Scenario-Based EPM relies on modern technology (modern data warehouse / business intelligence and data analytic tools; enterprise resource planning systems; enterprise content management systems; customer relationship management systems), super data crunching, and data scientists to efficiently do scenario analysis on an ongoing basis. Technology vendors that offer broad corporate-performance-management (CPM) suites should be considered by organizations seeking to implement a Scenario-Based EPM strategy.
Scenario-Based EPM includes:
Process: Organizations need to ensure that their current EPM processes are built around key drivers of business value, and focus on the most volatile and material aspects of the business.
People: Leadership commitment in program sponsorship, organizational discipline and mindset change are required. Data scientists trained to work with modern data technologies, large data sets, and apply sophisticated statistical techniques to different scenarios are helpful.
Technology: Technology is a major enabler of Scenario-Based EPM. Companies need to move away from using spreadsheets as their main planning tool to take advantage of sophisticated software that enables better scenario planning.
The goal is to design and build a data warehouse / business intelligence (BI) architecture that provides a flexible, multi-faceted analytical ecosystem for each unique organization. A traditional BI architecture has analytical processing first pass through a data warehouse. In the new, modern BI architecture, data reaches users through a multiplicity of organization data structures, each tailored to the type of content it contains and the type of user who wants to consume it.
The data revolution (big and small data sets) provides significant improvements. New tools like Hadoop allow organizations to cost-effectively consume and analyze large volumes of semi-structured data. In addition, it complements traditional top-down data delivery methods with more flexible, bottom-up approaches that promote predictive or exploration analytics and rapid application development.
Scenario planning is a strategic planning method used to make flexible short and long-term plans. Scenario planning may involve aspects of Systems thinking, specifically the recognition that many factors may combine in complex ways to create sometime surprising futures (due to non-linear feedback loops). Systems thinking used in conjunction with scenario planning leads to plausible scenario story lines because the causal relationship between factors can be demonstrated. In these cases when scenario planning is integrated with a systems thinking approach to scenario development, it is sometimes referred to as structural dynamics. Business Planning and Forecasting refers to the set of activities where business is planned against the strategy and what forecast activities or results of the organization may occur from operational execution during a particular time period.
Enterprise Performance Management (EPM) considers the visibility of operations in a closed-loop model across all facets of the enterprise. There are several emerging domains in the EPM field which are being driven by corporate initiatives, academic research, and commercial approaches. These include:
- Strategy Formulation
- Business Planning and Forecasting
- Financial Management
- Supply Chain Effectiveness
The six stages of the closed-loop EPM process model are:
- Strategy Development
- Strategy Translation
- Organization Alignment
- Operations Planning
- Learning and Monitoring
- Testing and Adaptation
1. Identify the key factors that can have a material impact on the organization. For example, consumer products companies may look at gross domestic product growth and consumer spending, airlines at oil prices, global manufacturing companies at exchange rates and freight costs, and financial services companies at consumer credit quality, interest rates and asset prices.
2. Define relevant scenarios (typically three to four) that describe a range of future operating environments. For example, what if oil prices average $75 a barrel, $110 a barrel or $140 a barrel?
3. Agree on a baseline scenario that will be used to develop/review strategy, set targets and develop operational plans and budgets.
4. Develop strategic plans, targets, action plans and budgets using the baseline scenario.
5. Develop alternative views of targets, plans and budgets under each scenario. Identify the major impacts and changes under each scenario.
6. Identify relevant triggers and corresponding tolerance ranges for each scenario.
7. Whenever established triggers/ tolerances are exceeded—meaning a new scenario becomes effective—adjust tactics using the previously developed plans and generate a new forecast reflecting the change in scenario and the changes in tactics.