In periods of great tumult, organisations forecast more frequently, in the hope that it will give them a better handle on their trading prospects, levels of activity and resources needed for the coming months. But cranking the handle more often doesn’t necessarily lead to richer or more accurate insights and neither does it allow management to look out further on the time horizon. That’s the role of scenario planning.
Indeed, FSN’s 2021 research, “Agility in Planning, Budgeting and Forecasting (PBF)” finds that scenario planners are twice as likely to be able to forecast with confidence beyond a year, compared to non-scenario planners. 52% of organisations are unable to look out further than 6 months. Yet despite this profound gap in capability, only 4% of finance organisations regularly deploy scenario planning.
But what is scenario planning and what are the pre-requisites for success?
Scenario planning is a strategic method of analysing alternative future scenarios and the outcomes and potential solutions for each sequence of events. Unautomated, it’s a time-consuming exercise and practically worthless unless an organisation can simultaneously model multiple scenarios, assumptions and variables – something that is hugely challenging if not impossible within the limitations of a spreadsheet. In fact, 80% of non-scenario planners say this is the greatest obstacle to scenario planning.
To mount a credible and dependable scenario planning process three pre-requisites need to be in place. Firstly, scenario planners eschew spreadsheets for planning. Just 8% of scenario planners say they are “data overloaded” – overwhelmed by disconnected spreadsheets (and data governance is poor) vs 33% of non-scenario planners.
Secondly, scenario planners have mastered their data, i.e. data is actively managed as a corporate asset and business partners have the tools, skills and resources needed to provide competitive edge and insight. 67% of scenario planners say they have mastered their data.
Finally, scenario panners use a specialised PBF tool that provides the financial intelligence needed to quickly build agile scenario plans and which provides a unified environment for data and applications (probably in the cloud). 42% use specialist cloud software in all their business units compared to 5% that do not engage in scenario planning.
The research identified other benefits of being a scenario planner too. They are more likely to engage with more stakeholders within and outside the organisation, and they are more likely to look outside the business to consider risks and opportunities. This makes sense when organisations are considering much more varied potential future scenarios, which broadens their awareness of external influences, as well as the importance of including a wide range of inputs into planning, budgeting and forecasting.
As the world starts to emerge from the pandemic new challenges are beginning to surface, such as the shape of the recovery (“U”, “V” or even “W”), the potential for high inflation, and the possibility of a massive stock market correction as well as all of the accumulated disruption to supply chains, customers and workforces. But on the positive side there are also massive opportunities for new business models and growth. Making sense of it all needs a long-term perspective coupled with the agility to respond as circumstances change. It’s not easy, but for those that ‘grasp the nettle’ and invest time, scenario planning could provide a window on immense opportunities.
To listen to the recent webinar where Gary discusses his findings, click here.