By Ben Heinl

In this series I will be looking at the Hard Problems of FP&A. Too often our industry gets distracted by things that do not matter or we focus only on problems that are very easy to solve. I intend to point directly at specific Hard Problems of FP&A and how we have seen them solved.

The second hard problem is What-If Analysis and Scenario Modelling.

This is a hard problem often completely ignored by most planning tools out there because… well it really is too hard for them. I lump What-If Analysis and Scenario Modelling together as they are kind of the same in terms of the technology needed to underpin the process, but there is some distinction.

A Scenario Modelling process is often a more structured and often collaborative process, like modelling out best / medium / worst case outcomes. To illustrate what this looks like I’ll point you straight to the great in-depth content from our colleagues at Apliqo who have done a great job covering this topic from their beginner’s guide to scenario analysis to a great example of scenario planning around various predicted outcomes of the pandemic, to an example of preparing for the next forex shock, scenario stress-testing a coming recession and even a full demo of what that looks like in an IBM Planning Analyics (TM1) based system.

What-If Analysis is often the term used when a more ad-hoc scenario may be carried out by a single individual about something that an organisation would not have time to collaboratively pull together in a more formal process. Sometimes this could be an unforeseen event like “a cyclone just hit our manufacturing plant – how will this affect our financial forecasts?” or it could be something more positive like, “what will happen if we win this massive contract?” or “what if we open 20 more stores next year?”

What makes the above so hard? Well first of all, you ideally need to have an Integrated Business Plan of some sort (go check out Hard Problem #1). But what software vendors often ignore in this space is that in the real world you don’t often need to go into an existing forecast model and change a number and – voila! – I’m finished! (despite this being what they show you in a sales demo). Often you need to update a lot of numbers at different levels (production, supply chain, sales, other business drivers like DSO or utilisation or yield).

But here is the big one… you don’t need to just change numbers, you need to fundamentally change business structures like adding or removing stores or products or production lines or employees or suppliers. Often you want to strategically completely restructure your business and look at past data in the new structure to see how that would flow through.

This stuff is not easy to do in rigid software systems whose consultants say you need to simplify your planning and analysis processes. It is precisely doing these kinds of Scenario Modelling and What-If Analysis processes that can make the difference between success and failure. It is not an exaggeration to say that this is exactly where companies need their FP&A tools to support them the most in making the key decisions that differentiate them from their competitors; in order to do that you need to dive into the detail and complexity of your business and the markets you compete in.

As an aside – TM1 has a massively unsung feature called “sandboxing” which enables end users to do what-if scenarios utilising their full Integrated Business Plan without needing to set up anything beforehand or get in anyone else’s way. With TM1 rules, you can just recalculate the whole scenario easily in real-time, while only adding the “deltas” of the new data to the model – whereas other software solutions often have to duplicate the entire dataset and batch-run the numbers – which can take up a lot of time and space.  

Because TM1 can do this stuff, people love it.. like really fall in love with it. Other “planning” tools look like simple data entry tools with really nice user interfaces in comparison (because that is often all they are). Manny Perez – the genius who invented TM1 – wasn’t trying to create a tool that just lets you assemble a nice-looking data entry tool. He was an analyst at Exxon having to deal with serious scenarios and decisions regarding the transport of oil globally in a time of political and economic uncertainty. A pretty data entry tool was not going to cut it and this helped Manny get it right from the start.