By Robert Douglas, Europe Planning Director at Workday Adaptive Planning
Organisations across the world are currently dealing with the economic instability brought on by the fight against COVID-19. On top of being forced to adapt to these unpredictable circumstances seemingly overnight, the impact of the pandemic continues, challenging companies to course-correct in nearly real time, with no end in sight.
The key to persevering in this fast-changing world is the ability to identify disruption and proactively respond to it, which is why trying to work with a business plan developed months ago limits an organisation’s ability to be successful on both counts. The reality is that agility starts with planning. And, in these times, scenario planning gives organisations the ability to weigh trade-offs and explore the impact of different decisions.
Thinking ahead
The pandemic perfectly illustrates that no one can ever claim to know exactly what lies ahead. But preparing for the unexpected is key in order to respond with agility. Successful finance leaders and financial planning and analysis (FP&A) professionals can identify a list of potential scenarios the organisation might face and then map out potential outcomes. This allows them to also propose actions that can be taken to mitigate the most critical risks associated with all identified eventualities.
Running accurate scenario planning on short notice, especially in the face of uncertainty, can be challenging. While the process itself boils down to a handful steps, carrying them out efficiently requires having access to solid data and the technology necessary to run multiple, sophisticated models.
Assessing the impact to the top line
Preparing for any significant event or change requires planning. Many companies coming into 2020 were already assessing if the long-running economic expansion would begin to show signs of slowing. The pandemic, while sudden, accelerated the need for scenario planning at a pace that most companies had never experienced. At the onset of the pandemic, it was reported some finance teams were handling 30 times more forecasts and build-out scenarios than in a typical week*.
Because there is no historical data for a pandemic, many companies started by assessing the impacts to the top line of their business. Modelling things like new sales, business renewal activity, and any upsell opportunities for customers to create that topline start. From there, teams might consider a range of scenarios, for example looking at 50 percent, 65 percent and even 80 percent of pre-pandemic plans. This allows a view into what could happen to the balance sheet and income statement to better help businesses understand variances on the metrics that matter most to them.
Considering the current economic and health crisis, the focus is really on the “levers” that can be pulled to make trade-offs. For most companies, the biggest expense is people, which is why workforce planning has emerged as a top priority for 2020. Looking at whether to continue with hiring or freeze hiring in certain areas or regions allows teams to evaluate various outcomes. And since no company wants to cut jobs, it’s important to have a full understanding of the various levers available in order to make the right decisions that align with the longer-term business strategy. All options need to be put on the table and assessed against a range of scenarios.
Align and execute
While scenario planning and ‘what if’-analysis is owned by finance, it cannot be done in a finance vacuum. Leaders from across the organisation need to be involved with validating all assumptions made and make sure the right levers are identified from the start. This keeps everyone aligned, and with modern planning solutions, this can be done seamlessly using real-time dashboards with up-to-date data that executives can access around the clock.
Apart from agreeing on the current state of the organisation, finance teams and leadership need to also agree on what the best outcome for the business looks like. This will require understanding the priorities across the workforce, customer satisfaction standards, sales, product development, and more. By agreeing on the organisational priorities up front, as business strategies are revised, the scenarios the finance team needs to focus on can be identified and managed.
The speed at which the economic outlook changes also means scenario planning, like every other sort of planning, needs to be continuous. Priorities will inevitably change in the face of new developments impacting the business, and as soon as this happens it needs to be communicated to finance so that new scenarios can be created and evaluated to inform decision-making.
Once the finance team has established the scenarios with which it is working, defined the top priorities for the business, and identified the levers it is willing to pull, it becomes worthwhile to dive deeper into the data and generate sophisticated and actionable in-depth plans and reports. For some companies, this will mean digging into supply chain issues, for others it may be assessing risk by segment or proactively offering support to clients and customers.
Technology as the enabler
Being able to answer crucial ‘what if’ questions for the business—and do so at the pace our current climate dictates–relies on modern technologies. Without a powerful IT infrastructure that can support real-time access to performance data from across the organisation combined with modern planning tools, teams will be challenged to create the plans and reports needed to guide critical decision-making.
Innovations in FP&A technologies have already reshaped many finance teams and ushered in unprecedented business agility in recent years. By moving away from on-prem data silos to the cloud, where data can inform highly complex models on demand from anywhere around the world, businesses have ensured they have the capacity to effectively plan for a near-infinite number of scenarios.
No one knows what lies ahead, but through the power of “what if” finance teams can help organisations adapt and adjust as business conditions change and continue to do so. And while the pandemic has certainly escalated this need, the effective use of scenario planning has proven that finance teams can embrace flexibility and use it as a strategic advantage.
