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AVOIDING THE PLANNING “FALLACY”

Avoiding the Planning “Fallacy”

Ryland Hamlet

October 1, 2008
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Executive Summary

Patient Care InternetWork (PCI) is the leading application service provider in the online

recruiting market. PCI provides the infrastructure for a consortium of worldwide hospitals. The

purpose of this consortium is to help nurses find hospitals needing nurses. The consortium is

made up of nurses, hospitals, and agency suppliers of nurses. Planning is a crucial activity for

coordinating these stakeholders. This planning includes business planning and information

technology (IT) planning. The output of this planning is the business plan and IT plan. These

plans are used as a blueprint to ultimately meet the objectives set out in the company’s mission

statement. The problem this paper addresses was discovered during PCI recent management

retreats. The problem statement is as follows:

In the past, PCI has grossly overestimated forecasts. This planning fallacy has lead to

near insolvency due to accepting risky projects based on the overstated projections.

This purpose of this paper was to analyze PCI’s business and IT plan. The goal of the analysis

was to help future planners understand how to avoid the planning fallacy leading to inaccurate

financial forecasts. In the analysis, the business plan was found to contain key sub-plans such as

the marketing, financial, operational plans, and strategic goals. The IT plan took the strategic

goals related to the technology and converted the business goals into IT projects. This

conversion of business to IT goals is being accomplished at PCI. The conversion is exemplified

by the Business-IT Alignment of Strategies (BIAS) Matrix. BIAS is the process PCI uses to

maintain alignment of business and IT goals. The over-optimistic planning was found to be

related to the forecasting metrics associated with strategic goals.

The recommended solution is to utilize forecasts that are adjusted using real outcomes of

companies similar to PCI. By using the regression formula developed in this paper, PCI can

avoid the planning fallacy; avoid overly risky projects, and becoming more successful. The
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following sections detail the findings of the analysis and the recommendation.
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Table of Contents
Executive Summary.....................................2

Table of Contents.....................................4

Avoiding the Planning “Fallacy”.......................6

Discussion and Analysis.............................6

Company Business Plan.............................7

IT Plan. PCI is provides a consortium and B2B exchange.

Robert Plant predicts eConsortia to be the “new vehicle” in

e-Commerce. If Plant’s prediction is true, then PCI will

“over time …look forward to more customer transactions and

greater revenue” (Plant, 2000). PCI’s IT plan translates the

business strategic goals to an action plan to increase

transactions and revenue. To increase revenue and

successfully implement the business plan, the IT plan must be

completely in alignment with the businesses strategic goals.

According to a survey of IT managers by Deloitte Consulting,

most IT plans are not aligned. The study reported “that a

pitiful 10% of [the IT managers] feel that their companies

are "extremely successful" at aligning IT plans with

corporate strategies” (Johnson, 2004). To maintain

alignment, PCI lists IT goals along side of the strategic

goals in a Business-IT Alignment of Strategies (BIAS) Matrix.

The BIAS Matrix in Figure 1 is used as the primary

communication device in all joint planning sessions. . .8

Commonalities and Divergences. There are a few

commonalities between the business and IT plans. The business

plan is the main strategic document for PCI. The IT plan is

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also a strategic, but provides a conversion of business plan

strategies into a list of goals for the IT department. This

list of IT goals is the consortium provider’s most important

tactical document. As described in the book Information

Technology for Management by Turban et al., “the creation of

the IT plan consists of strategic IT planning, information

requirements analysis, resource allocation, and project

planning” (Lekacos, 2000). Though the IT plan starts with

strategic planning, it ends with functional tactics and actions

needed to implement strategic goals. ....................9

Recommendation and Conclusion......................10

References Cited.....................................13
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Avoiding the Planning “Fallacy”

Time management guru, businessman, and author Alan Lakein says for most people, “failing to

plan is planning to fail” (brainyquote.com, 2004). Extending Lakein’s concept to business, it

could be said that a lack of business planning is planning for business failure. Even with

planning, however, avoiding business failure is not assured. To avoid failure executives must

create plans, while at the same time avoiding the planning fallacy (Lovallo & Kahneman, 2003).

The planning fallacy occurs when executives create plans based on too much optimism. Overly

optimistic planning may be why Kmart failed, while its close competitor Wal-Mart succeeds.

This paper analyzes the business plan and information technology (IT) plan for Patient Care

InternetWork (PCI). The paper describes the business plan, the IT plan, commonalities,

divergences, and concludes with a recommendation on how to avoid the planning fallacy.

Discussion and Analysis

Patient Care InternetWork (PCI) a global application service provider in the online recruiting

market. Business and IT planning are important activities that help PCI expoit market

opportunities. PCI’s current opportunity is to exploit the worldwide shortage of nurses. Most of

PCI’s planning center around its service lines. PCI’s service lines include: (1) providing the

infrastructure for a consortium of international hospitals seeking nurses, and (2) self-help

services for nurses looking for jobs. There is no charge for hospitals or nurses to register with

the consortium. The majority of the nurses who register are from India and the Philippines.

Most of these nurses are not licensed in the country they desire to work. PCI offer theses nurses

paid services to help them obtain licensing and visas. These services are designed to increase the

nurse’s marketability to hospitals in the consortium. The planning activities target both the nurse

and the hospital members of the consortium.

PCI values planning activities, both business and strategic IT planning. The main reason for

planning is to increase online sales within each service line. PCI also plans to be able to better
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coordinate the various business stakeholders. In PCI’s line of business, like many other small

businesses, the Internet is the great equalizer. “It can make small companies seem like large

companies” (Goodman, 1999). Attainment of sales goals depend on the first impression nurses

have with PCI. PCI plans emphasize credibility and the appearance of “bigness,” especially on

the company website. Nurses worldwide come to this website to register, post a resume,

improve test scores, and search for opportunities.. Many departments are needed to help nurses

find opportunities. These departments also manage and support the business-to-business (B2B)

exchange made up paying nurse agencies and hospital buyers. To satisfy all of these

stakeholders, PCI pays close attention to strategies outlined in the business plan.

Company Business Plan

A good business plan is based on high-level strategic planning centered on obtaining competitive

advantage. Strategic planning is a product of a “company reviewing its external environment,

identifying possible opportunities, screening the opportunities through the company mission; and

creating long-term objectives, grand strategies, action plans and functional tactics” (Pearce,

2001). Strategic planning is done annually leading to an updated business plan containing key

department sub-plans. The key sub-plans include the marketing plan, financial plan, and

operations plan. Each component describes when and how sales and operational objectives are

to be met. The business plan components ultimately help the firm meet the mission statement

listed below.

PCI will be the advocate of job seeking nurses with responsibilities to our
stakeholders. In as such, PCI helps protect the rights and maximize the
opportunities for nurses worldwide, while meeting the changing needs of nurses,
hospitals, agencies, the community, investors, and owners.

The business plan is the blue-print used to guide the firm in meeting the mission, while meeting

financial ratio metrics like profitability and efficiency. To meet financial metrics, PCI
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concentrates on three to five goals per year. Following a total quality management approach

outlined by Dervitsiotis, the limited goals enable PCI to “maintain a clear focus for how

resources will be mobilized with maximum leverage for improvements” (Dervitsiotis, 1999).

The improvement needed over last fiscal year is outlined in this year’s strategic goals listed

below:

A. Register 10,000 nurses

B. Sell 3 paid services to 2,000 nurse

C. Register 1250 hospitals to the consortium

D. Sign-up 100 agencies

IT Plan. PCI is provides a consortium and B2B exchange. Robert Plant predicts

eConsortia to be the “new vehicle” in e-Commerce. If Plant’s prediction is true, then PCI will

“over time …look forward to more customer transactions and greater revenue” (Plant, 2000).

PCI’s IT plan translates the business strategic goals to an action plan to increase transactions and

revenue. To increase revenue and successfully implement the business plan, the IT plan must be

completely in alignment with the businesses strategic goals. According to a survey of IT

managers by Deloitte Consulting, most IT plans are not aligned. The study reported “that a

pitiful 10% of [the IT managers] feel that their companies are "extremely successful" at aligning

IT plans with corporate strategies” (Johnson, 2004). To maintain alignment, PCI lists IT goals

along side of the strategic goals in a Business-IT Alignment of Strategies (BIAS) Matrix. The

BIAS Matrix in Figure 1 is used as the primary communication device in all joint planning

sessions.
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Business Plan Strategic Goal

• IT Plan Goal
A. Register 10,000 nurses
• Hire team of web developers
• Hire technical sales force
• Implement informational website
B. Sell paid 3 services to 2,000 nurse in one year
• Implement online application service lines
• Implement pay pal
C. Register1250 hospitals to join consortium
• Implement consortium of hospitals (buyers)
D. Sign 100 agencies

Figure 1: Business-IT Alignment Strategic Matrix

Commonalities and Divergences. There are a few commonalities between the business and IT

plans. The business plan is the main strategic document for PCI. The IT plan is also a strategic,

but provides a conversion of business plan strategies into a list of goals for the IT department.

This list of IT goals is the consortium provider’s most important tactical document. As described

in the book Information Technology for Management by Turban et al., “the creation of the IT

plan consists of strategic IT planning, information requirements analysis, resource allocation, and

project planning” (Lekacos, 2000). Though the IT plan starts with strategic planning, it ends

with functional tactics and actions needed to implement strategic goals.

The divergences of the two plans are obvious. The lower level project detail is what makes the

IT plan different. The IT plan is more tactical than strategic. An IT plan looks more like a high

level project plan than a strategic plan. In fact, the business area analysis in the IT planning

process translates the business strategy into potential projects as seen in Figure 2.
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Figure 2: IT Planning Process (Harris, 2003)

The input to the IT planning process is the strategies from the business plan. The output of the

process is resources performing tactical actions in the form of IT projects. Business plans often

contain implementation plans; however, they are not at a resource level as is the IT plan.

Recommendation and Conclusion

To avoid the fallacy, both plans should include financial forecasting based on actual or historical

outcomes. The goal in this type of forecasting is to estimate the correlation between the forecast

and the actual outcomes, expressed as a coefficient between 0 and 1 (Lovallo & Kahneman,

2003). Using this correlation coefficient obtained through regression analysis, the forecasted or

intuitive revenue is regressed from outcomes documented from a similar company. This similar

company is called a reference class. The regression formula recommended is:

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E = I + [ C * ( R – I ) ] (Lovallo & Kahneman, 2003)

where,

E is the regressed or realistic estimate,

I is the intuitive estimate,

C is the correlation from the reference class, and,

R is the revenue observed in the reference class.

Business Plan Revenue Element Intuitive Reference Correlation Regressed

Strategic Goal Estimate (I) Class (R) (C) Estimated
(E)
A. Register 10,000 Advertising value of registered
$50,000 $40,000 0.25 $37,500
nurses users - B2C ($5/user)
B. Sell services to Board application, Online
2,000 nurse in one training, and Visa Assistance $1200,000 700,000 0.8 400,000
year
C. Sign-up 1250 Advertising value of registered
hospitals to join users B2B ($20/user) $25,000 $50,000 0.33 33,250
consortium
Registration ($1500 ) and
$150,000 $100,000 .050 125,000
D. Sign 100 agencies usage (10 submissions @
$20,000 $10,000 0.40 16,000
$20/submission)
$1,445,000 400,700 $611,750

Figure 1: PCI Business Plan Financial Forecasts

Figure 1 shows the regressed revenue estimates for PCI’s strategic goals. The regressed estimate

is more realistic based on the similar companies. The increased realism in forecasting helps

avoid the planning fallacy.

General Dwight D. Eisenhower once said, “In preparing for battle I have always found that plans

are useless, but planning is indispensable” (brainyquotes.com, 2004a). What Eisenhower meant

is that plans are fluid, accurate only at the time they are produced. The process of planning is

what is valuable. Planning is an ongoing process designed to continuously improve the firm’s

abilities to reach its strategic goals. These strategic goals are found in the firm’s business plan.
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PCI is a application service provider whose e-consortia is used by hospitals to find nurses.

Agencies are also members of the consortia supplying nurses to hospitals over the PCI’s B2B

exchange To meet the stakeholders expectations over this Internet based exchange, it is

important that the businesses strategic goals are translated to IT goals. The IT plan provides the

translation needed. The IT planning process converts the business’s strategic goals into IT goals.

To be successful, PCI must avoid the planning fallacy by using realistic forecasting.
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