There’s one constant in the business world: change.
Change can be good or bad. Either way, you’re most successful when you have a plan to take on change. Often, the best way to plan for change is by foreseeing all possible paths the future can take. This includes planning for the best case, worst case, as well as more typical scenarios.
But did you know that there’s a methodology you can adopt to envision your metrics across multiple future scenarios? This methodology is known as scenario planning, and can prove invaluable when seeking the best outcomes in a volatile environment.
Read on to learn more about how scenario planning helps turn tough situations into conquerable pathways, as well as three examples of scenario planning you can implement as a revenue or finance leader.
What is scenario planning?
Scenario planning is a methodology used to assess, predict, and plan for multiple outcomes derived from a single problem statement. The method involves adjusting assumptions, formulas, and values to produce altered sets of data as previews of future possibilities given alternate circumstances.
Key scenario planning terminology to remember:
- Your baseline refers to the current state of your data and the assumption that things will stay the same
- Your best case scenario is an optimal future state of your data where performance is better than expected
- Your worst case scenario is the circumstance where the future does not live up to expectations, resulting in missed goals and targets
- Assumptions are made each time you create a new scenario, indicating the likely change in a situation
- Forecasts are predictions of the future state of a given metric, based on historical data, assumptions, and correlated variables
With scenario planning and the scenario development process, you identify one or more key metrics for which you forecast all potential future states including your baseline, best case, and worst case scenarios, based on assumptions.
Why is scenario planning used?
Scenario planning is used by Finance, Revenue, Sales, and Human Resources, among many other business leaders, to visualize and assess all future possibilities that branch from a business objective or problem statement.
Here are a few other reasons why business leaders use scenario planning:
- Be prepared for critical uncertainties internal and external to the company
- Research multiple scenarios to solve the problem
- Risk assessment
- Back decisions with data
- Meet cross-functional company goals together
- Foresee the future from different angles
The benefits of scenario planning for Finance, Revenue, and HR teams
The most obvious benefit of scenario planning is the competitive edge gained by planning for all possible outcomes.
During a recession or market crash, for example, your company can quickly implement changes to the organizational structure to keep the company afloat. And during the best of times, you can leverage the momentum gained from success.
Here are some of the other benefits of scenario planning, especially for Finance and Revenue functions:
- Easier to set goals and build an action plan to meet them
- Win buy-in from business partners and leadership
- Prep your team to achieve targets in difficult times
- Accommodate recession effects in the budget
- Efficiently manage operations and resources
- Minimize reforecasting and do-overs
- Build the optimal workforce with org charting to meet business goals
In tough times and in brighter days, the most forward-looking teams advance to the front of the race.
By employing a scenario planning methodology, you transform your strategic planning to be agile and flexible in a multitude of environments and situations.
Ultimately, the main benefit of scenario planning is the increased probability of consistent, scalable, and repeatable positive outcomes.
What are the basic steps of scenario planning?
More traditional methods of scenario planning involve several steps and a long process: starting with a problem statement or business goal and leading up to modeling scenarios across haphazard spreadsheet models.
In the modern business planning world, scenario planning is much more straightforward and usually takes four basic steps:
- Model your baseline
- Choose your metric
- Create a scenario
- Observe the results and build an action plan
Read through each of the scenario planning process steps in our step-by-step guide to scenario planning. To further illustrate how you can implement scenario planning within your organization, here are three examples of common use cases that benefit from scenario analysis:
Scenario planning steps demonstrated through examples
This section will take you through three common use cases where scenario planning can enhance the outcome of work done: workforce planning, sales & revenue planning, and strategic operations management.
Recall how scenario planning starts with a problem statement. In each of these examples, we’ll outline a problem statement and outline our assumptions, which we will then convert to scenarios. + Pro tip: check out this expert article on scenario planning steps by FP&A influencer, Asif Masani.
Fair warning: scenario planning is so crucial because it is used to answer difficult situations and make difficult decisions with big impacts. Some of the examples covered here involve very serious topics such as headcount freezing and severance. We cover these examples to illustrate how critical it is to follow best practices and use the best tools when it comes to scenario planning.
Final note, all three examples are based on mock data with no relationship or resemblance to any real-life data whatsoever. We’ll display our demo applications built within the Pigment platform.
Use scenarios to optimize workforce planning
Problem statement: what is the impact on total compensation costs with a 10% headcount reduction in Sales?
Questions like these are hard-hitting and make a big impact on everyone involved. However, these are very real actions that are at times necessary to analyze. The best way forward is to thoroughly scope out several possible scenarios before deciding on the optimal path.
To address this problem statement with scenario planning, you’ll need to look at three components:
Build out your worst case headcount reduction assumptions
In the worst case scenario, you will have to make the tough call to prevent the business from going under by reducing headcount. Within this context, narrow down your assumption to a measurable number.
Assume your product has more potential in the UK and is performing well in the region, as compared to the US. You may use this factor to determine that you want to reduce headcount by 10% in the US Sales team. Enter this assumption into your scenario planning model.
Calculate workforce strength through the headcount planning process
With the 10% US Sales headcount reduction in mind, start calculating what this will look like. To do this, you’ll want to first classify the functions that make up Sales and tally headcount under each team. Then, apply your 10% reduction to the applicable teams. The end result should look a little like this:
Here, we’re applying a 10% reduction across all functions within the Sales teams working out of the US, as our worst case scenario. It would result in 10 less headcount if this scenario were to be implemented.
Headcount reduction or hiring freeze: build the comparison waterfall
Now, you’ll want to check exactly how the assumed 10% headcount reduction will affect total compensation costs. The breakdown of costs includes the variance between baseline scenario costs and headcount reduction costs, including severance costs:
At this point, you can clearly view the variation in total compensation before and after headcount reduction. However, there’s one more factor that deserves its own scenario: hiring freeze.
Following the same steps assuming a 10% freeze in new hires instead of a 10% reduction in workforce, you arrive at the following waterfall comparison chart:
Essentially, assuming you freeze hiring instead of reducing headcount, you arrive at a comparable figure. Which indicates that you could potentially decide to freeze headcount and bridge skills gaps instead of reducing workforce strength.
Decisions like these can be made on a much more granular level when you use scenario planning on your business planning platform.
Scenarios for long-term sales capacity planning
Problem statement: what is the long term impact of baseline, best case, and worst case sales capacity on SaaS KPIs?
In this example, your aim is to determine the long-term impact of your sales capacity plan on your business KPIs such as Customer Acquisition Cost (CAC), Lifetime Value (LTV), LTV/CAC, New Logos, and Bookings. You also want to understand what business performance would look like in the best case and worst case scenarios.
Plot your assumptions: ramp time and headcount freeze
As you’ve learned through this article, we start scenario planning by mapping out our assumptions. Here, there are two main areas where you need to make assumptions: your overall ramp time across scenarios and the decision to freeze headcount in your worst case scenario.
For ramp assumptions, split the metric by sales rep role across your baseline, best case, and worst case scenarios.
Follow this up by mapping out the details of your worst case scenario - specifically, determine if there will be a hiring freeze, to calculate the impact of not growing your workforce on all your other metrics.
Remember, scenario planning allows you to test the impact of each decision in a “playground” environment. Feel free to plot as many assumptions as you need to plan for every future possibility.
Build your sales capacity and quota forecast
Now that you’ve sorted out your assumptions, you’ll want to build out your capacity and quota forecasts. This will allow you to feed your quota forecast by rep into your scenario planning model, as well as your overall forecast for FTEs and TBHs across each scenario.
Examine your what-if scenario results
Having fed your assumptions and forecasts for several upcoming years into your model, you can now view the impact on your KPIs for each: baseline, best case, and worst case scenario:
You can then modify your scenarios further on different assumptions, or make a decision based on the results of the existing what-if scenario results.
Problem statement: allocate functional targets to the Product Development cost center based on Rule of 40 goals.
The Rule of 40 is a rule of thumb used mainly in SaaS to measure a company’s financial health. Essentially, this rule states that the sum of recurring revenue growth % and EBITDA margin % should be above 40% for a company to sustain long-term growth.
To solve this problem statement, you’ll examine your Rule of 40 breakdown across baseline, best case, and worst case scenarios. Follow this up with P&L targets as a % of revenue, and finally allocate targets to the cost center for all three scenarios.
Rule of 40 breakdown
As we just saw, the Rule of 40 adds revenue growth % to EBITDA margin % for a score that determines financial health. With scenario planning, you have the ability to break down your Rule of 40 components across multiple potential scenarios. This lets you quickly foresee the state of the business:
Set P&L targets by percentage of revenue
With your Rule of 40 forecasts in mind for your best case and worst case scenarios, set your P&L targets for the upcoming years. The general outcome should show you your net income and EBITDA as a percentage of revenue. In our specific example, we see that forecasted operating expenses are much higher in the worst case scenario. We’ll address this by setting lower targets for the worst case scenario.
Allocate functional targets to cost centers
In this final step, we’ll allocate targets to the Product Development department for each scenario, based on the net income forecasts calculated in the previous step. A couple things to note: in our example, we split the cost center into teams for more granularity. We also forecast the total cost across three scenarios: baseline, best case, and worst case to arrive at lower costs in the worst case scenario.
Who should use scenario planning?
Anyone within the company with a need to answer, “what if…” should use scenario planning. This methodology is the difference between speculation and purpose-driven action. Without scenario planning, companies are forced to take drastic decisions in an economic crunch that they are unprepared to face.
Truly, anyone from the CFO to the entire Revenue team can use scenario planning for endless use cases, including workforce planning, budgeting, sales performance management, or campaign measurement.
What you need to get started with scenario planning
You’ve actually taken the first step by learning all about scenario planning through examples. Dig a little deeper by understanding why it’s much better to plan scenarios on a business planning platform rather than spreadsheets.
As you advance your knowledge of scenario planning, start to identify aspects of your role that require this methodology. The easiest way to do this: start a list of all your “What if?” questions.
No one can predict the future with 100% accuracy. But you can plan for what’s likely to happen, and for the rare unlikely possibilities that come true.
Through the scenario planning methodology, you begin to control your future by making decisions based on a 360 degree view of the world. Although you can’t change external events, you can build your strategy to react to these events, with scenario planning.