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What Is Contingency Planning in Business? - Definition, Example & Importance

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  • 0:00 What Is Contingency Planning?
  • 0:15 Importance Of…
  • 1:15 Contingency Planning Process
  • 4:20 Contingency Plan…
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Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

Every business is impacted by events, and a poor response to those events could, in extreme cases, result in the loss of the business. Learn what contingency planning is and why we do it, and explore the process for implementing it at your company.

What Is Contingency Planning?

Contingency planning is developing responses in advance for various situations that might impact business. Although negative events probably come to mind first, a good contingency plan should also address positive events that might disrupt operations - such as a very large order.

The Importance of Contingency Planning

Every business has the possibility of a situation that adversely impacts operations. If the response to the situation is poor, it might have a dramatic impact on the future of the business, such as loss of customers, loss of data, or even the loss of the business.

A good contingency plan should include any event that might disrupt operations. Here are some specific areas to include in the plan:

  • Natural disasters, such as hurricanes, fires, and earthquakes
  • Crises, such as threatening employees or customers, on-the-job injuries, and worksite accidents
  • Personnel, such as death of a senior manager, or union members going on strike
  • Data loss, such as loss due to natural disasters, sabotage, or other criminal action (such as an attack on a website)
  • Mismanagement, such as theft, neglect of critical duties, or accidental destruction
  • Product issues, such as a huge order that requires reallocation of plant resources, or a product recall

The Contingency Planning Process

There are four steps to the contingency planning process.

Step 1: Analyze Risks

To begin, we need to list out all of the possible events that could disrupt operations. We can use the list mentioned earlier to help us brainstorm possible risks for our business.

Step 2: Determine the Likelihood and Impact of Risks

It is possible to come up with an enormous list of potential impacts, but some of the events will be so unlikely that it may not be reasonable to include them in the plan. Here's a process to focus in on the most critical events:

  • List all possible events that could disrupt operations.
  • Give each one a ranking from 1 to 10 based on its impact on operations. For example, an explosion at the plant might be a 10, while a fire at a specific machine might be a 3.
  • Give each one a ranking based on your estimate of the likelihood of the occurrence. It might be useful to make a chart for this, with a 1 to indicate that it might happen once in 100 years, while a 10 might indicate that it could happen once a month.
  • Multiply the impact ranking by the likelihood of occurrence ranking to get a total score for each possible event.
  • Use the scores to rank the events. Begin working on the highest scores first in your contingency planning and work down the list. You may have a cutoff, so that you don't spend time planning for scores below a specific value, since they would have a lower impact and lower chance of occurrence, and might not be worth the time to address. You might also look at the low score items and come up with a general process to address any items that occur that aren't specifically addressed in the plan, with a decision chart to determine steps to take.

Step 3: Develop a Process for Each Item

Starting with your highest score events, document each one:

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