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 unexpected outcomes.

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.

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.

Critical assumption planning (CAP) is a service mark of D. Dunham & Co. It helps managers and entrepreneurs maximize business development learning at least cost. The continuous process consists of six steps: Knowledge Base Assessment, Critical Assumption Planning, Test Program Design, Funding Request, Test Implementation and Venture Reassessment. CAP is built on the foundation of the work of Block (1989) who showed that assumptions can stand in the way of perceiving current business realities. The identification and assessment of assumptions solves this problem and forms the foundation for managing new business ventures. CAP involves six steps, combined in a "Learning Loop". Once all six steps are completed, a milestone is reached and the loop starts over again. The loop is constantly repeated as the business is developing.

This step takes "a comprehensive analysis of what is known and unknown about the competition, market and technology" (Sykes 1995). In this step the entrepreneur oversees his plans and the first assumptions are exposed. Important parts of the business plan to check are the definition of the business concept and an assessment of the competition.

During this step the assumptions are identified and there is a determination of criticality. The hardest part of CAP is to identify the assumptions that are not written down. To determine the criticality of the assumptions, they must be quantified. This makes it possible to put the financial results in a spreadsheet and link them. These financial impacts change for various assumptions. CAP measures the criticality of an assumption as a change in the net present value of a venture (NPV). To determine criticality each assumption is assigned a range of uncertainty: base case, best and worst case. Then, assumption for assumption, while keeping the other assumptions at base case, the NPV changes for each assumption in the worst and best case scenarios are checked. The NPV analysis proves the company with information about the criticality of an assumption. Two signals strongly indicate a critical assumption: a big difference in NPV between the best and worst case scenarios, or a huge loss of NPV in the worst case scenario

When the test program design is ready and the costs are clear, resources must be allocated to the test program. In most companies or start ups clearance from senior managers or venture capitalists is needed to conduct the tests.

In this step the actual testing of the assumptions takes place.

When the results of one or more tests are known, it might be that resources must be re allocated and business plans updated.