Last Updated: February 10, 2021
By Rich Wagner, Prevedere CEO
It is apparent that traditional forecasting methods are not a suitable mode of business planning in the COVID economy. Too many hard-to-predict variables are at work for old techniques to be effective. Most CFOs we work and speak with are embracing scenario planning. It’s more agile, iterative, and better at modeling business performance in alternative future states.
While the desire for successful scenario planning is strong, most approaches fall short. Obstacles include the limited availability of analytical tools and the right data, resource and time constraints, and over-stretched in-house data science teams. The big consulting firms are pushing to engage, but their process can take a long time and comes with a high price tag. In any event, the scenarios they build will only be as good as their models and data. Financial planning and forecasting software do scenario planning based on internal drivers so they can’t project the financial consequences of COVID and its economic fallout.
In our experience, a number of important factors are required for successful scenario planning.
Success Factor #1: Enrich Scenario Plans with External Data
The first is the need to enrich scenario plans with external data. Internal data alone is not sufficient for the job of modeling the economy and its impact on a business during the pandemic. To be effective, scenario plans must consider a range of macroeconomic, industry, consumer, and COVID shock factors.
Success Factor #2: Build Alternative Economic Scenarios
It is also essential to build alternative scenarios using an econometric modeling process. Econometrics offers a proven technique for predicting business performance based on economic factors. It takes some sophisticated software to make econometrics work, though. An AI- and ML-based analytics engine can rapidly build thousands of custom, driver-based models that project business outcomes under different macroeconomic scenarios.
Success Factor #3: Iterate Quickly
The process must start quickly and then iterate at a fast clip. It does little good to commit to scenario building and then let months pass before it delivers actionable information. The time of uncertainty and volatility is now—and it’s expected to last through 2021. Planning based on scenarios should be a regular activity, done on a weekly or even daily basis. The process only works if stakeholders can rapidly update scenarios in a repeatable way that enables everyone to stay on top of constant changes.
Success Factor #4: Incorporate Economic Context
Economic context matters. The current downturn is nothing like past recessions. An experienced economist can add economic color to scenario plans and help financial leaders interpret shifting economic signals. From this dynamic, financial managers gain new economic insights they can apply to their plans and forecasts.
Ultimately, success depends on operationalizing scenario planning across the business. Various business units, geographic regions, and product groups can put scenario planning to work in their own forecasting and planning efforts. By embedding scenario planning in the business, the organization prepares itself for a range of hard-to-see eventualities.
For more about why Prevedere is the fastest path to better scenario planning: https://prevedere.com/economic-scenario-planning/economic-scenario-planning-whitepaper/