpected events to happen***
Even dealing with good and honest people requires a contingency plan. Not too long ago, I thought I was having one of my best Thursdays! Three months of work, countless hours of negotiations with investors and multiple banks to get equity and debt financing arranged, dozens of hours of research to get up to speed on the government regulations regarding the industry, research into ERP systems for that industry segment, multiple (and always positive) discussions with the owners about a transition plan and future growth strategies, and quite a few thousands of dollars of our own money in legal fees for the various acquisition documents, and I was finally ready to close a transaction that would have added another portfolio company to Ideasphere Partners! The goal of completing the acquisition of the company within the next 45 days – as I had agreed with the owners two weeks earlier– was within clear reach, and it looked like it had all finally come together. Our negotiations contingency plans worked and we had to initiate a couple of them to handle some unexpected challenges; including a seriously incompetent loan officer from one of the regional banks involved. But sometimes you need a contingency plan to the contingency plans so my personal contingency plan, in case the deal fell apart, was to continue negotiating for a project with a client that was starting within the next few weeks, while I was working on this deal. Whether the transaction fell apart or we had a successful closing, I would take on the project and work both projects for a few months until I was able to transition the client’s project to their internal team, or another Ideasphere partner.
I was pumped. Another successful transaction was getting under way! So I forwarded the relevant documents/updates to the Investment Banker, a really good guy representing the sellers, sent our investors an update on progress (letting them know we were ready to start the closing process that following Monday), and late that night finally started getting ready for a three day fishing and camping trip with one of my best friends and his two boys. Contingency plans to the contingency plans? Who needs them! Hah! Like my friend Paul says, “Want to make God laugh? Tell Her your plans; ’cause everything you think you know, including God’s gender isn’t so”
I worked most of the morning that Friday so by noon I was done and started packing the boat for the trip. Being a bit of a workaholic, sometime after lunch on Friday, before heading out to the boat ramp, I decided to check e-mails one last time before the trip. And there it was; an e-mail from the broker with the subject line “no longer interested in moving forward.” I seriously thought about not reading it until I got back from my trip but, in the end, I could not ignore it, so I opened it. The e-mail in three politely worded sentences apologized for the change and informed me that the owners decided to no longer pursue our transaction. Since the no-shop exclusivity period had expired two weeks earlier, because the incompetent loan officer from one of the banks took too long to get things together, entertaining another offer was within their rights according to the terms of our agreement. And they had a good reason, a better all-cash bid from another buyer had come in that week. The sellers were good people that I really liked, so I assigned it to the “things happen” category, filed all the documents in a folder, in case their transaction fell apart and they came back to my group, and turned my attention to signing a contract and closing the second project.
Sometimes, even with the best of intentions things don’t go as planned. Not having a contingency is irresponsible.
The moral of the stories….
Always have a contingency plan because it isn’t over ’till it’s over, and even then you don’t know.