This is a guest blog post from our partner Adaptive Insights, written by Bob Hansen. Hansen explains the why scenario modeling is imperative when facing disruption.
Three out of four finance executives recently acknowledged that the planning processes their companies have in place do not equip them to respond quickly to major economic and geopolitical disruption.
Published in November of last year, the survey results could hardly have been more timely. Just a few weeks later, a virus would emerge in Wuhan, China, that would touch off a global pandemic, sending shocks through virtually every business.
Few could possibly have predicted how this event could have sent recently minted plans and forecasts for 2020 into trash bins everywhere. But even before the SARS-CoV-2 outbreak, CFOs and other execs were keenly aware that business conditions were unpredictable. They were equally aware of the hurdles keeping them from the adaptability and agility needed to outmaneuver and pivot around unforeseen obstacles. The same 75% of survey respondents who said their planning processes left them vulnerable also reported that outdated legacy planning systems, siloed planning processes with limited collaboration, and a lack of relevant workforce skills were keeping them from embracing the one thing their business needed to weather the storms of disruption: agility.
If ever there was a time to marshal all the tools and technology available to help organizations meet the needs of persistent, significant change, that time is now. And as businesses figure out how to recover from the initial shocks brought by the pandemic, gaining a clearer picture of what the future could hold may well be priceless.
CFOs have known this all along
A look back shows that finance executives have long recognized the importance of agility—and the need to plan for the unexpected. A 2016 global survey found that 67% of CFOs respondents said they were concerned about economic uncertainty in their region. Those worries turned out to be prescient. Soon would come tumultuous trade wars and other global impacts, culminating eventually in an unprecedented global pandemic impacting public health, transportation, critical supply chains, and more.
Indeed, forces like digital transformation, automation, and globalization have made agility a business imperative. Though change is a constant, it continues to accelerate.
Now, with so much uncertainty in front of us, agility is more important than ever.
Scenario planning: The reality check every business needs
Back in 2016, CFOs were asked how they could add the most strategic value when managing through an economic or business contraction. Nearly half (48%) said planning for multiple scenarios could help reduce risk by allowing their organizations to respond and course-correct when conditions change.
Since then, scenario planning has become an even more critical capability for finance and beyond. For businesses, it’s helpful to understand that scenario planning isn’t about modeling the likely effects of a specific disruption, such as a pandemic. Why? Because a disrupted supply chain could result from any number of causes: a natural disaster, a fuel crisis, a regional currency crash, political unrest, a pandemic—the list is virtually endless. So it’s important to instead build scenarios based on the likely impacts and model around those. Running what-if scenarios involving possibilities like cost cutting or changes in demand helps to prepare a series of contingency plans to address the financial, operational, and cash flow impacts that could result from specific disruptions.
And companies are doing this now more than ever before. For example, one higher education institution is running scenarios around the loss of room and board revenue, the possibility of fewer returning students, and the expenses associated with remote online learning. Another example is a healthcare organization that has used multidimensional, driver-based modeling capabilities to make course corrections while managing changes in patient volumes, increased government regulations, and a decline in insurance reimbursement.
Regardless of the industry or use case, multiple scenario planning empowers organizations to isolate their drivers, model according to how those drivers might be impacted, and sharpen their foresight to know what their future selves might need to do. It’s a reality check for a reality that hasn’t yet happened.
Scenario planning beyond the bottom line
How are these companies able to conjure up a crystal ball and peer into a mix of their possible futures? They do it through active planning.
Unlike its manual, siloed, episodic, static predecessor, active planning is comprehensive, continuous, and collaborative. Active planning processes are fueled by real-time data, powerful automation, and advanced technologies like machine learning to help planners throughout the business model what-if scenarios with virtually no limits—while iterating multiple scenarios rapidly to identify the most likely outcomes and most effective actions. The most advanced platforms even help you identify erroneous predictions, so you can have more confidence in the scenarios you model. Meanwhile, monitoring results helps you to identify trends and patterns that could further refine your scenario model.
By incorporating financial and nonfinancial inputs that might be impacted by economic disruptions into your active planning model, you can draw more parallels between drivers and better understand how one affects the other. Your responding game plan will also be more comprehensive, encompassing multiple departments for swifter execution and more precise pivots. This includes financial, workforce, and salesplanning.
Are you exploring enough what-ifs?
The right platform will allow CFOs and their teams to model any number of scenarios—and modeling enough of them could mean the difference between success and failure. Just be sure these scenarios are anchored around your key business drivers so that you avoid wandering off into low-value explorations that tie up valuable resources to game out extremely unlikely events.
But do assess a wide range of outcomes, including best case, worst case, and most likely. Generating a 360-degree view of potential outcomes helps you and your organizational leaders make better decisions. And developing strong internal communications to distribute and disseminate scenarios quickly and with the right people allows you to stay on top of changing conditions and quickly shift gears.
To jump-start the what-if scenario modeling process, ask questions that will help you fully explore the possibilities of a business interruption, price war, revenue slide, or any other scenario worth planning for:
- What do financial hits like deferred revenue or default payments do to revenue forecasts? How will they affect demand planning for things like potential location closures or inventory imbalances?
- How will you balance your short-term workforce needs against the long-term needs of the business?
- Is there a shortage of a certain skill set that’s currently high in demand and lacking in your area? How can you source people with those skills?
- What if you forgo hiring until the next quarter or even the quarter after that?
- What happens if you need to reduce employee pay or staff levels?
- How will you adjust your goals or quotes, and what does the ripple effect of that look like throughout the sales department?
- What if your sales pipeline freezes or shrinks?
- How can you adjust for potential reduction of sales resources, and how will that impact bookings, productivity, and costs?
- How will seasonality affect already disrupted cash flow?
You’re not a fortuneteller, but you can be better prepared
You may not be able to predict the next pandemic, the next recession, or the latest technological advancement that sends shockwaves through your industry. But if you model enough of the most critical what-if scenarios, you can meet disruption with agility. And that may be the most valuable outcome of all.
This blog post was originally published by Adaptive Insights and appeared here.