How to build an effective scenario planning process to protect and grow your business

Scenario planning is a method of dealing with uncertainty.

After the severe acute respiratory syndrome coronavirus (SARS) outbreak in 2002, the organizers of the Wimbledon tennis tournament decided to take out pandemic insurance to protect themselves from potential losses. 

While the vast majority of SARS cases occurred in East Asia, tournament organizers had the foresight to explore a simple question: “What if there is another outbreak, but this time at a global scale—a pandemic?” 

That exercise, and their resulting decision to invest in insurance paid off big in 2020 when the COVID-19 pandemic struck. When Wimbledon was canceled, tournament organizers received an insurance settlement of $142 million. In contrast, other large sporting events, including the French Open and Premier League, were indefinitely postponed resulting in enormous losses to their organizers and investors.

Businesses use scenario planning to help them make more confident decisions in the face of changing business conditions (as illustrated above).

This guide delves deeper into the importance of scenario planning, especially for SaaS organizations, along with the use of “what-if analysis” to forecast varying business outcomes, understand the risks involved, and mitigate those with data-driven insights. This article also highlights the benefits of scenario planning, its challenges and limitations, and how to overcome those for more accurate forecasts.

What is scenario planning and why does it matter?

Data is critical for business success since it enables CXOs and CFOs to leverage relevant information and trends, including market volatility, global events, resource deployment, geolocations, new product lines, and service subscriptions, in order to align strategic business goals and foster growth opportunities. 

Scenario planning involves using the data available to run 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. From projecting financial earnings and estimating cash flow to developing mitigating actions, scenario planning is more than just a financial planning tool. It’s an integrated approach to dealing with uncertainty and risk, especially in today’s complex and dynamic world. 

The challenge is, humans do a poor job of calculating risk. Given our innate optimism bias, we not only tend to overestimate our chances of experiencing positive results (negating the possibilities of potential risks), but also underestimate how long a task can take (thus, setting improbable timelines). However, the business impact of not accounting for scenarios—both risks and opportunities—is huge. 

Types of scenario planning

With scenario planning, as the CXO of a SaaS company, you can take your original budgeted forecast and use it to develop new scenarios that align with your business plan, in defined time periods (say 3, 6 or even 12 months, as required). It helps in connecting all the dots and ensures you are on the right track towards actual change. 

There are two ways to classify scenario analysis, based on the situation:

• 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 forecasts more accurate and any plans based on them more realistic. 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.
• Crisis scenarios: In a fast-changing environment, scenario analysis can be deployed for understanding the impact of known future events and unexpected events. Of course, these are by their nature difficult to predict. However, as the Wimbledon example illustrates, considering potential crisis scenarios that could impact your business can help you better protect it.

Using “what-if” scenario analysis to create more accurate, realistic plans 

Scenario planning is an integral part of financial planning and analysis, and plays a key role in SaaS business strategy. 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 look at 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, resulting in underperformance.

One way to account for uncertainties in forecasts is to simulate various scenarios. The common ones are best-case and worst-case scenarios. Another approach is “what-if” scenario planning, which is used to evaluate potential outcomes based on what might happen. By running these "what-if" scenarios, CFOs and finance teams work with a range of values instead of just one. It enables the management to react and change course more effectively by being more informed. 

What-if scenario analysis helps you quickly recalibrate your forecasts and resource allocations. 

It is important to note that what-if scenarios aren’t prophecies and may not radically change your goals or growth plans. They will, however, ensure that you have a plan in place if your variables stray from the original assumptions. 

Using scenario planning to alleviate risks and negative impact during crisis situations

Planning in the midst of a crisis is complex and stressful. Scenario planning helps ensure your plans are flexible and rapidly adapt and adjust to change. 

So, how do you do that? We recommend the McKinsey approach, which calls for launching a “plan-ahead” team ready to tackle the next anticipated phase of whatever crisis you’re dealing with. 

This “plan-ahead” team uses scenario analysis to explore the different possible situations that might emerge next and uses the results to develop a crisis action plan they can implement if one or more of those situations occurs. 

The key here is to get started quickly. You may not see the crisis coming. But, with this approach, you can more effectively deal with it.  

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
• High risk “big bets”—demanding a large up-front investment to reserve the company’s right to play in the space in the future

It is also a good idea 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.

One of the benefits of McKinsey’s approach 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 find it easier to shift to continuous planning, a key aspect of organizations that better handle crises.

Building the foundation for scenario planning for your business

Scenario planning requires a well-considered structure and process to ensure its effectiveness and success. In this section, we have illustrated a high-level scenario planning methodology consisting of six basic scenario planning steps.

Before we delve into it, however, the first step towards an effective scenario planning process is to assemble a cross-functional team.

The more informed your scenarios are, the more reliable your scenario planning will be. Often, the data and other information you need to run a wider range of scenarios can be found with different leaders and teams within the organization. With the right people around the table along with the right kind of data, each scenario planning exercise will become more insightful.

The following leaders/CXOs and their teams should ideally feature in your scenario planning team: 

• Executive leadership: Given their unique strategic perspective, domain knowledge, and understanding 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: These leaders 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.

How to develop an effective scenario planning process

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.

The scenario planning process described here is the "business-as-usual" type of planning.

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. This is the ideal projected scenario, most often used by the management to achieve their objectives.
• The worst-case scenario in which the situation is much worse than you expected. This analysis considers the most serious or severe outcome that may happen in a given situation. 
• A baseline scenario in which nothing changes, i.e., the average scenario based on management assumptions. Your business is relatively unmoved by the uncertainty you’re planning for.

To ensure reliability during these scenario-planning analyses, you will 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. In this case, it can be useful to interview internal leaders and external stakeholders to understand their perspectives on the uncertainty you’re planning for. 

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 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—a mathematical technique that predicts possible outcomes of an uncertain event.

Step 5: Develop 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, including:

• 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: Implement and monitor your scenarios and strategy 

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. 

Step 7: 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 many benefits of scenario planning

Several factors can impact a business, both positively and negatively. Having plans in place to mitigate risks and seize opportunities when they get triggered is an important aspect of ensuring growth and success. Mainly, scenario planning helps with:

• Better risk management: In an ever-evolving business landscape, risk is omnipresent. Scenario planning, with its emphasis on exploring various potential futures, serves as a robust mechanism for identifying and mitigating risks. Without scenario planning and visibility into budgets, it would be difficult to know which activities need to be scaled up or down to ensure the success of business objectives.‍
• Higher flexibility: The dynamism of the modern business environment demands strategic flexibility. Scenario planning empowers organizations to be flexible and adapt better to different situations, fostering agility in decision-making. This adaptability is a valuable asset for businesses in the current global stage where change is the only constant.‍
• More innovation: Engaging in scenario planning encourages a culture of innovation within organizations. By contemplating diverse future scenarios, companies are able to think “differently” and explore unconventional ideas, leading to breakthrough innovations.‍
• Competitive advantage: Organizations that actively engage in scenario planning are better equipped to anticipate shifts in the market. In a competitive landscape, the ability to foresee and adapt to changes is a distinct advantage, especially over competitors who may be unprepared to handle sudden shifts or unexpected developments.
• Stakeholder alignment: Scenario planning facilitates communication and alignment among stakeholders by creating a shared understanding of potential future developments. This alignment is instrumental in ensuring a unified approach to achieving strategic objectives.

Challenges and limitations of scenario planning

From risks such as changes in government regulations and high attrition to opportunities like product gaps in the market, scenario planning helps companies prepare for any contingencies.

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 important to have the right people on your planning team, people who can speak with knowledgeably about the possible impact of each scenario on your business. When it comes to determining the quantitative impacts, using a purpose-built financial planning and analysis (FP&A) software, 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 is top of mind for CFOs and business 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 what you need to prioritize can be a challenge. 

Scenario planning is critical to success in SaaS

Scenario planning and “what-if” analysis together ensure that your SaaS business has a structure to deal with the unlikeliest yet possible situations and is prepared (to the best of its ability) to react quickly and decisively in those times.

However, these analyses are not just reserved for once-in-a-century global events, such as the COVID-19 pandemic. Business leaders and CFOs can also use the principles of scenario planning to assess the possibilities of a new project line or a product expansion. Scenario planning can help ensure you and your business are ready for just about anything.

Using a scenario planning tool like Drivetrain can eliminate the technical challenges of the process, making you more resilient in the face of uncertainty and enabling you to future-proof your SaaS business. For example, Drivetrain can help you answer questions like, 

• What would be the impact on expansion ARR and churn ARR if you increase the customer success team’s headcount by five employees? What about 10? 
• What is the impact on new ARR of abruptly slashing your marketing budget by 30% in the last quarter? 
• What if the attrition on your sales team increases from 10% to 20% mid-year? How would the change in your sales capacity impact sales targets? 

Further, our in-built what-if analysis tool assists you with creating various simulations to avoid overprediction and underprediction in forecasts and ensuring your business is better prepared to make informed choices based on how the market evolves.

Drivetrain is a deceptively simple yet powerful SaaS financial planning software, empowering CFOs and finance teams to run their financial planning and analysis operations successfully.

Contact us to book your demo today!