‘When’

Scenario Planning is generally triggered by significant events (sometimes referred to as "black swan" events). These events could be economic in nature or specific to the company itself. This article focuses on larger Scenario Planning exercises that are triggered by economic events and cause major business disruptions.

Some examples of when Scenario Planning was triggered recently include:

• Covid impact in ’20 that disrupted regular business and forced companies to consider how impacted they were likely to be;
• Inflation and fast pace of Interest rate hikes in ‘22;
• The Great Recession in ‘2008;
• Product launches — success or failure.

Generally, the events are significant enough to render current Budgets / Forecasts outdated and, in some cases, meaningless. In other instances, previous correlations between economic variables and company performance often shift significantly and need to be re-evaluated.

‘Why’

Scenario Planning is often necessitated by challenging circumstances and the need for quick, strategic responses to minimise losses and protect capital. Key considerations include:

• How are revenues going to play out in the scenario, and what does that mean for profitability? Similarly, with losses, especially credit losses.
• Contingency planning — what expenses should be cut to preserve profitability / capital? Revenues are typically impacted, so the key question is how an organisation correctly sizes itself for anticipated revenues.
• What is the organisation's playbook if the scenario comes to pass? Do we cut expenses and reduce / increase investments? What are some of the flexibility levers?
• If there are credit losses, how should the organisation staff up or down?
• Finally, how bad could it be — what can be done to reduce losses / maintain profit? Does the company need to raise or preserve capital?

‘How’

Now the ‘How’ of Scenario Planning. Once the decision is made to run a scenario, what are the considerations, and how do you practically execute a Scenario Planning exercise?

1. Senior Management / CEO/ CFO ownership: It is important to have senior management ownership (CFO/ CEO) of the request, especially in larger organisations. These organisations require multiple people involved in Scenario Planning exercises, such as the Divisional CFO,  Division Head, and Division FP&A Head. It's important for them to know that the results of this request will be reviewed by senior leaders. Their involvement strengthens accountability and ensures quality outcomes. Clear expectations from senior leaders help align priorities and clarify deliverables.

2. Central vs lower level: Corporate FP&A typically needs to assess the level at which the exercise needs to be done. Can it be done centrally with central functions such as Treasury, FP&A and Strategy, or does it need to be done at a lower level and pushed down to each division? The further below it gets pushed down, the higher the work that’s generated. If the exercise is moved to the lowest level, you will need to prioritise a systemic collection at the least. Additionally, do you want the forecast done at the lowest level involving every member of the larger planning organisation? Clearly, the lower you push it down, the longer it will take to turn around, and this will necessitate clear and precise directions.

3. Rolling Forecast process: The next thing Corporate should determine is whether this could be handled via a Rolling Forecast exercise or if the scenario is too unique. Most organisations have a Rolling Forecast, with some on a monthly cadence and others on a quarterly cadence. If the Scenario Planning exercise needs to be done separately and cannot be handled in a Rolling Forecast, it will introduce more complexity as it will necessitate a separate set of economic assumptions, a different mode of collection, and a different scope of involvement of the broader organisation.

4. Specific guidance to the team: The next thing Corporate should focus on is communicating clear deadlines, assumptions and guidelines. Also, it is helpful to point out some things to consider to ensure the divisions have considered some correlations. For example, in a slowing economy, does it trigger write-offs / charge-offs of debts / inventory? This is helpful to avoid after-the-fact realisation. Communication is key during this process, and it's useful to have feedback from divisional FP&A leaders as there may be some implications that have not been considered. Communication can be done formally via email or through weekly, bi-weekly or monthly FP&A calls.  

5. Modelling: Typically, most outcomes are modelled at a divisional / lower level. In some cases, models may be correlated to economic drivers, but in others, they may not. It's important to be aware of the regular model and see whether we need any modifications in unique circumstances. It’s also essential to have clear communication from the centre on the level of detail that is required in Scenario Planning. This will influence the choice of models and the process. Modelers should consider whether a high-level model might be more suitable if time is short and the regular models don’t fit the unique circumstances.

6. Communication is key during this process, and it's ideal for corporations to have regular scheduled or informal discussions on how the exercise is going and whether any involvement/ help is needed from the centre. The role of Corporate FP&A is key in this process. They cannot simply consolidate the information but must guide the different divisions regarding needs, results and challenging outcomes. They are the bridge between divisional and company leadership.

Conclusion

In summary, a few things to keep in mind when conducting a Scenario Planning exercise

• Is a Scenario Planning exercise the right fit for the problem facing the organisation?
• Top management buy-in to start.
• Clear communication through the process with systemic support as needed.
• Make sure the exercise is targeted at the right level.
• Review and challenge the process throughout the exercise.