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.
