By Edward Roske, Chief Performance Officer, Argano
Picture this: you're the captain of a ship navigating treacherous waters, with uncertain waves and shifting winds threatening to send you off course. But fear not, there to safely steer you to your destination is scenario planning as part of your enterprise performance management (EPM) efforts.
Inflation, supply chain snarls, geopolitical turmoil, recession risks, interest rate fluctuations, demand shifts, and technology disruptions like never seen before, even the most seasoned captain of industry can feel lost in a sea of possibilities. Each day both exciting opportunities and devastating consequences if we don’t execute on a solid plan.
Back in days of yesteryear – say, pre-March-2020 – the world changed fairly slowly. The rate of change was always increasing, but in the average year, change was relatively unnoticeable. But in just the last few years, the pace of change has skyrocketed, making it impossible to predict what’s coming next.
To master these waves of uncertainty, we call on scenario planning within EPM. We are still doing other areas of EPM like account reconciliation, enterprise data management, financial consolidation and close, planning, budgeting, forecasting, and reporting, but scenario planning brings a new tool into the toolbox, one that helps us codify our potential paths.
It is also important to know that scenario planning does not live in a vacuum apart from the other areas of EPM. Scenario planning joins with operational planning, tying in with the other areas of EPM that help you run the business and make better decisions, those that cut across various functions.
Think of scenario planning as planning a voyage. You know where you want to go, and where you currently are, but there many unknowns ahead. A navigator carefully considers the weather conditions, charts a proposed course, and prepares for different scenarios such as wind direction changes or sudden storms.
Similarly, scenario planning involves creating multiple possible scenarios based on future events that might impact your organization. You consider factors like the economy, market changes, and emerging technologies, and then plot a course of action for each scenario. Those scenarios act as a map for the organization, helping them to navigate and make goal-oriented decisions. Some of those scenarios are rough waters to be strongly avoided, so the executives need to chart a course toward the best possible scenarios for the company.
Just as a sailor needs to be agile and adaptive to constantly changing conditions, organizations must also be flexible to respond to changes in their business environment. Scenario planning helps organizations identify potential risks and opportunities, increase their likelihood of surviving in each scenario, and make data-informed, proactive decisions to ensure they reach their destination with all aboard safe, sound, and wildly profitable.
For most organizations, there are three to five potential scenarios that encapsulate most of the likely outcomes. You don’t need to plan for every possible change in the wind but rather “what if we suddenly go from sailing ahead at top speed to driving into a recessionary storm.” It’s critical to brainstorm the possible scenarios and then group those into a few possible scenarios.
To some leaders, scenario planning means stopping after coming up with a list of scenarios. Others believe that those scenarios need financial plans to various levels of detail. Others come up with a set of actions and keep those plans ready at all times.
Truly, all are important, but the most critical aspect of scenario planning is the realization that you can’t only have one path, one set of numbers, or one budget because the world is no longer that linear. Even Google Maps will give you three suggested routes these days and that’s just to get from your house to the grocery store. Companies can’t have fewer scenarios than you do when you’re running errands.
Enterprise performance management is needed when the seas are calm, but when you’re caught in a perfect storm of internal and external change, it becomes critical. In the office of the CFO, EPM is used to help people take numbers and do things with them. It could be consolidation of actuals, planning for the future, reporting on what’s happening, or analyzing to find out why something is happening. At the end of the day, it’s putting the right information into the hands of the right people so they can make better business decisions faster.
While EPM cannot calm the changing waters, it can help keep us on the right path. Think of it as a compass, a GPS, and a navigation system for business: it tells us where we are at any point, it tells us the direction we need to go, and EPM helps us create a plan for getting there. Scenario planning within EPM comes into play by telling us what could happen, providing vital data points to work with inside of the larger enterprise performance management umbrella.
There are seven key steps (a treasure map, if you will forgive another nautical metaphor) to effective scenario planning within EPM:
You have the knowledge, you have the tools, and now you need to be the skipper I know you were born to be. It may seem like you’re just going on a short three-hour tour – a three-hour tour – but if the weather starts getting rough and your tiny ship gets tossed, you need to be the courageous, fearless crew that makes sure we don’t get lost.
So, grab the wheel of your business, hoist the sails of your scenario planning, and watch as your EPM compass guides you to a smooth and prosperous journey, where uncertainty is just a ripple in the sea of success.
I’d love to hear your thoughts and questions as you navigate your journey. Please email me at Edward.Roske@Argano.com and hey, stay safe out there. There’s a storm a-comin’.
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