Scenario planning describes the tools, processes, and strategies used to identify and prepare for possible uncertainties in a business’ future.
They say that hindsight is 20/20. This is never more accurate than when managing a business. Unexpected market fluctuations, emergent events, and ongoing changes within industries can upend even the best-thought-out plans. As a recent example, leaders need look no further back than the 2020 business year. The unanticipated and astonishing impact of the first truly global pandemic of the modern age left the enterprise world reeling. All around the planet organizations are still recovering from unexpected, rapid changes from the initial blow of COVID-19, with lost profits, difficult new regulatory requirements, and even bankruptcy and closure as the unfortunate result.
With so much at stake, how can companies better prepare for the future, identifying and planning for a range of uncertainties that may or may not ever actually occur? The answer may be found in scenario planning. Flexible planning allows management to create what-if scenarios and evaluate tradeoff decisions, so that when emergent events or other factors force change, the business already has planned and thought-out contingencies in place. But scenario planning is more than just a business continuity plan or subset of FinOps; it is a fully integrated approach for addressing and adapting to the uncertainty of modern business.
The basic premise is this: If an organization can define critical uncertainties and create working contingencies for a range of scenarios, then they will be more capable of surviving—or even thriving—when faced with those scenarios in reality.
For businesses, scenario planning gives decision-makers a glimpse into the future—not one, single, immutable future, but a range of possible future scenarios. This allows them to identify many different outcomes and to estimate the impacts of these scenarios. They can then evaluate the effectiveness of different proposed responses, identifying the courses of action most likely to lead to positive outcomes for the organization, its employees, and its customers.
Rather than having to scramble and improvise in the face of emergent events, organizations can refer to relevant scenario plans and respond quickly and decisively. This allows leaders to make tradeoffs and informed decisions quickly, evaluating all possible combinations of decisions and their impact regarding budget, resources, priorities, and timelines.
Companies able to pivot quickly and thrive in a constantly changing world continuously practice scenario planning. However, companies that practice scenario planning are still often the exception rather than the rule. As such, those organizations that invest in scenario planning and create working contingency strategies are more likely to see positive outcomes in the face of abrupt change and other future scenarios. This provides a clear advantage over those companies that wait until change occurs to begin to formulate a plan.
Transparency and insight are at the heart of scenario planning. To prepare for the unexpected, businesses need to develop a clear picture of their budgets, forecasts, and other variables, and to precisely identify their key drivers for business growth. With this information made more readily available, business executives and other leaders have a framework in place that they may use for non-emergency decisions as well as those that must be made during times of potential crisis.
As previously addressed, scenario planning gives businesses the power to plan for the future. More specifically, it provides a format for performing ‘what-if’ analysis for many different scenarios. This allows decision makers to accurately forecast the impact these scenarios may have on budgets, priorities, and resources. At the same time, it empowers organizations to pivot wherever and whenever is necessary, without the confusion or downtime that normally accompanies such a change in strategy.
Additionally, scenario planning extends beyond management. To implement it effectively, it relies heavily on the insights and recommendations of personnel across various departments. By bringing these key players together, businesses improve their approach to knowledge management, better collaborating, gathering, and distributing essential information throughout the organization.
Scenario planning involves many different approaches to future proofing a business. The following are four commonly used types of scenario planning:
Planning for operational scenarios is the most widely employed form of scenario planning. In operational scenarios, a business identifies and explores the immediate impact of a specific situation. The short-term implications are explored, and plans are devised to promote positive outcomes.
In normative scenario planning, businesses start with a preferred result or outcome. This form of scenario planning blurs the line slightly with a statement of goals, but with a focus on how the organization hopes to operate in the future, rather than simply what it wants to achieve. Normative scenario planning is a valuable addition to other forms of scenario planning, clearly expressing and summarizing necessary changes and target activities that will be needed to reach the proposed scenario.
Quantitative scenarios allow for quick changes to financial models by altering a limited number of variables with fixed relationships. These models present best and worst-case versions for each scenario and are useful in forecasting annual business returns.
Focusing on the environment of the business products and services more than the business itself, strategic management scenarios require a comprehensive view of the industry, market, and economy.
Scenario planning tends to take the form of a four-step process:
The first step in scenario planning is for the business to determine what they are up against. This means bringing all participants together to workshop and brainstorm, with the goal of identifying potential, possible, and likely shifts that may impact the company.
With the driving forces identified and discussed, the next step is to refine the list to focus on only two of the most potentially impactful. These ‘critical uncertainties’ are those that may represent the greatest potential impact and would yield the best results if prepared for. Possible uncertainties may include priority, cost, and availability or resources.
Top-two critical uncertainties in hand, it’s now time to turn these uncertainties into scenarios. Plot the uncertainties on a simple graph, with one acting as the x-axis and the other as y-axis, with the two extremes for each uncertainty represented by the ends of each axis. This will result in there being four different quadrants, ranging from least desirable to most desirable for the business.
The team is again brought together to discuss the implications of each scenario. They then should identify where on the graph they feel the business currently is. Then, the team should plot a new point representing where they believe the organization will be on the graph after an established amount of time (such as one year). Finally, the team will discuss how best to prepare for that future and catalog any options that might be worth considering.
The above process should allow most organizations to get started with scenario planning. To help ensure an effective approach, consider these best practices:
Scenarios are more useful and easier to plan for when they are kept simple. Focus on two only two critical uncertainties at a time. Other scenarios can be further pursued once the two most critical issues have been fully explored.
The beauty of scenario planning is that it allows organizations to prepare for a range of circumstances, rather than only preparing for the best-case scenario. When building a strategy, be sure that it is one that will be relevant no matter what scenario plays out.
Scenario planning does not need to be limited to the immediate future. With the right information and some educated assumptions, businesses can prepare for scenarios far ahead. Long-term scenario planning not only allows for the creation of effective strategies to guide companies for years down the road, but it also unlocks a culture of looking towards the future, which can be a benefit in and of itself.
Although finance and analysis experts are essential to most approaches to scenario planning, planning teams should include leaders from departments and levels across the entire organization. Bringing in more groups will provide increased insight and help ensure that scenarios are as fleshed out as possible.
A substantial portion of scenario planning is based on educated guesswork; it must be supported by reliable data for it to be relevant and applicable. More data means more accurate models, and helps inform goals, establish baselines, and determine which products and services are the most foundational.
Scenarios need to be as fluid as the futures they represent. When changing conditions render scenarios obsolete, then they should be retired and replaced with ones that are relevant to the anticipated circumstances.
No one knows for certain what the future holds. But with the right approach to scenario planning, organizations of all kinds can be better prepared to weather emergent events and changing circumstances that might otherwise topple their business. ServiceNow Scenario Planning (an enhancement to ServiceNow Portfolio Workbench) provides the tools and capabilities companies need to consolidate priorities, budgets, and strategic importance to effectively move forward, regardless of which scenarios become reality. ServiceNow Scenario Planning leverages the power of the Now Platform®, building on reliable, real-time ServiceNow application data and available strategic and operational resources, for unmatched forecast accuracy.
And that’s only the beginning. ServiceNow Scenario Planning empowers organizations with the ability to:
Hindsight is 20/20, but with the right data and resources, looking to the future can be just as reliable. Build the strategies that will carry your business through whatever the world may throw your way, with Scenario Planning from ServiceNow.
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