Last Updated: February 10, 2021
Planning for upcoming business cycles is challenging enough in ordinary times. These are not ordinary times. Traditional modes of planning are not adequate to address the highly unusual nature of the COVID economy. Such an unprecedented level of uncertainty requires a more adaptable and agile approach. As recent research from McKinsey & Company noted about the pandemic, “Companies need a new approach to financial planning and performance management—one that informs rapid realignment of plans and actions and ensures organizational resilience.” This blog is the first in a series of three dealing with drivers of change in the planning discipline and the need for Economic Scenario Planning in a volatile economy.
Why Planning Is Challenging in a Pandemic
Planning has typically relied on internal company data and well-understood economic forces. This approach is no longer adequate, however, because of the depth and variety of unpredictable trends in the economy and specific industry sectors. Consider the following external factors that could have a dramatic impact on a company’s performance: When will the economy mount a comeback? Will unemployment rise or fall and on what timeline? When will people to return to work in offices or restaurants re-open? Will some jobs be lost forever? Which ones? The upcoming election adds another element of uncertainty.
Indeed, 85% of business performance is driven by external forces. The better their impact can be understood, the more meaningful the resulting plan will be.
The pandemic also changes many, if not all, underlying assumptions companies have held about the impact of recessions on business performance. This is not a normal recession. During COVID, a grocery store might flourish next door to a restaurant that goes out of business. Predicting the “winners and losers” in this recession is nearly impossible with the old models.
Business outcomes can vary substantially even in the same category. Coca Cola’s revenue dropped 33% in April and May, 2020, while Pepsi’s sales fell by just 3%. Why? One explanation holds that Coke was more reliant on restaurant sales, so the lock-down had a greater impact on their business. A large increase in the snacks business, buoyed by an increase in grocery shopping and eating at home also offset some of Pepsi’s declining sales. Geographic and industry variations also abound.
Needed: A New Approach to Planning
Planning must adapt to today’s unique conditions. It no longer makes sense to rely just on historical data and assumptions about a world in a steady state. Rather, planners should incorporate multi-faceted external real-time views and data sets into an agile planning process. These may include data on a company’s unique business drivers, as well macroeconomic conditions that signal future outcomes.
The example of a home goods retailer shows the need for an agile planning capability. The pandemic might deeply depress certain merchandise categories, such as home décor items, which may be seen as a luxury. At the same time, concerns about COVID 19 could trigger a major uptick in sales of cleaning products. And, predictions about the effects of unemployment on revenue would also need to be questioned carefully, as government stimulus payments might give customers more disposable income than traditional economic models would predict.
Nor can planning depend on monitoring only one leading indicator due to too much variability. The data mix may also comprise “hard” and “soft” data. Hard data refers to concrete, retrospective results in a given area of the economy, e.g., monthly retail sales. In contrast, soft data sets are based on sentiments like consumer confidence. They are especially relevant during COVID because they reveal consumer intent. Companies must be able to adopt and iterate plans quickly, easily, and broadly across the business, increasing the need for automation and at scale.
It’s Time to Act
Now is the time to make the move from traditional steady state planning to Economic Scenario Planning, which will be covered in depth in the next blog in this series. One sign that planning is about to change comes from the SEC. The Commission has issued a statement requiring public companies to inform investors about where the company stands in operational and financial terms during the pandemic.
The SEC aside, companies are well-advised to prepare for what will likely be a challenging couple of years. Senior business leaders should want to stay ahead of evolving and volatile conditions. And, when the economy improves corporate managers do not want to be caught off-guard. They want to be more than ready to capitalize on the opportunity.
Navigate What’s Next with Economic Scenario Planning
The COVID-19 crisis has given rise to a world of economic uncertainty, with uneven effects across regions and industries. As we head into the 2021 planning cycle, every business wants to know How will the pandemic impact next year’s numbers? Prevedere’s Economic Scenario Planning solution helps companies navigate these tumultuous times. The solution projects future business outcomes for three plausible macroeconomic scenarios under COVID-19. Companies can use these insights to sharpen 2021 forecasts and plans, improve shareholder guidance, and stay on top of the pandemic’s evolving impact.