Nobody wants to be a corporate Chicken Little, anticipating all the possible ways the sky could fall in the coming months and years. But 2020 showed the critical importance of scenario planning. While a global pandemic might be a once-in-a-lifetime event (we hope!), there are plenty of other potential crises a company can face, from issues caused by climate change to a volatile economy. For finance professionals responsible for keeping companies in the black, planning for the day the sky falls is part of the job.
To get some insights on developing a scenario planning framework that supports accurate and appropriate outcomes, we talked to Jack McCullough, founder and president of the CFO Leadership Council. In addition to extensive experience providing CFO services for start-ups and high-growth companies, he is a regular keynote speaker at conferences across the world and the author of “Secrets of Rockstar CFOs.”
Take a Holistic View
Effective scenario planning should always start with an in-depth understanding of the business across the enterprise. “Go on a listening tour,” says Jack. He suggests talking to executives from across the company to understand their challenges, opportunities, needs, and constraints. A comprehensive study of operations across the business will better inform strategies for adaptation and pivoting in an unpredictable landscape. It also sets the stage for the entire scenario planning process, which relies on an interrelated, cross-functional perspective.
At the same time, be ready to provide direction and guidance. Colleagues are also invested in making sure their departments are equipped to face unexpected situations and may be concerned about the company’s ability to manage uncertainty. Offering information and transparency will go a long way toward building confidence and trust. “Prepare to empower others across the company, while also being realistic about what can be accomplished given limited resources,” says Jack.
Armed with this input from across the organization, the company’s CEO can then develop an overall objective for scenario planning that can serve as a guiding light and benchmark. “Leadership needs to articulate her or his vision for the company, define goals–financial and non-financial, quantifiable and non-quantifiable–and give a definition of success,” Jack explains.
This also provides context for the overall project, increasing the likelihood that employees feel motivated to pitch in to make the organization more resilient and crisis-proof across the board. “People should feel like they have a role in scenario planning success,” he says.
Choose the Team Carefully
Major disasters and challenges reverberate through every department, so siloing concerns and planning would be a serious misstep. Jack says, “The more the players understand each other’s issues, the better and more productive the planning process is likely to be.”
Of course, who is involved in a scenario planning project will vary according to the circumstances and the nature of each business. In general, says Jack, the CFO should run the process, and if the company has a financial planning and analysis function, the senior person in that group should be involved as well.
The CEO’s input is important, since they are responsible for designing and communicating the corporate vision. However, says Jack, “This does not mean he or she should micromanage the process, but just be involved, even if only for the optics–though hopefully for more than that.”
The cross-functionality should continue here too, with representatives from each department included: sales, marketing, customer support, and so on. But, Jack cautions, be on alert for a fiefdom mindset. “Make sure each group respects the challenges faced by the other groups,” he says. Everyone should be focused on the entire company as a whole, and “if the groups are not on the same page, the process is doomed from the start.”
Watch Out for Common Pitfalls
Jack has identified several phenomena that can obstruct scenario planning frameworks. The main one is “analysis paralysis.” Overplanning–such as creating responses to too many hypothetical and specific situations–is an inefficient use of time and other resources: “If 2020 taught us nothing else, it’s our limited ability to see far into the future,” he points out. Presumably, few CFOs had a pandemic on their scenario bingo card. More important, he says, are a flexible mindset and the ability to quickly shift to face unexpected circumstances.
Although getting insights and forecasts from other departments is crucial, Jack notes it’s important to be aware that individuals may have different motivations when providing key information, which may be difficult to discern. For example, he says, “A VP of sales may believe that revenue will increase 15% year over year, but tell the CFO that it will increase only 10% as a way to manage expectations. The sales team wants to set low expectations that they know they can make.”
That kind of behavior isn’t limited to financials. Engineers might provide a later deadline for a software release, for example. “It’s human nature, but it does make it challenging for the CFO to forecast under these circumstances,” Jack notes. “Just make sure the leaders understand and respect each other’s capabilities and challenges, and that you have a culture of mutual respect.”
Look Within to Plan Ahead
A productive scenario planning framework requires more than assessing external risks–it requires significant internal evaluation as well. With leadership defining the vision, financial professionals should take charge of the effort, partnering with senior members of functional areas across the organization to develop a plan that integrates data and perspectives from each.
This holistic, integrated approach to scenario planning techniques may seem more complicated and time-consuming at the outset, but ultimately it results in a framework that is far more useful and effective for facing the unknown. And when the sky starts to fall, the businesses that have put in the work will be ready.
Learn more about scenario planning in our guide, “Scenario Planning for Finance: What, How and Why.”