Scenario Planning: The Reality Check Every Business Needs

Scenario planning prepares organizations for uncertainty by creating a playbook for potential business disruptions. When executed correctly, it’s a strategic approach to dealing with uncertainty and visualizing the future, so finance teams can help build agility and move the company forward.

CFOs and finance leaders use scenario planning to eliminate some of the guesswork and be more prepared in times of volatility. In addition, it can deliver a competitive advantage by helping businesses react with speed and agility to change. Because a certain situation has been anticipated, people spend their time executing on and ameliorating a crisis, not scrambling to come up with a plan. 

Why the Time for Scenario Planning Is Now

If ever there was a time to marshal all the tools and technology available to help you respond to change as it happens, that time is now. Given the uncertainty in our world, it’s helpful to understand that scenario planning isn’t about modeling the likely causes of a specific disruption, such as a pandemic. That’s because a disruption 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. In other words, it’s crucial to do scenario planning about effects, not causes.

So it’s important to instead build scenarios based on the likely impacts and model around those. Running what-if scenarios involving possibilities such as 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 numerous disruptions.

For example, a Workday higher education customer 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 a modern approach to planning.

Modern, continuous planning processes are fueled by real-time data, powerful automation, and advanced technologies such as machine learning to help planners throughout the business model what-if scenarios with virtually no limits—while rapidly iterating multiple scenarios 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 disruptions into your planning model, you can draw more parallels between drivers and better understand how one affects the other. Your response game plan will also be more comprehensive, encompassing multiple departments for swifter execution and more precise pivots. This includes financial, workforce, and sales planning.

Scenario Planning Processes

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 resources to game out extremely unlikely impacts. To draw an extreme, and fanciful, example, the discovery of a virtually free, limitless source of energy would radically reshape our world and upend entire industries, but there’s little chance that will happen anytime soon.

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 such as deferred revenue or default payments do to revenue forecasts? How will they affect demand planning for things such as 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 Fortune Teller, 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.