Since 2008, the global business community has operated under extraordinary circumstances. After years of crises, extreme volatility and unforeseen events, the extraordinary is now the ordinary and the previously unthinkable is a reality. Companies that once prepared detailed, long-range plans—with budgets based on a stable view of the future—now operate in an environment that presents new and unforeseen challenges every day, week and month.
Among the developments adding to the ongoing uncertainty and volatility are:
- Rise of new economies such as China, India, Brazil and Turkey, with attendant wealth creation and rising consumer demand;
- Demand for commodities, creating boom and bust cycles in everything from oil to corn to copper;
- Demographic change, with rapid population growth in some countries and an aging, shrinking population in others;
- Environmental concerns, including climate change, water scarcity and resource depletion;
- Global interdependence, with companies sourcing talent and resources from multiple countries while opening up new markets for their own products and services; and
- Technological innovation, as inexpensive cloud computing, telecommunications and social media increase global interconnectedness while accelerating the pace of change.
Consequently, managers are increasingly realizing that the past is not a good predictor of the future. They and their boards, as well as the investors and other stakeholders to whom they are ultimately accountable, are questioning the logic of basing strategies, plans and budgets on a single, static view of the future, derived from an extrapolation of past performance. Finance organizations, in particular, are under more pressure than ever to find better ways to support the core business by managing uncertainty, volatility and risk.
Not surprisingly, scenario planning—a capability that helps manage uncertainty by providing alternative views of the future against which strategies, tactics and budgets can be tested—has become increasingly important in such an environment.
Due to global supply chains, a 24/7 news cycle, international financial dependencies and other elements, today’s uncertainties and events have immediate impact as well as long-term consequences. This means that scenario planning — once used primarily by capital-intensive industries with long planning horizons, such as aerospace, chemicals and energy—is now used by many more industries. As more companies adopt scenario planning, however, it ceases to become a competitive advantage.
To operate effectively in these uncertain times, companies should consider moving to what we call scenario based enterprise performance management (EPM). The approach regularly incorporates scenarios into business management processes on an ongoing basis.
Scenario-based EPM can assist, not just in strategic planning, but also in business planning, forecasting, reporting and analysis, providing the foundation for risk mitigation strategies, integration of early warning measures into performance management and, perhaps most valuable of all, for managing the unexpected nature of day to day business.
Scenario-based EPM can help firms transform their planning and reporting process from a reactive, accounting-based activity—a rearview mirror—into a value-centric capability focused on shaping and managing optimal outcomes.
7 Steps to Scenario-Based EPM
Incorporating a scenario capability into an organization’s EPM processes requires seven steps:
1. Identify the key factors that can have a material impact on the organization. For example, consumer products companies may look at GDP growth and consumer spending, airlines at oil prices, global manufacturing companies at exchange rates and freight costs, and financial services companies at consumer credit quality, interest rates and asset prices.
2. Define relevant scenarios (typically three to four) that describe a range of future operating environments. For example: What if oil prices average $75 a barrel, $110 a barrel or $200 a barrel?
3. Agree on a baseline scenario that will be used to develop/review strategy, set targets and develop operational plans and budgets.
4. Develop strategic plans, targets, action plans and budgets using the baseline scenario.
5. Develop alternative views of targets, plans and budgets under each scenario. Identify the major impacts and changes under each scenario. For example:
- What will be the positive/negative impact on key financial metrics such as sales, margins and earnings under each scenario?
- How will investments/projects be reprioritized under each scenario?
- What will the impact be on product mix, pricing and promotional spending under each scenario?
6. Identify relevant triggers and corresponding tolerance ranges for each scenario that should be monitored on an ongoing basis in order to provide management with advance warning of material changes in the operating environment.
7. Whenever established triggers or tolerances are exceeded — meaning a new scenario becomes effective — adjust tactics using the previously developed plans and generate a new forecast reflecting the change in the scenario and the changes in tactics.
We believe that companies can obtain significant benefits by developing a scenario-based EPM capability. And at a time of intense market uncertainty, companies may find that broader use of scenario-based EPM could be a valuable tool for determining how businesses will respond in a wide range of potentially difficult situations. As scenario-based EPM becomes the basis, not just for avoiding risk, it also can be used to identify and seize growth opportunities in developed and emerging markets.
By David Axson, from: http://businessfinancemag.com/article/how-deal-continuing-volatility-0907
David Axson is an executive director in the Finance & Enterprise Performance consulting practice at Accenture, a global management consulting, technology services and outsourcing company. Axson, an accomplished author, has more than 27 years of consulting, industry and entrepreneurial experience working with clients in more than 40 countries.