Scenario Planning: The Reality Check Every Business Needs
The ability to quickly and easily assess potential outcomes—best case, worst case, most likely case—is extremely valuable when variables are constantly changing.
The ability to quickly and easily assess potential outcomes—best case, worst case, most likely case—is extremely valuable when variables are constantly changing.
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.
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.
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.
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.
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.
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.
It’s a reality check for a reality that hasn’t yet happened.
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:
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.
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