What if you had, ready at hand, an instruction book that told you exactly what to do in the event of any kind of emergency? You would feel more prepared to handle whatever challenge comes at you, wouldn’t you? Maybe you’d feel more confident knowing you always had a "plan B." That’s what Scenario Planning is: an organization’s instruction book on how to handle major challenges. It’s the process of anticipating change before it happens and building an action plan for when it does.
In the Connected Planning world, the process of anticipating change is contained in a Scenario Plan. And when a given scenario plan drives your allocated annual operating plan, that’s the action plan—it tells the organization who needs to deliver on what by when. It tells account execs what their new quotas will be this quarter by selling which products in which territories. It tells team managers what their revised travel and entertainment budget is. It tells hiring managers where to promote talent and where speed up or slow down hiring rates by level. And all these actions you’re taking came from the scenario plan that predicted why you want to take those actions now. And while you’re taking action right now, your competition, caught by surprise, is busy figuring out what the right course of action is.
So, why is this playbook called a scenario plan? When you go through the process of anticipating change, all of the assumptions you make, rules & constraints you know, and historical and market data you have, are recorded in a scenario plan—usually expressed as a multi-year (3–5 years is common) P&L, balance sheet, and cashflow reflecting those assumptions, rules and constraints, and data you recorded. You can quickly see the effect that the levers of changes have on the future performance of the organization.
In my travels, I’ve found very few organizations doing this well. The trick is anticipating the scenarios to plan for and then devoting the time and attention to define each scenario. Scenario planning is generally industry-specific, but some plans are made across industries, especially adjacent industries. Industry drivers, news, and global trends will help inform the assumptions and rules made in a scenario plan. A good scenario for every organization to debate is called “What If a New Disrupter Gets into My Line of Business Tomorrow?” Other scenarios to build can include:
Your own mergers, acquisitions and divestitures, or new joint-ventures or partnerships.
Volume, pricing, and mix scenarios.
Geographic or customer-type expansion.
Doubling of raw-materials costs.
Extraordinary new tariffs, taxes, or other regulations and compliance fees.
New product introductions and competitive reactions.
Labor cost and source (FTE, temp, gig workers) changes.
A simple way to get started is to form a scenario planning team and have them list out the main factors that drive your industry: availability of skilled labor, innovation, product lifecycle, alliance and partnership trends, customer buying behavior, customer acquisition costs, emerging markets, and many other drivers.
Pick any two and plot them in a simple 2x2 matrix like this:
Here I chose "Availability of Skilled Labor" as the x-axis, and "Customer Acquisition Costs" as the y-axis. At the intersections of "low" and "high" for each axis, I’ve considered what the possible future could look like given those circumstances and considered a plan of action. For example, if the availability of skilled labor is high, and customer acquisition costs are low, why not grow faster than you normally would? This approach requires consideration of the intersection of the two concerns and comes up with four possible scenarios. Behind each of those scenarios is a robust model with all the drivers and data considered and included. In this example, I would focus on drivers including higher pre-sales, quota-carrying and contract head-count, geographic and market expansion, higher marketing expenditures, and so on.
The next step is to iterate and refine the process of scenario identification, debate, and planning—and to cast a wider net of participants to all areas of the organization, not just a select few in corporate development.
If your organization developed the ability to generate, debate and model dozens of scenarios, enabled by a fast, easy-to-configure, collaborative scenario planning platform, your organization could be more agile, more adept at reacting to change, and ready for whatever lies ahead.
Scenario planning is one part of the whole Connected Planning process that I’ll describe in upcoming blog entries. In the meantime, looking forward to how you come up with and operationalize scenario planning.
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Ron Dimon, managing director at Deloitte Consulting LLP, has been working with Finance Systems for more than 30 years and Enterprise Performance Management (EPM) technologies and processes since 1999. Ron works in the Analytics & Cognitive practice at Deloitte to deliver the complete EPM package: from vision, through business-case, to systems & processes that improve competitive advantage and deliver on the promise of EPM. He is the author of "Enterprise Performance Management Done Right, An Operating System for Your Organization" (John Wiley & Sons, 2013).