The need for Driver-Based Scenario Planning (DBSP) has never been greater as we continue to operate in a world of incredibly high VUCA (Volatility, Uncertainty, Complexity, Ambiguity). The disruption caused by any or all of the following: economic, environmental, geopolitical, social, and technological change, has created an ecosystem of great challenge for both FP&A professionals and the organizations they support.
When we think about the key barriers to leveraging the power of DBSP, it often comes down to a combination of these three factors:
- It’s too time-intensive to plan out individual scenarios.
- We evaluate too many scenarios, and they never happen.
- We struggle to drive action and accountability.
It’s important to remember that the future success of our organizations rests upon the decisions we make today. There is much power when we leverage and utilize DBSP that brings creativity, productivity, and a competitive edge to the organization. With DBSP teams can drive the benefits of:
- Awareness – DBSP encourages us to think outside of our organizational boundaries.
- Competitive Advantage – DBSP helps to drive agility and the ability to move more quickly.
- Time – DBSP can help to provide time to evaluate options aiding in better decision making.
Start Responding, Stop Reacting.
If we think about why we want to conduct DBSP, it is to be able to develop contingency plans and corresponding actions. When events occur, and they will, we want to be in a position where we can respond rather than react. It might sound just like semantics, but there is a big difference between reacting and responding to a situation.
- Driven by emotion.
- Lacks thought and thorough analysis.
- Rarely results in the optimal outcome.
- More thoughtful and measured.
- It’s logical, methodical, and intelligent.
- You have the benefit of time to analyze and vet your options in advance.
People tend to panic in emergency situations. Especially if there is no action plan to follow. A well-documented contingency plan really helps employees push through their initial fears, make better decisions, and move more quickly into recovery mode. The contingency plan also helps you build internal awareness among stakeholders of indicators for an urgent response. All factors that will minimize the negative impact and accelerate recovery when responding rather than reacting.
Identify. Prioritize. Plan.
One of the first barriers we want to overcome by using DBSP is identifying the scenarios we wish to address, given our limited resources.
Step number one is to start with the most likely version of what the future will look like built on a driver-based model. A driver-based model will help you create a scalable scenario-planning framework. This will permit you to model your scenarios more quickly. It will emphasize the key relationships between your Operational and Financial results and will permit you to focus on the key drivers of the business.
Once you have developed your model of what is most likely to happen, you can then adjust your key drivers and assumptions to generate the various scenarios more quickly and help you gain insights on how these different outcomes can affect your business. When developing your base case, you want to incorporate a cross-functional team to be able to include the widest understanding of the risks and opportunities the organization is facing. We will need to consider both the internal and external factors that affect the business. We then want to shortlist the most highly volatile factors from each group which are those factors that are most likely and impactful on your business. In other words, those that are volatile and to which the business is most sensitive. Then we want to identify alternative scenarios based on these key factors.
The next challenge we face is prioritizing and determining the financial impact of the scenarios. If we analyze too many scenarios, we may be consuming an unsustainable level of time, energy, and resources. Where we don’t want to end up is a place where we feel we are trapped in an endless loop of scenarios, that will eventually become so overwhelming that we fail to make any decisions at all.
Too many scenarios with a wide range of outcomes can paralyze a company’s leadership. It can cause a lack of direction, choice overload, and diminishing returns. It is simply not feasible to review all possible scenarios. We need to use a framework to help us prioritize and understand the severity of which scenarios to analyze. We need to perform a qualitative assessment.
We start by looking at the velocity of the potential scenario; how quickly can the scenario develop? Obviously, those that can develop the fastest, pose the greatest threat or opportunity to the organization. Next, we rank the scenarios on the basis of how likely the scenario is to occur. Those that are certain deserve a much greater degree of scrutiny than those that we would rank as rare to occur. Then we want to grade the scenarios on the impact they may have on the organization. Those with an extreme potential impact deserve a much greater amount of our time than those we would characterize as having a negligible impact on the business.
By determining which scenarios, we believe are the most critical as a function of their velocity, likelihood, and impact, we can maximize the value of our time, energy, and resources. The other scenarios can either be put on a “watch list” or even labeled as “no further action necessary.”
We are now in a situation where we need only to adjust the operational drivers of each scenario in order to understand the financial impact of the various alternative scenarios.
Now we need to develop responses to our prioritized scenarios. The scenario development process should begin and end with an emphasis on action. If we want to become a best-in-class organization when it comes to scenario analysis, we need to move beyond just producing a base-case scenario. We even need to evolve beyond both creating an upside and downside scenario and monitoring those scenarios. We need to have a plan in place if either the upside or downside scenario comes to pass. We need to develop scenario response plans.
We need to think ahead about what our short-term and longer-term actions will be. We need to consider the lead time required to take those actions. We want to create a framework where we can monitor the emergence of a particular scenario and develop signposts that make responding to the particular scenario easier.
As an organization, we need to identify who will track and execute the response. And critically, we want to have our responses pre-approved, so that we can take action as quickly as possible.
So, to address those barriers we identified in the beginning of this piece:
- DBSP is too time intensive – Start simple. Identify key highly volatile factors that impact your performance.
- We evaluate too many scenarios, and they never happen –Use a standardized approach to prioritizing scenarios.
- We struggle to drive action and accountability – Plan trade-offs in advance. No action is also a decision.
To learn more about how you can get the most out of your planning process, check out our Workday Adaptive Planning solution to learn more.
About Brian Kalish– Brian is the Executive Leader – FP&A and Treasury at eCapital Advisors, headquartered in Minneapolis, Minnesota. He is available as a public speaker addressing many of the most topical issues facing Treasury and FP&A professionals today. He has spoken all over the world to audiences both large and small. Brian is passionately committed to building and connecting the global FP&A community. He continues to host FP&A Roundtables and events in North America, Europe, Asia and South America.