Challenges and solutions

Traditional planning is typically a rigid, corporate, financially focused framework to develop strategies, set goals, and allocate resources. For most companies, it includes the rituals of annual budgeting, quarterly forecasting, and monthly reporting based on an assumed predictable future that has one set of goals. Consequently, it is a process that lacks the flexibility needed for today’s uncertain world.

By contrast, scenario management is a more flexible approach that adapts to a constantly changing future and anticipates a range of possible futures. Using this, management is focused on what is driving performance and spend their time assessing and preparing plans that accommodate multiple realistic scenarios.

Unfortunately, our latest FP&A Trends survey shows that 20% of organizations are unable to run scenarios at all, with a further 25% of organizations needing more than one week to produce a scenario. Only 16% can indeed run a scenario in less than one day. This lack of agility severely hampers how organizations manage uncertainty.

Components of the scenario management approach

While scenario planning is commonly conducted by corporations to evaluate best, worst, and average future performance cases, scenario management, its less adopted cousin, takes this a step further. It is an adaptable, on-demand planning ecosystem that recognizes a range of potential futures shaped by both internal and external performance drivers.

To this end, scenario management requires:

1. Access to clean and timely data

Data is the lifeblood of any planning methodology. However, our last FP&A Trends survey revealed that 36% of respondents had no single source of trusted data. On top of this, 23% said the data collected was too complex, making analysis and reporting difficult, and 16% said there were too many inconsistencies in definitions and classifications. These data issues clearly need to be sorted if organizations want to move towards fact-based scenarios. Yet it is not essential to wait for perfectly clean data – otherwise, the transition to scenario management will never take place. Our previous article, FP&A and data mastery: A blueprint for excellence, provides recommended actions that can be taken to improve data quality.

2. Identifying drivers of performance

Identifying significant drivers, both internal and external, is key for building driver-based models that support scenario management. Drivers and their relationships can be uncovered by a combination of analytical review and discussions with relevant business users who are affected by them. Some organizations have already started to use AI/ML algorithms for this purpose. It should be remembered that historical data may not always reflect the future. That is why scenarios need to be run for a range of drivers.

3. Driver-based planning models

Fully driver-based models are effectively ‘digital twins’ of the organization that explain mathematically how inputs (e.g., raw materials and advertising campaigns) are related to outputs (e.g., turnover and gross profit). Driver-based models should be fully automated. While predicted driver values are entered, the model is capable of quickly calculating outcomes, producing a connected profit and loss (P&L), balance sheet, and cash flow statement. Models should be constantly checked for accuracy as results come in and updated accordingly.

Currently, the results of the FP&A Trends survey show that only 5% of organizations have full driver-based models, and only 16% of all organizations surveyed have connected P&L, balance sheet, and cash flow statements. This needs to change if organizations are to take advantage of scenario management.

4. Scenario development process

Scenarios are developed in conjunction with business managers who review whether the AI/ML driver predictions are realistic. These predictions are then fed into the driver-based models. Results are subsequently reviewed by management to assess whether the resulting scenarios need to be refined. Once completed, plans are developed for the scenarios that deal best with predicted performance, taking advantage of an expected opportunity or overcoming a predicted challenge. The aim is to be ready for any scenario that materializes.

This process is valid at every level of the organization. For example, scenarios may be managed purely within the production or sales area. However, results must be fed through to other departments for feedback if they are expected to be affected.

Key enablers of scenario management

There are 3 key enablers for scenario management:

1. Senior management support

Senior management support is key to the success of scenario management since it represents a fundamental change to how an organization plans. It requires management, at every level, to recognize that this is the only valid method of planning during uncertain times. Similarly, when performance is analyzed, variances from targets may not necessarily be deemed anyone’s fault without senior management support. It could be that the drivers chosen were incomplete, may have changed, or were not fully understood. Identifying and verifying drivers is everyone’s responsibility to ensure collective accountability.

2. Technology platform

In our recent FP&A Trends survey, 44% of respondents found that their systems were neither easy nor dynamic enough to run scenarios. This is often the case when using inappropriate technologies such as spreadsheets or older consolidation systems. scenario management requires a modern planning platform where the whole organization can be brought together to share and review options in one place, using one set of data, with access to one set of tools.

3. Skilled FP&A staff

The last enabler is to ensure the FP&A team has the necessary time and skills to use modern, advanced analytics such as AI/ML algorithms. They also need to have solid business acumen and an understanding of the market so that they can engage with stakeholders from around the company and help identify, validate, and discuss drivers along with the results produced.

Case Study

One manufacturer we interviewed found that traditional planning could not address an increasingly uncertain business environment. In response, they transitioned to scenario management, which involved:

• identifying the key factors that affect outcomes
• using in-house AI predictive capabilities to quantify operational drivers
• defining assumptions and relationships that exist between drivers for scenario development
• incorporating sensitivity analysis to determine the range of potential outcomes
• developing execution plans for the most likely scenarios
• continuously assessing new information and market changes to understand their impact on performance

The VP of FP&A at this organization emphasized the importance of understanding the key drivers and assumptions used in scenario management. Without a clear understanding of these elements by the leadership team, there is always a risk of missing out on potential benefits due to an inability to evaluate the relationship between drivers and assumptions. The use of modern technology with real-time modeling is essential for a thorough analysis of the interrelationship between drivers and assumptions and for providing guidance during decision-making.

Conclusions

Scenario management is a fundamental shift away from traditional, outdated planning practices. When implemented correctly, it can form the basis of a flexible, on-demand planning approach that acknowledges the potential of multiple futures.

The key requirements include access to clean, timely data, identification of performance drivers, fully automated driver-based planning models, and a collaborative scenario development process. Enabling scenario management requires support from senior management, a suitable technology platform, and skilled FP&A staff.

Embracing scenario management will help organizations transform the role of FP&A into an essential Business Partnering team that can effectively help them manage risks and capitalize on opportunities.