In 2003, when there was an outbreak of SARS, the organizers of the Wimbledon tennis tournament had the foresight to take out pandemic insurance.
It was a simple question of ‘What-If’ there is another outbreak, but this time at a global scale—a pandemic.
The decision paid off in 2020 when they received a huge insurance payout of $142 million after the competition was canceled when the Covid-19 pandemic struck. In contrast, sporting events such as the French Open and Premier League were indefinitely postponed resulting in losses to their organizers and investors.
Why does scenario planning matter?
Because humans do a poor job of calculating risk.
As cited before, the business impact of not accounting for scenarios—both risks and opportunities—is huge. Having plans in place to mitigate risks and seize opportunities when they get triggered is an important aspect of ensuring growth and success.
Several factors can impact a business. From risks such as changes in government regulations and high attrition to opportunities like a competitor going out of business, scenario planning helps companies prepare for these contingencies.
Scenario planning helps with:
- Better risk management: It reduces uncertainty and provides options for the way forward. For example, during the start of the Covid pandemic, several countries introduced travel and event restrictions. Many big-ticket line items such as event sponsorships and travel budgets needed to be reallocated or at least a portion of it. Without scenario planning and visibility into budgets, it’s difficult to know which activities need to be scaled up or down to ensure objectives and outcomes are met
- Higher flexibility: It enables a business to be flexible, especially during crises. For example, SaaS companies based in the UK that engaged in scenario planning before the Brexit referendum were better prepared to minimize the impact. They identified the key risk drivers and planned for scenarios such as “What if the majority voted to leave the EU?” and “How would leaving the EU affect our finances and our ability to hire?”
Types of Scenario Planning
We classify scenario analysis in two ways based on the situation:
- For business-as-usual scenarios: By creating the best case and worst case plots on the base case scenario to get a forecast range, scenario planning helps make plans more feasible and generate more accurate forecasts. By accounting for both extremes, the performance bounds and the variability of KPIs and assumptions that go into a model are known. This helps stakeholders build plans within an acceptable or reasonable range of numbers.
- During crises: In a fast-changing environment, scenario analysis can be deployed for understanding the impact of (i) known future events—such as the Brexit referendum example cited above or a cash-strapped competitor going out of business, and (ii) unexpected events—such as the Covid pandemic.
Applying scenario planning in creating feasible and accurate plans
What-If scenario analysis helps recalibrate your forecasts and resource allocations.
Many assumptions are made during planning. Each assumption takes on the average value since it is difficult to build the variability (i.e., a range of values) into forecast models.
For example, let’s consider modeling the pipeline via the paid advertising channel.
Metrics like search volume, CTR, conversion rate, and cost per click have relatively high variability. Modeling these uncertainties is complex. And even then, it might not be any more accurate than a simpler model that only uses averages from historical data.
This affects stakeholders who make business decisions based on these targets such as hiring, budgeting and strategy, oftentimes resulting in under-performance.
One way to account for uncertainties in forecasts is to simulate various scenarios. The common ones are best-case and worst-case scenarios. By running these "What-if" scenarios, executives work with a range of values instead of just one. It also helps the management react and change course more effectively by being more informed.
Applying scenario planning to mitigate risks and lessen negative impact during crises
Planning in the midst of a crisis is complex and is often stressful.
Scenario planning helps ensure your plans are flexible and rapidly adapt and adjust to change.
So, how do we do it? We recommend the McKinsey approach.
Diving deeper into point two, McKinsey recommends creating at least four scenarios as part of the planning process. It also advises against disregarding extreme cases.
One of the benefits is that the potential tradeoffs between scenarios become better understood. As a result, companies make faster and more informed decisions and course-correct as necessary to sustain and drive growth. Companies that do this well shift to continuous planning, a key aspect of organizations that better handle crises.
A salient point from the article includes how once a scenario is triggered, McKinsey recommends evaluating the activities under each scenario by how easy they would be to scale up or down (optionality); and flexibility of the timelines (time-sensitivity).
Then, they recommend grouping the activities into three categories:
- Low risk “no-regrets moves” (projects or investments that are financially sound under all scenarios)
- Medium risk “real options” (which require lower up-front investments but could be scaled up when the time is right), and
- High risk “big bets” (demanding a large up-front investment to reserve the company’s right to play in the space in the future)
Another point that we found pertinent is to earmark a portion of the budget for plan pivots—say, under 10% to support flexibility in planning because your new plans may require additional investment.
How Drivetrain’s What-If Scenario Analysis tool can help create feasible plans and tide through uncertainties
Drivetrain’s ‘What-If’ scenario analysis tool lets you see how changes to your plan could affect key metrics or projections. You can explore outcomes by adjusting these settings—assumptions and duration—and the tool instantly outputs the resulting forecast.
For example, a fast-growing B2B SaaS company valued at a half-a-billion dollars wanted to understand the impact of making customers pay from the contract signing date instead of the go-live date on the company’s cash runway. Drivetrain helped the CEO compute by how much more their company runway gets extended by this change with the in-built What-If analysis tool—in just minutes.
Drivetrain can also help companies tackle scenarios. For instance, it can answer scenarios like,
- What would be the impact on expansion ARR and churn ARR if we increased the customer success team’s headcount by five employees? What about 10?
- What is the impact on New ARR if the marketing budget is cut by 30% in the last quarter?
- What if attrition increases from 10% to 20% mid year? How would it impact sales targets?
As seen above, creating scenarios—best case, worst case and other scenarios is fast and easy with Drivetrain.
We don't know what we don't know.
When a crisis strikes and budgets need to be reallocated, various teams need to have visibility into these budgets and an idea of the array of levers to pull that can make the maximum business impact.
Scenario planning and ‘What-If’ analysis ensures that your business has a structure to deal with uncertainties and is prepared as best as possible for addressing unexpected events. It makes it possible to react quickly to changing business conditions.
Drivetrain helps in building your forecasts that take care of uncertainties. Our What-If scenario tool helps simulate and thus avoid overprediction and underprediction in forecasts. It can ensure your business is better prepared to make informed choices based on how the market evolves.
Interested in making your SaaS organization agile and adding more flexibility during the planning exercise? Reach out to us at firstname.lastname@example.org to know more or get a free product demonstration.