"Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win."
— Sun Tzu, The Art of War
Running a SaaS business in today’s market is, in many ways, like going to war every day. With the current market downturn and an overall tightening of purse strings, unless your product is deeply ingrained in the processes of a company, you cannot assume that your customers aren’t looking at other options.
However, with scenario planning, companies can become better prepared to more effectively handle this and other situations they might encounter in the future.
Scenario planning is a method of dealing with uncertainty. Businesses use scenario planning to help them make more confident decisions in the face of changing business conditions.
Scenario planning involves running best case, worst case, and baseline scenarios along with a variety of what-if scenarios to more fully understand the impact a certain event or possibility might have on the company’s future growth and revenue.
It's how SaaS companies can ‘win first’ and then go to war.
How to start scenario planning for your business
Scenario planning allows you to envision the possible future under a variety of conditions, which can give you some powerful advantages. Building scenario planning into your business is one of the best things you can do to proactively deal with uncertainty. It also enhances strategic planning — particularly in terms of preparedness and response — and positions your company for greater business growth in the future.
Assemble a cross-functional scenario planning team
The more informed your scenarios are the more reliable your scenario planning will be. Often, the data and other information you need for scenario planning will reside in more than area of business and with different leaders within your company.
Putting together a cross-functional team is one of the best practices for building scenario planning into your business because it gives you the ability to run a wider range of scenarios. With the right people around the table, each scenario planning exercise will be better informed, giving you more confidence in the results.
Here’s who you should have on your scenario planning team:
- Executive leadership – Given their unique strategic perspective, domain knowledge, and grasp of long-term goals and vision, each person on your company’s leadership team can contribute what they see as threats and opportunities in a potential situation.
- CFO – While the CFO is part of the executive leadership, we’ve singled out this role here because every scenario planned for will have an associated cost. The CFO understands the company’s budget and forecasts at a deep level and can best speak to how resources might be reallocated to reach the goals for each scenario.
- Marketing, sales, and customer success leaders – These are the teams closest to the customer. They can speak to how different scenarios might impact the company’s ability to gain new customers and keep current customers happy. In this sense, they serve as an important sounding board for the business leaders.
- Product leaders – The people can provide important inputs on how the product can be changed or improved to hit certain goals based on a range of scenarios.
- Legal team – In some scenarios, it may be necessary to get a legal opinion based on the nature of the threat or opportunity being explored to ensure that the planned response can actually be implemented.
Creating an effective scenario planning process
Scenario planning requires a well-considered structure and process to ensure its effectiveness and success. In this section, we'll cover at a high level a scenario planning methodology consisting of six basic scenario planning steps.
There are different types of scenario planning. The form of scenario planning we describe here can be thought of as a "business-as-usual" type of planning, which looks at various potential outcomes of a future situation. This is in contrast to the type of scenario planning you would do if your business is in the midst of a crisis.
The process outlined here assumes that you already know your baseline — where you're starting from today in terms of your strategic direction, any key initiatives, and what is currently driving your company's financial and business performance. You need to know your baseline in order to evaluate how various scenarios might affect your business. The key here is to get the most current information you can. If your company has adopted continuous planning, obtaining current information about your baseline will be easier.
Step 1: Identify the driving forces in your market
Your scenario planning team needs to identify the major factors influencing your specific market and are relevant to your business. Your team can brainstorm ideas or use techniques like SWOT analysis (which identifies strengths, weakness, opportunities, threats) and/or a PESTEL analysis (which stands for political, economic, social, technological, environmental and legal).
Step 2. Identify the critical uncertainties for your business
Once you identify all the driving forces that are impacting your market, identify those that could significantly impact a business like yours both positively and negatively. These are the critical uncertainties that your scenario planning is intended to help you prepare for.
Step 3. Develop multiple scenarios
For each of your critical uncertainties, you’ll develop plausible scenarios that might occur in the future. You’ll want to cover multiple scenarios including:
- The best case scenario in which your business performs much better than expected
- The worst case scenario in which the situation is much worse than you expected
- A baseline scenario in which nothing changes. Your business is relatively unimpacted by the uncertainty you’re planning for
Remember, the more informed your scenario planning is, the more reliable the results will be. So, to inform your scenarios, you’ll need to gather as much information as you can.
In addition to using your own historical data and internal studies, look for external market research to help you develop your scenarios. Interview internal and external stakeholders and thought leaders to get their perspectives on the uncertainty you’re planning for can also be useful.
Step 4: Analyze and evaluate your scenarios
Once your team has created detailed scenarios, you’ll need to take a deep dive to analyze how each one might impact various aspects of your business such as revenue, customer acquisition, and the overall operations of your business in the future.
You may also need to determine more qualitative impacts, such as your customers’ perception of your brand or its reputation in the market.
For more quantitative scenarios, you can use methods such as Monte Carlo simulations, which is a mathematical technique that predicts possible outcomes of an uncertain event.
Note that a quantitative scenario analysis can be highly complex. While you may be able to use spreadsheets to run the necessary analyses, using a purpose-built financial planning and analysis software will make the process much easier.
Step 5: Developing a strategy for each scenario
After running multiple scenarios, the next logical step is to develop effective strategies that will help you mitigate risks or take advantage of opportunities.
These strategies should outline an implementation plan, which includes:
- The steps you’ll take to respond to a specific scenario
- The events or conditions that would trigger those responses
- A monitoring plan to ensure your plan is having the intended effect.
With strategies in place for each potential outcome, you’ll be well prepared to respond effectively to any of the situations your scenarios envision.
Step 6: Implementation and monitoring
One of the biggest benefits scenario planning can provide is agility. With strategies already in place, your business can more quickly pivot in response to a given scenario. But you need to know which strategy to implement, and when.
Businesses need to keep a close eye on the uncertainties they’ve planned for in order to determine which scenario is playing out and implement the appropriate strategy.
Regularly review and update your scenarios
It’s also important to realize that scenarios don’t always pan out exactly the way you expected. Scenario planning isn’t a one-time activity. You’ll need to regularly review and update your scenarios as needed to ensure you’re well prepared to respond to them if they occur.
The SaaS industry, given its global nature, is very sensitive. It is in many ways like the oft-repeated quote on Chaos theory, where a flap of a butterfly’s wings in the Amazon could result in a storm in Europe.
Smart planning teams know that it is in the company’s best interest to keep a keen watch on any possible ‘flutters’ that could potentially wreak havoc on their best-laid plans.
For example, before 2020, few could have envisioned something as unexpected as the global pandemic, which forced companies to take drastic measures to stay afloat and support their employees as they quickly moved to remote work. However, as part of their response, many companies were also using scenario planning during that time, which helped them handle the second and third waves of the pandemic better than they were able to respond to the first.
Scenario planning challenges and limitations
Scenario planning helps you more effectively mitigate risks in your business as well as help you more quickly respond to new opportunities in the market. However, the process can be challenging, and it does have some limitations to be aware of.
Lack of resources and expertise
Effective scenario planning requires deep domain expertise and the right tools. A lack of either can make your scenarios much less reliable, which could lead to decisions that don’t have the impact you expect.
This is why it’s so important to have the right people on your planning team, people who can speak with authority about the impacts to your business that each scenario might have.
When it comes to determining the quantitative impacts, using an intuitive FP&A tool with the ability to run various ‘what-if’ analyses will make your scenario planning not only easier but far more reliable.
Resistance to change and adoption
Scenario planning brings with it the possibility of potentially big changes in the business, which can lead to a lot of resistance and fear within the organization.
While you want employees to embrace your current strategy, to the extent you can build a culture that embraces change for the good of the company, your scenario planning will be easier.
Difficulty in accurately predicting the future
Scenario planning is limited in the sense that while it can help you figure out the best route to get where you might need to go under different circumstances, it’s still not a given that you’ll reach your intended destination. This is because anything can happen along the way. The scenarios you’ve planned for can change in unexpected ways. However, with a strategy in place, odds are you’ll be better able to respond if they do.
Balancing short-term and long-term perspectives
Companies often find it tough to balance short-term requirements and long-term goals. ‘What should we focus on when coming up with scenarios?’ is a question that plagues CFOs and other executive leaders when they decide to do scenario planning.
To some extent, that question can be answered by looking at the potential impacts of different uncertainties on the business. However, some impacts may not be as immediate as others, so which do you prioritize? Choosing which uncertainties can focus on when they can impact your business on different timeframes can indeed feel like a tightrope exercise.
Scenario planning is critical to success in SaaS
Don’t let the challenges and limitations above discourage you from building a scenario planning process for your business. The benefits far outweigh the challenges, and given the uncertainty in today’s economy, scenario planning could be critical to the success of your business going forward.
Drivetrain can eliminate the technical challenges of scenario planning, to help you harness this powerful type of planning to future-proof your business, helping you become more resilient in the face of uncertainty. With a simple and intuitive UI, you can run multiple scenarios across different timeframes with just a few clicks.
With scenario planning, your company will be better prepared for the future with well-conceived strategies that can lead to greater revenues, reduced risk, and overall better outcomes for the company.