Prerequisites to successfully implementing scenario planning

Introduction

The pandemic has brought to light the importance of scenario planning and contingency planning. In the world of increasing uncertainty, organizations need to be agile. Scenario planning provides a structured approach to proactive planning rather than taking reactive actions. However, for scenario planning to be successful, an organization should assess its ability to deliver results in three key areas: data quality, technology and people.

Data: Providing relevant insights

Good quality data is an important element in scenario planning. Data should be fit for purpose and accessible in a timely fashion. There is a misconception that the more data collected, the better. This is not always the case. Data should be relevant. To determine the relevance, an organization needs to understand its operational and financial processes and identify its KPIs. Once KPIs are defined, the business can identify the relevant drivers to each KPI and the data that is needed to measure them. This process feeds into scenario planning because the drivers form the variables that will affect the results. The role of the FP&A team is to work with different parts of the organization in translating qualitative drivers into quantitative drivers for scenario planning.

Technology: Moving from being gatekeepers to being enablers

There are many different technologies and tools in the market for scenario planning. The tool should enable the users to simulate different situations with agility and a certain level of accuracy. When choosing the appropriate technology, you need to keep the following in mind:

1. Input controls help ensure that any data required to be entered by the user is in the appropriate format. This is usually the modification of the variables. There should also be validity checks on inputs for reasonableness and an audit trail of changes.
2. Assumptions drive changes in the variables and the model computation that shows the results of each scenario. These are one of the most significant human inputs. They show how changes in each variable can impact the financial results if the organization does nothing.
3. Version control allows users to review several iterations and provides a form of accountability.
4. Agility. The purpose of scenario planning is to simulate company results of different circumstances. The model should be agile enough that it can grow with the organization as it evolves.
5. Ownership. There should be clear ownership of the master data and the tool. Although the business may own the budgets and the forecast, FP&A is the owner of the master data and the tool. This is necessary to protect the integrity of the model and the results that it generates.
    

All of the above suggests the need for a dedicated tool rather than simply performing scenario planning using spreadsheets. Spreadsheets are not designed for complex and agile modelling. They also require more maintenance time to ensure that they are “fool proof” since they are prone to corruption. A dedicated scenario planning tool, on the other hand, provides the flexibility and security required for agile planning. This in turn allows FP&A to be the enablers of business decisions rather than the gatekeepers of the data.

People: Becoming a trusted business advisor

Businesses are made up of people – the owners, the management, the workforce and their customers. Therefore, it is important for FP&A team to consider the human factor in scenario planning. FP&A professionals also need to build rapport and trust with their stakeholders to promote collaboration within the organization. Transparency during the scenario planning process can alleviate possible conflicts between FP&A, management and operation teams as relationships are being established. Transparency involves communication of objectives and goals, actions and impact of actions (as well as non-actions). Communication is not limited to only down chain communication from management but also feedback from operations to FP&A teams as well as to management.

Finance business partners (FBPs) play a key role in scenario planning through the translation of qualitative elements into quantitative elements. FBPs also work with operations to turn the results from scenario planning into executable actions.

FP&A teams should validate the results generated from the tool since these results will form the basis of their recommendations on what actions may be required in the scenario that is being analyzed. Credible analysis and insight through scenario planning enables the FP&A team to become trusted partners to the business. The FP&A team will no longer take a back seat but joins the growth journey of the organization.

Conclusion

Scenario planning gives the organization a view of the interrelations that exist between its operations and its actions. It shows the impact on company financial performance when changes are made to any one factor. However, scenario planning is not a crystal ball. As Donald Rumsfeld, a former US Secretary of Defense, once said, “There are known knowns – there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don’t know. But there are also unknown unknowns – things we do not know we don’t know.” Scenario planning can help with managing some of the known variables so the business can be more prepared and proactive. This means what may be a crisis to others can become a managed situation to the organization.