Unpredictability is not an exception to the planning process; it is inherent to the planning process itself. Scenario planning — the ideation and analysis of possible future outcomes — stretches the organizational mindset for the possibility of multiple future outcomes.
AFP’s Bryan Lapidus, FPAC, director FP&A Practice, moderated a discussion around AFP’s Guide to Scenario Planning, underwritten by Workday, which examined what scenario planning is, how to execute on scenario planning throughout the year, and provided practitioner examples of scenario planning. Lapidus was joined in the discussion by Jack Alexander, CFO-turned-advisor, author and coach at Jack Alexander & Associates LLC, and Kinnari Desai, vice president and head of Corporate Finance at Workday.
The scenario planning process
Every organization has a different need and scenario planning process that works for them. The goal is that finance and operating executives use scenario planning broadly in the future and integrate it into key planning and management activities. For Desai’s organization, they use a five-step approach that has proven to work well for them.
- Alignment. What are the top two or three priorities for the business that we want to focus on? Whether it is top-line growth, margins or cash flow, it is important to be clear upfront. Ask for perspectives from the executive team and talk to business leaders from various departments to understand what scenarios are likely from their side.
- Multiple perspectives and inputs. Bring in external data and perspectives where relevant. It could be from the industry, peers, customers or economic data.
- Manageable number of scenarios. Keep variables to a small number; there are several variables that impact business, but not every variable has a material impact. Focus on four or five variables and then spend time understanding how they might shift.
- Frequency of planning. Keep an eye on the frequency of scenario planning and adjust as you go along. Not all variables change on a similar cadence; some need weekly, monthly or daily attention.
- Single source of truth. Ensure everyone on the team uses consistent information to make decisions that affect the business. The decisions being made should serve the organization’s shared plans and objectives.
Using scenarios to drive operational agility
Scenario analysis and agility are closely related and mutually beneficial. According to McKinsey, agility is the ability of an organization to renew itself, adapt, change quickly, and succeed in a rapidly changing, ambitious and turbulent environment. According to Alexander, there is a three-phase model of what leads to agility.
- Vision. It is important to have the ability to see things develop. If you have this vision, you can acknowledge uncertainties and consider other scenarios.
- Recognition. The recognition phase is where you interpret what you are seeing and think about how it might impact the organization. In order to accomplish this recognition, it is important to build a skilled team with diversified experience.
- Response. Putting together a response allows you to anticipate and prepare for surprises, perhaps even the specific ones that emerge. This will shorten the time to implement the responses and have a much greater effect.
Scenario planning helps across all three of these phases because it identifies critical assumptions and considers alternative outcomes other than the primary plan. Combined with business intelligence, external outlooks, and a focus on customers and competitors, it is a recipe for success.
Keys for effective scenario planning
If done well, scenario planning can project the total impact of the “story” on a firm and encourage the development of an appropriate response. Some of the necessary conditions required to conduct successful scenario planning include:
- Broad business perspective. As finance individuals, we must have a broad business perspective and move away from thinking only about finance and to thinking about the business as a whole. We must look at both the cost model and external views such as markets, competition and customers.
- Multi-disciplinary participation. Multi-disciplinary participation includes having senior management and other operating teams involved in thinking about potential scenarios and defining actions and responses.
- Robust projection model. This model could take many different forms, but you cannot replicate the annual budgeting process to run scenarios. It is important to have explicit identification of critical assumptions and drivers-based planning.
- Ability to monitor critical assumptions and scenario evaluation. It is important to have the ability to identify critical assumptions and monitor them throughout the year to see which scenario path you are heading towards. In addition, it is important to update scenarios and revisit them periodically.
- Soft skills. FP&A professionals are required to have a diverse skill set, including reporting, forecasting, Excel, PowerPoint, and others. However, soft skills are gaining more value, and it is now equally important to have skills like curiosity, willingness, ability to learn the business, storytelling, a change mindset, flexibility and collaboration.
Scenario planning is a continuum; it is not a point-in-time exercise, and it should be done with the business by your side. We live in a world that is full of uncertainty, with the pace of change more rapid than ever. Expanding the use of scenario planning helps provide better insights to overall decision-making and increases preparedness for any possible future outcome.
For more information on this topic, download AFP's Guide to Scenario Planning.