For a recent article in the Wall Street Journal, “Companies’ Financial Planning Comes Up Short in the Coronavirus Era,” I was asked how FP&A professionals could have predicted both the pandemic occurring and the scope and scale of its impact.
I explained that it’s not about financial planning & analysis (FP&A) trying to predict the future.
It’s not the role of FP&A to predict the plethora of possible causes for a change in the business landscape. It’s about the preparation for a range of possible outcomes, the likelihood of each outcome, and developing corresponding strategies to maximize the long-term benefit.
To that end, clear and efficient scenario planning supports a deeper understanding of that process. Learning how to communicate it to business stakeholders and partners has shown itself to be vital for FP&A in both the “New Normal”, in which we are currently operating, as well as in the “New New Normal” which is to follow.
We are currently operating in an environment with a very high (if not the highest ever) level of VUCA, (Volatility, Uncertainty, Complexity, Ambiguity). The way you mitigate uncertainty is with planning, planning, and more planning. To quote General/President Dwight D. Eisenhower, “In preparing for battle I have always found that plans are useless, but planning is indispensable”.
The challenge we often face is how broad an array of outcomes we should plan for. This challenge was succinctly described in a recent virtual FP&A Roundtable where one participant pointed out, “Even the most adverse scenarios we imagined were never really as bad as where we are right now.”
FP&A teams should be helping their business leaders consider a wide range of scenarios. The pandemic has highlighted an opportunity to have a range-based plan based on scenario analysis rather than a set plan. While planning for multiple scenarios undeniably makes the planning process more complex, it does give management a better chance to look at what could possibly happen and develop action plans in response. When the unexpected occurs, organizations that have planned for a multitude of scenarios will be more prepared than those that did not. Of course, there is a cost associated with producing a more in-depth, robust, wider-ranging scenario planning regiment, but as history has taught us repeatedly, reacting in a crisis is costly.
As we have witnessed through the first twenty years of the 21st century, the range of possible crises and impacts continues to expand. We had the Financial Crisis/Recession of 2008, where hopefully the comment “Well that will never happen” has been struck from our lexicon and is now considered a punishable capital offense.
The 2008 economic crisis was a watershed event for FP&A teams and scenario planning. Though only twelve years ago, it truly highlighted the difference between possibility and probability and the danger and impact of tail risk. It also underscored the importance of creating data-driven modeling capabilities, and developing the people, processes, mindset and technology to create a true culture of analytics within our organizations.
The oil collapse of 2014 is another example of the importance of scenario planning. A barrel of Brent Crude fell from a price of about $112 in mid-June 2014 to about $62 by year’s end, a drop of nearly 45 per cent in less than six months. Think about the value to those oil-related businesses all over the world, who may have had the forethought to run scenarios and maybe even simulations for their business models as oil prices dropped precipitously in that six-month period. Think about the organizations that didn’t and were negatively impacted. What was the cost to them to determine (on-the-fly) the impact to their revenue, their stock price, their operating and strategic goals?
That brings us to today. Given the incredible advances that cloud-based technologies have provided us with, we have never been in a stronger position to leverage the enormous amounts of data we currently have access to. We are talking about internal/external and structured/unstructured data in the scope of brontobytes (10^27th power). Not to mention eventually leveraging the 70% – 80% of data that is considered “dark”. (According to Gartner, dark data is the information assets organizations collect, process, and store during regular business activities, but generally fail to use for other purposes).
By leveraging the technology that is currently available, by preparing and training our people to utilize these new technologies, by having the processes in place (both from a data and decision-making governance perspective), and by having a culture that embraces all of these components, organizations can run robust scenario planning platforms to maximize the opportunities and minimize the risks that our highly uncertain world continues to throw in our path.
Brian is Founder and Principal at Kalish Consulting. He is Former Executive Director – Global FP&A Practice at AFP. He has over 20 years of experience in Finance, FP&A, Treasury and Investor Relations. He previously held a number of treasury and finance positions with the FHLB, Washington Mutual/JP Morgan, NRUCFC, Fifth Third and Fannie Mae. He has spoken all over the world to audiences both large and small hosting FP&A Roundtable meetings in North America, Europe, Asia and soon South America. Brian attended Georgia Tech, in Atlanta, GA for his undergraduate studies in Business and the Pamplin College of Business at Virginia Tech for his graduate work. In 2014, Brian was awarded the Global Certified Corporate FP&A Professional designation.