What Is A Contingency Plan? (Importance And Example)

By Indeed Editorial Team

Published 16 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Having a contingency plan in place is crucial for many businesses to create a more efficient and constant operation in case of an unexpected disruption. An optimal contingency plan ensures that essential resources are available for bringing an organisation's structure back to normal by utilising minimum resources quickly. Learning about contingency plans may help you effectively handle challenges that may arise in an organisation. In this article, we find out what a contingency plan is, determine its benefits and understand it better with the help of an example.

What is a contingency plan?

The answer to, 'What is a contingency plan?', may allow you to understand its nuances, like using diverse resources to solve unforeseen and complex problems that may arise in operations or projects. A contingency plan is a pre-planned approach that an organisation may deploy to avoid varied factors that may disrupt its smooth functioning. A successful contingency plan provides various measures that may allow you to take actions carefully and wisely against an unfavourable situation. The cost of enforcing a contingency plan may be high, but its exclusion may prove to be unreasonable.

Key components of a contingency plan

Designing an effective contingency plan involves evaluation of the impact of catastrophic events and developing a reformative strategy. You may consider allotting contingency responsibilities to teams with relevant expertise and taking actions that lessen recovery time and enable the organisation to stay in business. Apart from these, you may opt for adequate business income insurance, test your plan once you have taken care of all the fronts and make changes accordingly. A contingency plan may include the following key components:

  • Trigger: This is the event or situation that triggers the requirement for you to deploy your contingency plan. This includes a specific development, like losing a supplier, or an indefinite issue, like data analysis suggesting that a plan is not achieving performance targets.

  • Available responses: A basic contingency plan includes a single response to a single possible problem. A broader issue or one considered being more likely to be faced by an organisation may include multiple responses providing you with different options you may consider.

  • Key people: Some important people that may be part of a contingency plan may include managers and staff members. These officials are from different departments that are relevant to the original project and the contingency plan.

  • Team breakdowns: Apart from definite instructions marked for key staff members, it is also important to include information about the various duties of different departments whenever there is a need to activate the contingency plan. This may help you give clear information to the staff.

  • Goals: Setting clear desired outcomes for every contingency plan may prove to be important for an organisation. These goals may include basic results, like reducing the effects of disruption or adopting complex problem-solving methods to eliminate disturbances.

  • Response timelines: Creating different phases of response may enhance the results of your contingency plan when tackling an emergency. These phases may involve actions you may take immediately, actions on the first day of response and actions in the first week or beyond.

Related: How To Become A Risk Analyst (Skills And Qualifications)

How to create a contingency plan

If you have decided to create a strong and systematic contingency plan for the organisation, you may be required to cover all the essential elements. You may determine the effects of various adverse scenarios on the organisation alongside protecting the employees. Here is how to create a successful contingency plan:

1. Assess the state of the company

An effective contingency plan functions within the structure of a company, its capabilities and available resources. Possessing a detailed audit of the company's financial position and understanding its multiple departments may help you design a solid contingency plan. Once you have the necessary details of the organisation, you are better equipped with knowledge that may help you adapt to varied challenges.

Assess the company's operations, customers and facilities to recognise varied bottlenecks and how they may present serious threats to the organisation. You may consider preparing a comprehensive impact analysis. Focus on boosting the efficiency of operations, setting up back-ups and eradicating redundancies.

2. Identify the company's potential risks

It may be easy to design a contingency plan when you are aware of when or why an unfavourable event might take place. The adverse events may comprise specific risks, like an important person in the company resigning from the post, or general risks, like receiving unsuitable media coverage. Making a list of some major potential risks may equip you with better planning.

You may seek help from various people in the organisation to create a thorough contingency plan. Speaking with colleagues and managers and taking their suggestions and opinions is a great way to generate more ideas. You may also hire consultants or conduct research through reading articles from industry leaders to identify possible threats the company faces.

3. Brainstorm potential solutions

Gathering a list of ideas by brainstorming may prove to be a great way to compile a number of emergency responses. You may focus on most critical risks since they are most likely to occur or may incur an enormous cost to the company. Spending enough time brainstorming solutions may help you determine a solid course of action you may take to produce a contingency plan.

Brainstorming solutions may help you solve some important challenges, like how to assess damages, what to do when you have lost crucial utilities and what to do when you have lost access to your premise. This may help you develop a business impact analysis. With this knowledge, you may design a system for prioritising recovery and simplifying operations.

4. Develop your contingency plans

When you have identified some of the most viable solutions to problems, you are more likely to create an effective plan for contingencies. The length of your contingency plan is dependent on several factors. These factors may include how important you think a contingency plan is for the organisation or how likely it is for an organisation to face disruptions. While designing the plan, keep in mind the different departments and resources that will be required to deploy the plan.

Having more than one response to a single problem may help you become resourceful in a difficult situation. Possessing multiple solutions also helps you choose a provision that best suits the present situation. This allows you to discover a balance between making preparations and being adaptable.

5. Share your plans and make revisions

Remaining open to opinions is a great way to improve the effectiveness of your contingency plan. These suggestions and opinions may lead you to identify gaps in your draft of the plan. Department heads for teams mentioned in the plan may help you define your final contingency plan that aligns with the resources and capabilities of their respective teams.

Once you have gathered the suggestions from a number of people, you are better equipped with the knowledge to make adjustments accordingly. You may also consider asking staff if they feel comfortable with the plan. This helps you to notice anything you may have overlooked or potential options you were not aware of.

6. Keep your plans updated

Most businesses are dynamic in nature and with time, factors contributing to adverse situations may also change. Being aware of this ever-changing scenario, it may be a good option to change your contingency plans accordingly. It may be rewarding to regularly review your plans and ensure that they remain relevant to the current operations of the company.

Assessing these plans annually remains a practical approach, but whenever the organisation undergoes a major change, it may be ideal to analyse your plan and see if it needs to be updated. You may ensure that your contingency plan aligns with the developments taking place in the organisation.

Related: Business Strategy Components And Examples

Example of a contingency plan

A simple example of a contingency plan is, given you have insurance on extra expenses, you may consider using air freight instead of trucks. Adopting a format that is easy to understand when creating a contingency plan may help you design an effective plan. Here is an example that uses a simple outline format that may quickly explain the key components of a response to disadvantageous marketing performance:

  • Trigger: Online performance of an advertisement dips below 20% conversions.

  • Response: Change the advertisement being served or target audience to modify the campaign.

  • Who: Marketing department and visual media department.

  • Marketing: Assess advertising performance metrics to identify diminishing returns, pick out low-performing advertisements for removal and identify low-performing avatars for adjustment.

  • Visual media: Work alongside the marketing team to develop graphic ideas for advertisements, analyse high-performing advertisements to recognise successful trends and design new graphics and deliver them to marketing for implementation.

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