Strategic Scenario Planning (What-If Analysis)

What is strategic scenario planning?

 

Strategic scenario planning, or what-if analysis, is a series of interconnected analyses designed to help the organization understand the choices available to adjust or adapt organizational portfolios.  Scenario planning can be applied to assets, products, capabilities, programs, projects and any other portfolio that the organization needs to manage.

 

Many organizations don’t recognize that their data is held hostage in varying systems and lack the proper tools to quickly conduct what-if analysis. The scenario planning process relies on leveraging existing data to develop options for revised portfolio mixes along with the implications of those changes to multiple areas of the business.  This guide will look at each of the types of what-if analysis and the considerations that need to be made.

 

Strategic scenario planning is an essential part of continuous planning, the regular (often quarterly) review cycle for portfolios of investments, and it may also be applied on an ad hoc basis when a significant change, threat, or opportunity occurs.

 

Why is strategic scenario planning / what-if analysis important?

 

Organizations can’t have just one strategic plan.  In today’s world things move fast with emerging opportunities and threats, new technologies enabling innovation, and shifting priorities and imperatives.  In a constantly changing world, organizations need a plan B.  And a plan C.  And potentially many more variations.

 

But the only thing worse than not changing a strategic plan in response to shifting circumstances, is making the wrong changes.  That’s why effective strategic analysis of organizational data, and the ability to develop the right recommendations with insight into the implications, dependencies and limitations, is so essential.  Scenario building can be the difference between success and failure of the entire enterprise.

 

The challenges of what-if scenario analysis

 

There are two main categories of challenge that organizations must overcome to implement the kind of scenario building that will allow them to succeed.  Those categories are:

 

Data challenges

The scenario planning process relies on the ability to assess organizational data and develop multiple scenarios in support of the strategic scenario planning process.  Leaders must be able to assess alternate scenarios, balance conflicting priorities and understand the trade-offs involved with each choice.  And they must be able to do that with confidence that the scenarios they are reviewing are accurate and complete.

 

Many organizations lack to ability to quickly and easily run an ad hoc analysis whenever a significant event occurs and drive the appropriate adjustments to portfolio investments. In these cases, scenario planning simply cannot be achieved because of challenges with the organizational data, which is the fuel for the analysis process. Data is often stored in different systems that lack integration with each other.  Data formats are often inconsistent with each other, making it impossible to construct scenarios for what-if comparisons.  In many areas of the business there are gaps in data completeness and significant questions around the integrity of what data does exist.  In addition, with work being delivered through the tri-modal reality, different work approaches often generate different data sets that cannot easily be combined and compared.

 

Everyone is familiar with the phrase ‘garbage in, garbage out’ for a reason.  If organizational data is not integrated, consistent, and of high quality then effective strategic scenario planning just isn’t possible.

 

Tool challenges

 

Let’s start with the obvious.  Excel is not a strategic planning tool.  Microsoft Excel may have a what-if analysis function, but that doesn’t mean you should be using it to determine the fate of your organizational investments.  Yet that’s exactly what many organizations do.  They compound the data challenges described above by copying and pasting that data into spreadsheets and then manually manipulating it with formulas, or use a downloadable scenario planning template.

 

But challenges around tools aren’t simply a case of relying on manual spreadsheets.  Scenario planning projects are multidimensional – you can’t simply conduct one scenario analysis and expect to make the right decisions.  Instead, multiple scenarios are required, developing multiple perspectives for each of the scenarios under consideration.  Only then can a complete picture of the advantages and limitations of each possible course of action be developed.

 

Many organizations don’t have the tools to do that.  They have a tool that optimizes resource capacity planning and allows for some consideration of different future scenarios for resource allocations.  Or they have financial analysis tools that allow comparison between different funding models.  But they don’t have everything they need (we’ll look at the different types of analysis later in the guide).  Further, the analysis tools they do have often aren’t integrated with each other, or with the strategic portfolio management platform, making comprehensive analysis even more difficult.

 

The impact of these challenges

 

The combination of data and tool challenges leave organizations with a complete inability to develop effective scenarios and choose between them with any degree of confidence.  Staff end up staying late to crunch unreliable numbers in inappropriate tools to try and develop options that are always going to be unsatisfactory.

 

And even if there is eventually a scenario that the organization is somewhat confident of, the process to reach that point isn’t scalable or repeatable.  The environment that organizations operate in is constantly evolving, and that means that comprehensive scenario analysis has to happen at least quarterly.  And there must be the ability to quickly and easily run an ad hoc analysis whenever a significant event occurs that has the potential to drive adjustments to portfolio investments.

 

Types of what-if scenario analysis

 

What kind of analysis do organizations need to consider?  And which forms are appropriate for which situations?  In this section we’re going to identify and explore some of the more common forms of analysis techniques that support strategic scenario analysis.  But remember, effective what-if analysis and modeling requires consideration of multiple dimensions for each scenario.  An improvement in one element may result in a worsening of another.  A change driven by one analysis may breach a constraint in another element of the business.

 

It is therefore essential to ensure that as many different relevant what-if scenarios as possible are run and that the results of those analyses are considered in their entirety.  That of course requires the right tool suite to support that.  We’ve already discussed the challenges around that, and later we’ll look at the most appropriate approach, but for now let’s focus on the following forms of analysis.

 

Portfolio prioritization

 

What is it?

Portfolio prioritization is the process of determining which assets to invest in, in which order.  It must consider how those investments align with strategic priorities to ensure that resources are focused on elements of work that will make the biggest benefit to the business.  While changes to prioritizations are potentially disruptive because they may involve shifting away from work that is already underway, it is vital to ensure that the work being done is always optimally aligned with the ever evolving needs of the business.

 

Where is it applied?

Portfolio prioritization should be a consideration for all portfolios, but particularly those that are directly aligned with work to support the current goals and objectives of the organization – the strategic portfolio, programs, projects, products and so on.

 

Who uses it?

Portfolio prioritization is essential for all portfolio owners and executive leaders.

 

Cost / value optimization and sensitivity analysis

 

What is it?

Cost / value optimization is  concerned with ensuring the return on investment (ROI) for all organizational investments is as high as it can be.  This is primarily a financial measure (we’ll consider other benefits later in this section), and helps to ensure that the funds available for investment are distributed across those investments in a way that optimizes financial performance.

A Cost/Optimization analysis is one way that portfolio owners can help ensure their investments are generating the best return. Sensitivity analysis is an important part of that process.  It considers the degree to which the return on investment responds to a shift in that investment.

 

• Is more value earned and / or is the value achieved sooner if the investment is increased?
• If so, where is the point of diminishing returns?
• Is the greater value better than diverting those funds to a different investment?
• Which investments can be reduced with minimal to no impact on the return?

 

Where is it applied?

Cost / value optimization and sensitivity analysis is an important consideration for every portfolio and must be a cornerstone of every portfolio review to consider the options and impacts of any fund allocation adjustments.

 

Who uses it?

While this is a financially focused analysis, it is not only important for the finance function.  It is also a critical consideration for portfolio owners to ensure their investments are generating the best return and for benefits owners for the same reason.

 

Resource capacity planning and utilization

 

What is it?

Resource capacity planning and utilization are primarily focused on people.  Resource management is a separate, and critical, element of strategic portfolio management and has its own guide.  However, within the realm of scenario analysis, the consideration is to optimize the way existing resources are utilized – the percentage of time allocated; the use of different skill sets, experience levels, job functions; etc.

 

One of the many benefits of resource capacity planning and utilization analysis is to help stakeholders balance the needs of their own work with the allocation to all investments. Considerations in this particular scenario also include the ease with which adjustments to resources can be made. 

 

• Where are upcoming bottlenecks and how easily can they be alleviated?
• Where is excess capacity currently existing, will that persist, and if so how can those individuals be re-skilled or repositioned?
• What are the appropriate strategies for changing resources – hiring, training, outsourcing, or contracting?

 

Where is it applied?

All portfolios use resources to execute on the work that is being invested in, but this is a particularly important consideration for portfolios where resource allocations are more fluid – programs, projects, etc.  It is also an area that is critically important to understand whenever the results of other analyses indicate that substantive adjustments are needed.

 

Who uses it?

Resource management software is most useful for one of the largest stakeholder groups.  In addition to portfolio owners, it is required by resource owners so that they can balance the needs of their own work with the allocation to these investments.  It is critical for the owners of individual work items within each portfolio as it impacts how they can plan and deliver that work (regardless of structure and work approach).  And it is essential for HR, leadership and development and procurement functions so they can plan for any resource changes that are required.  Finally, finance must be involved to understand the financial implications of any resource adjustments.

 

Near-term and multi-year roadmap optimization

 

What is it?

Roadmapping is another strategic imperative that is essential to organizational success and that has its own guide.  Within the context of scenario analysis it is the time-phased element, helping the organization understand how changes to current corporate strategy impact near- and long-term plans.  Optimizing this area requires consideration of dependencies between investments, the impact downstream of changes to scope, schedule or approach in current investments, and so on. Roadmapping tools help to accomplish this.

 

Near-term and multi-year roadmap optimization enables the organization to understand and adjust for any potential impact on future plans. Roadmaps have become an important strategic management tool in recent years and they must be integrated with the entire strategic portfolio management approach of the organization.  As a result they must also be one of the analyses that is carried out as part of scenario planning to ensure that the organization is not mortgaging its future in order to improve performance today.

 

Where is it applied?

If an organization has a roadmap for a portfolio or business area (and these roadmaps should be in place for every portfolio, business area, department, etc.), then optimization analysis must be carried out on that roadmap.

 

Who uses it?

Near-term and multi-year roadmap optimization is primarily a consideration for the owners of those roadmaps so that any impact on future plans are understood and adjusted for.

 

Near-term and multi-year capital planning

 

What is it?

Near-term and multi-year capital planning is the financial equivalent of the roadmap optimization that we just looked at.  It considers the financial implications in the near- and long-term of adjustments that are made today. That includes fundamental questions like can future investments be afforded, but also the planned mix of capital and operational spending, implications for cash flow, and so on.

 

Finance teams use near-term and multi-year capital plans to make recommendations that are critical to every stakeholder in every portfolio. With so much investment planning predicated by the financial capacity and capability of the organization, this is an analysis that is essential to complete and to get right.  Errors or gaps in this analysis can result in the inability of the organization to deliver in the future, and may jeopardize the organization’s very existence. That’s why it’s critical that an organization’s capital planning software can integrate with various datasets and conduct what-if scenario analysis.

 

Where is it applied?

Much like roadmapping, this analysis should be undertaken for every portfolio that is subject to review and adjustment.

 

Who uses it?

Finance departments are the primary consumers of the results of this analysis, but their interpretation of the results and the recommendations they make as a result of that interpretation are critical to every stakeholder in every portfolio.

 

Benefit realization / optimization

 

What is it?

Earlier in this section we looked at cost / value optimization, but benefits and outcomes are nor restricted solely to financial measures.  Investments also generate benefits in terms of market share, customer and employee satisfaction, risk reduction, reputational enhancement, and so on.  All of these benefits are impacted when changes occur within a portfolio and all must be considered as part of scenario analysis.

 

Every portfolio is expected to deliver specific benefits to the organization, so a benefit realization / optimization analysis should be applied in every situation.

Analysis here must consider not only whether the changing environment or proposed adjustments to investment portfolios are impacting the benefits, but also whether shifting enterprise priorities are causing individual benefit categories to become more or less relevant.  In addition, organizations must do more than ensure that benefit targets are met, they must ensure that benefits are being optimized – that the best possible return is being achieved for the investment that is being made. Having benefits realization software that offers what-if scenario planning is vital to strategic portfolio management.

 

Where is it applied?

Every portfolio is expected to deliver benefits to the organization so this analysis must be applied in every situation.  Often variances in execution that indicate expected benefits may no longer be achievable, are a prompt for ad hoc analysis cycles, but this analysis is an essential element to all reviews.

 

Who uses it?

There are multiple stakeholders in this analysis.  Leaders and portfolio owners use the information as one of the main elements in their decision making around any portfolio adjustments; work owners consume the outputs to understand how their deliverables and expected outcomes are evolving; and client representatives need to understand how their accountability for business outcomes is being impacted.

 

Ad hoc modeling

 

What is it?

 

Sometimes future scenarios are driven by a specific investment, initiative or circumstance.  There may be an unexpected opportunity in one market segment, a major systems failure impacting one element of operations, etc.  These scenarios require a response, but they require the right response.  That’s where ad hoc modeling comes in.

 

The ability to conduct ad hoc modeling is a critical component of any what-if scenario planning capability, enabling the organization to apply a specific context to any situation. This is the consideration of one specific adjustment – canceling an initiative, adding a new investment, delaying or accelerating one piece of work, and so on.  This type of analysis must still be done in conjunction with the other elements of scenario analysis, but these ad hoc analyses provide the scenario team with a specific context to the analysis cycle that they are a part of.

 

Where is it applied?

As the name suggests, ad hoc modeling is applied wherever it is needed on a one-off basis.

 

Who uses it?

Stakeholders in the investment or business area directly affected will be the primary users, but depending on the impact and potential adjustments there may be a much broader set of organizational stakeholders in ad hoc analyses.

 

Multi-dimensional scenario planning

 

We have mentioned on several occasions the fact that scenario planning is multi-dimensional, and now we want to explore that aspect in more detail.  When it is necessary or desirable to make adjustments to an enterprise portfolio, those changes must be made with the most complete understanding possible.  It’s not enough to know how to improve benefits, or how to improve resource utilization.  What-if scenarios must allow decision makers to consider and answer questions like:

 

• What is the cost in other areas (funding, long-term plans, resource capacity, etc.) of the optimal benefit choice?
• What compromise options are available that balance impacts on all areas?
• Where are the thresholds where performance becomes marginal / ceases to improve / reaches a non-viable level?
• What are the differences, now and in the future, between the most preferred options?

 

Without this level of insight it is impossible to make decisions with the confidence that the best possible choices are being made.  That risks the need to reverse decisions during the next review cycle, potentially compromising the overall ability to deliver.

 

No decision is made in a vacuum, which is why it’s important to have the right analytic capabilities to accommodate a wide variety of multi-dimensional scenarios. Of course achieving that level of analysis needs the right what-if scenario planning tools to help you.  We’ve touched on that in the challenges section above, but let’s now explore it in more detail.

 

Evolving investment management

 

Many organizations have evolved their approach to strategic planning in the last few years.  Annual planning has given way to quarterly planning, which is in turn evolving into continuous, adaptive planning.  That’s why scenario planning has become so important in today’s uncertain world.  But simply accelerating the frequency of planning and review cycles is not enough.

 

To create an environment where all of the data required to drive effective what-if analysis can be created, maintained and managed in a consistent way, organizations must change how they plan by creating their own scenarios.  Their investment management approach must evolve from using projects as the primary work delivery vehicle to an approach that embraces program and product level investment management. This allows for the elevation of funding and governance decisions to a more strategic level and ensures all planning and delivery remains a top-down exercise, helping to maintain alignment between priorities, delivery and benefits.

 

Furthermore, organizations should be looking to evolve beyond programs and products, embracing emerging methods like capability-driven planning and delivery.  By directly tying what an organization does to what it needs, the entire planning, management, and analysis process is rendered more effective and efficient – and therefore more likely to succeed.

 

Strategic what-if scenario planning software

 

You have seen by now that capable scenario planning tools are an integral part of strategic portfolio management. Strategic thinking must be managed from the top of the organization down, delivering meaningful insight and practical decision support through all investment types, all work structures and across the tri-modal reality.  Scenario planning cannot be separated from other strategic imperatives and in fact supports the ability to deliver on many of those imperatives.

 

However, this level of analysis and insight relies on accurate, complete and timely data.  And that means there must also be integration with adaptive project management – the execution focused aspects of portfolio management. Unless there is an ability to capture and manage data from the frontlines then there is no ability to conduct meaningful what-if analysis. And that data must come from all of the frontlines – projects, programs, products, capabilities, etc.  It must include each of the tri-modal realities and it must have a common baseline for comparison of data across asset types and work methods.

 

Finally, analysis must cover each of the common types that we have discussed here.  If your tools are focused only on resource management, or only on financial analysis then you are making decisions with incomplete information and at least some of those decisions will prove to be wrong.  At North Highland, we are proud that our strategic portfolio management software includes what-if scenario planning functionality capable of delivering all of that.

 

In Summary

 

Organizations cannot optimize performance unless they are able to ensure that they are getting the best possible return on each investment without compromising other areas of their business – today and in the future. That’s what makes strategic scenario planning, what-if analysis or whatever name you choose to use, so important.

 

But it’s only one of the imperatives within a complete strategic portfolio management approach to delivering success consistently and from the top-down.  Sustainable performance requires a commitment to all of those imperatives.