Scenario planning & the now of budgeting/planning

2020 will be a year all of us will remember. We struggled with stay-at-home orders, product shortages, border closures and more. But, what 2020 really did was put an expiration date on ‘business as usual’. The business environment has been markedly and permanently changed. The ‘new normal’ will not be ‘normal’ at all.

Business, today, is no longer that familiar, modestly changing world of yore. Businesses now exist in a more chaotic and unpredictable world and that world rewards firms with great plans, forecasts and vision. It absolutely punishes those firms that wait to be surprised. Firms that don’t anticipate different planning events will be called ‘former businesses’ and will either be acquired or fail.

Planning, therefore, is not an option but a modern business requirement.

Here’s an example of how a lack of vision and planning hampered a firm in 2020. This quote is from a highly instructive TechCrunch article on travel app Hopper:

“In hindsight, one misstep Hopper made is that it didn’t hire more customer service agents to deal with what the pandemic would bring. In fact, Hopper did the opposite — the company furloughed agents in an effort to cut costs and stay in business. At the time, Lalonde explains, there was just too much uncertainty to hire. Stores were out of toilet paper. The Western world had closed for travel. Vaccines had typically taken years to create. This was looking like a long-term, worst-case scenario.”

Planning: Then and Now

Years ago, a very successful entrepreneur and I were having a bite. In our very casual conversation, I asked him why he left a very large firm to launch his own business. His answer surprised me. He said that he hated budgeting and forecasting. His old employer was, in his opinion, obsessed with the process, so much so that he was spending a couple of person-months a year doing this. He liked spending time with customers and making deals not playing with spreadsheets and begging for budget scraps.

When I heard this, a number of thoughts flooded my brain. Clearly, his old employer had a bad process and probably bad planning technology. That firm needed to reengineer its process or other key talent would leave the firm. I also knew that this mess wasn’t scalable or flexible. People were spending inordinate amounts of time building rigid plans that may have been numerically correct but I doubt they reflected the reality and variability that I saw in their industry.

And, in a sense, I could commiserate with my friend on this matter as my employer at the time subjected us to an inane and irrelevant annual planning process. One of those dreaded work products involved the much-despised TT-5 spreadsheet. This macro marvel required my staff and I to input projected service revenues and expenses by client some 18+ months beforehand. Since our average gig was less than 90 days in duration, we couldn’t know who our clients would be or our backlog that far out in advance. And, we couldn’t estimate travel costs either as we didn’t know where the work would occur. So, we made stuff up just to get the accounting staff off our backs.

And those plans all lacked several critical components. While we got some piddly guidance on 1-2 factors (e.g., assume billing rates will grow 5% next year), we didn’t get any guidance around matters like:

• What are the odds that the economy could contract 5-7% next year?
• Should we assume more services buys in certain countries and less in others?
• How will competitors likely respond in the next year?
• How will airline and hotel pricing likely change in the next year?

And, I never saw any of these planning exercises ever attempt to understand what sensitivities or vulnerabilities exist in meeting our plans. For example, no planning process had responses to questions like:

• How vulnerable is your top line revenue number to the loss of a few key employees?
• Do you have any clients that make up more than 10% of total group revenues?
• What would do if market demand for one of your services suddenly fell off?

Great planning shouldn’t be laborious. It also shouldn’t be an exercise. Great planning is like a map that contains many potential routes to a new destination. It can also be an insurance policy against total failure.

How Planning is Evolving

Thankfully, plans have moved beyond paper to automated solutions. But there are clearly some more evolved solutions/processes out there (and others less so).

Many firms create an annual plan with quarterly updates. These plans often reflect P&L and capital projections. Some firms still prepare these with spreadsheet technology although this is mostly the case for laggardly and very small firms now.

More sophisticated firms utilize specialized planning technology. The best tools are:

• Integrated directly with key financial applications
• Automatically maintain an audit trail of who updated each balance and when
• Permit multiple users to work on the same plan simultaneously
• Can rapidly create and populate alternate plans to speed up the creation of finesse, stretch and scenario-based budgets/plans
• Coupled with a collaboration/email technology to speed the development and approval of plans
• Use process management technology to automatically trigger reminders and other tasks

Better tools also provide templates to help operational and non-financial personnel understand the impact of different actions on revenues and costs. For example, a tool that helps Sales leaders understand how the timing of new sales hiring impacts revenues in subsequent quarters can help speed the development of a plan and provide the firm greater confidence of the numbers within the plan. Other utilities can help leaders understand the timing and economic impacts of subscription bookings, services utilization, hiring funnel requirement/costs, sales capacity and more. The best tools can model the change (or delta) from one set of numbers and assumptions and show the potential impact to the firm in real-time. This power is critical as this knowledge used to be in a key person’s mind or buried in the cells (or macros) in a hard-to-find spreadsheet. The knowledge in these new utilities is out in the open and tunable based on the firm’s experience.

The better firms are using these tools to re-plan with greater frequency. Because newer tools can generate a lot of the work automatically and without taxing operational leaders, more realistic and more timely plans can be generated. One highly valued characteristic of these newer tools is their direct integration with core financial applications. It’s not just that these tools can pull in actuals to help populate the initial planning values, but the software can continue to keep updating values in real-time. The software can also trend out the data and show what’s been happening to key line items over time and prompt users to document why their numbers will or will not follow the trend. All of this is what makes newer planning tools ‘active’ and these stand in stark contrast to ‘passive’ data in spreadsheets.

Risk and Planning

Businesses and business people must take risks to grow their firm. The best business people are great at taking smart risks while also managing downside risks. For example, many years ago I asked a major hotel to indemnify us against some Force Majeure concerns, specifically, earthquakes. I’m glad I did as an earthquake had significantly destroyed or disrupted that area two weeks prior to the scheduled event. That one clause saved my organization over $1 million.

That anecdote is important as it illustrates the kind of thinking that should go into planning efforts. Planners should dig in and research what could happen to their firm in any number of scenarios, some of which your firm may have previously experienced. These situations fall into several categories:

• Natural disasters & pandemics
• Supply chain problems
• Employee actions (e.g., strikes)
• Adverse publicity/scandal
• Wars, blockades, terrorism
• Macro-economic growth or contraction
• Government investigation/action (e.g., new tariffs, trade embargo, tax increase, sanctions, etc.)
• New regulations
• A material change in the competitive landscape
• New, emerging customer needs/demands
• Employee malfeasance or error

For some potential risks (e.g., one’s data center catches fire), you should have a formal disaster recovery policy that is routinely tested. Other risks (e.g., outsized inflation occurs) require a combination of a playbook and a financial plan that incorporates the new costs, opportunities and business reactions.

For each of these scenarios, a business should know how to tell it is entering the early stages of one of these situations and what its countermeasures for minimizing the potential trauma will be. Some are quite obvious and immediate (e.g., a tornado destroys a key distribution center) while others can sneak up on a firm over time (e.g., an all-new Internet competitor quietly siphons off many of your best customers).

Scenario planning differs from many ‘forecasting’ exercises. When many planners create forecasts, they often work from an agreed upon budget and then create 1-3 alternate forecasts using some knowable macro factor that could impact these estimates. Commonly, we see an official plan/forecast along with a conservative and stretch plan/forecast being developed. This planning data might be helpful in preparing plan vs. actual management reports but they offer little guidance as to what a firm should do when confronted by a major game-changing event. For those they need scenario plans.

Scenario plans won’t stop some event from occurring but they can definitely expedite your firm’s response to it. That shortened response could save your firm millions and hasten its return to a level of normalcy.

Planning’s Future

Going forward, planning tools will likely shift their focus. Instead of being predominately focused on internal financial transaction data, we should see a trend towards greater use of externally sourced big data.

For example, we believe that planning tools would better help users if they could understand

• The impact of weather on retail sales
• If a potential pandemic from afar is moving and potentially threatening their supply chain
• Looming warranty/recall issues (from social sentiment intelligence)
• How changes in customer reviews of your products/services correlate to top line revenue and discounts offered

Even further out, we believe sensor data will provide insights into potential machine repair costs based on algorithmic analysis of prior and expected repair data. This ability to predict when a company will need to make repairs will hopefully reduce unplanned downtime (which improves net profits).

Another direction for planning technology will involve the analysis of big data feeds to spot emerging trends and to identify ‘signals’ of changes out in the global economy. Signals might be: growing seismic activity, a warming earth, mutating viruses, changing birth rate patterns, growing political tensions, etc. The value of a great signal is that it is an early indicator or harbinger of changes that will come to impact your firm. When a signal change is apparent, it’s time to dust off the scenario plan for this event, do a quick update and get moving while there’s time to get out in front of competitors. Signals permit your firm to proactively address a changing world/market instead of reacting to a change once your firm has been impacted.

Action Plan

Now that we are starting to see a way out of the pandemic, take time to reflect on what did and didn’t work well with how your firm forecasted and planned. That assessment will likely point out some issues with your firm’s:

• ability to frequently and easily re-plan throughout the year
• need for more non-financial data to help spot anomalies
• ability to spot signal changes early and often
• current planning tools

After this assessment, you may want to consider newer, more modern planning technology. The new technology shouldn’t mimic current practices, processes and technologies but should push you into examining solutions that quickly, effortlessly and painlessly permit very frequent planning/re-planning efforts.

The change we’ve all experienced of late may abate but frequent disruptive change is likely the future. Smart businesses will equip themselves with the tools that thrive in dynamic times. Are your planning tools in-sync with this new business world?