Scenario Planning: Pivoting from Pandemic to Proactive
On a scale of 1-10, how far off was your 2020 budget? Feel free to go as high as 14.
We started off 2020 with a great deal of promise: “the roaring 20’s 2.0” with perfect 2020 Vision. Two months in, the global economy got slapped in the face with the reality of being a global economy. And yet, we persevered. How? By reacting quickly.
Reactionary Scenario Planning
Once the pandemic became real, every company that’s still in business quickly came up with multiple scenarios for how the impacts of coronavirus would affect the lives of their employees, the lives of their customers, and the life of their business. We took the information they had (which back in March 2020 wasn’t very much) and created financial plans. Most people had three scenario plans ranging from “short-term recovery” to “multi-year recession” though we all hoped for the best.
We took those scenario plans and we compiled a set of actions: What we would do if that particular scenario came to be the right one. Short-term recovery? Minimize discretionary spending. Year-long economic hit? Stop our least profitable products and locations. Multi-year recession? Stop everything that isn’t making money, cut costs dramatically, and determine how long until the money runs out.
And then the data started coming in. The economic dip was deeper and faster than 90% of the predictions anyone made, so we revised our scenarios down. The economic recovery after the massive drop was faster than 99% of the predictions, so we revised our scenarios up. COVID-19 turned out to be more deadly, longer-lasting, with cases and deaths coming in multiple waves, so we extended our scenarios around recovery. The vaccines were developed and approved faster than any in history, so we allowed for scenarios with faster resumptions of more traditional spending and economic activity.
2020 was a year of – to coin a new term I hope doesn’t catch on – Reactionary Scenario Planning. The CFO of Coca-Cola called it “Scenario Management.” Yes, we were coming up with possible scenarios, but only in response to events. We were looking ahead by responding to what had already happened. We spent 2020 reacting to the world. Things happened to us; we did not happen to things.
Proactive Scenario Planning
You made it. You’re in 2021. And many companies made it through the year by Scenario Planning. Japheth Jev, CFO at Triumph Power and Gas in Nigeria said in an article on Financial Management News, “We let the management and the board understand that this crisis would definitely affect us, and it was going to affect our customers' businesses and destroy some of our revenue lines. We assessed the risk and ascertained the level of impact that we are going to suffer. And we also introduced scenario planning. To be frank, I never appreciated the importance of scenario planning until the advent of COVID-19.” [It’s a great article, by the way, and you should go to https://www.fm-magazine.com/news/2020/dec/japheth-jev-managing-cash-during-coronavirus-pandemic.html and read some of Jev’s wisdom on crisis planning.]
But now 2020 is over (and no offense, 2020, but good riddance). We’re planning our scenarios for 2021, and we need to pivot from being backward-looking about potential scenarios to being proactive about the scenarios we want to make happen. Take a pause, look ahead and say, “now that the end is in sight, what are the most plausible scenarios for 2021 to 2025.” It might be “Global Expansion” or “Delayed Expansion” or “Let’s Definitely Not Expand Ever.” It could be anything from “our new products launched well in 2021” to “well, that didn’t work.”
On that note, you probably should throw in a worst-case scenario, because in the words of a great Cylon prophet, “All this has happened before, and all of it will happen again.” There will be another catastrophic event, so take the time now to plan for how you’ll respond to it, so you’re not reacting in the moment.
You will find that there are too many possible scenarios for you to plan for, so group them together into broad categories that cover the 3-5 most likely general cases. Expand them – drive them off KPI’s, so they’re easy to revise – into full financial scenario plans. Then take those plans and come up with a set of actions to prepare for those scenarios and how to respond to those scenarios if it turns out to be reality.
Most importantly, make sure those scenario plans are circulated widely. If some of the plans are dire – otherwise known as the “start updating your resumes” scenarios – make sure everyone knows what to do to avoid those scenarios.
Make 2021 the year where things don’t happen to you; you go out and happen to things.
Next Steps in Making the Pivot
Each year, I conduct a global survey of Business Analytics. Last year, I asked over 250 companies how they were doing in the world of reporting, analysis, planning, and consolidation. If you want to see where you should be planning before it happens and you find yourself reacting to it, I’m unveiling the results on a webcast the last Wednesday of January. You’ll learn how your Analytics & EPM (Enterprise Performance Management) stacks up against the rest of the world so you can get there before everyone else. To register, go to:
If you have any questions, ask them in the comments or tweet them to me @ERoske.