What is a Contingency Plan?

Definition: A contingency plan is a set of actions defined to be followed by a person, group or organization when an undesirable non-usual event occurs, with the purpose of diminishing risks or avoid potential issues. It is commonly understood like a sequence of activities to be executed in cases of adverse unforeseen situations.

What Does Contingency Plan Mean?

In business, many out-of-control situations can cause a disruption of functions or even definitive shut-downs. The most feared situations are those related to natural catastrophes or terrorism attacks since even life is threatened. However, there are many other problematic scenarios that companies must prepare for. Managers should identify and analyze the most significant, unusual, but possible events in order to design and communicate specific contingency plans.

In this way, the organization will be prepared and can properly react in order to reduce damages and guarantee the continuation of operations. The plan could include both preventive and reactive actions. For example, placing the most expensive hardware equipment in separate floors can diminish material losses in case of fire, as a preventive action, or, instructions to quickly exit the place when a fire alarm is activated, as a reactive action.

Example

Helkian Textiles is a small firm operating in the textile industry. It offers attractive fabrics that show a range of flower-based patterns, which are seen as innovative and trendy. From the beginning, all patterns were entirely designed by one of the two young founders. Five years ago, the only designer working at Helkian suffered a surprising illness that kept her in bed during three months.

Other employees tried to substitute the designer and the firm even hired a new one after the first month of absence. However, nobody had the same experience and style that identified the brand. As a consequence, the firm was unable to provide clients with its unique products and many of them shifted to other providers. This situation caused strong financial consequences. The top management then learned that they had to implement contingency plans. Now, every key employee works with an assistant who is always learning and practicing. In cases of unexpected absences, the assistant is able to do the most important tasks and thus to guarantee work continuity.