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An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
An Overview of Scenario Planning - Introduction, Overview and Examples
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An Overview of Scenario Planning - Introduction, Overview and Examples

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An Overview of Scenario Planning. Topics include: Scenario Planning and Uncertainty, Scenario Planning Prerequisites, Key Benefits of Scenario Planning, Types of Scenario Planning, Overcoming Hurdles …

An Overview of Scenario Planning. Topics include: Scenario Planning and Uncertainty, Scenario Planning Prerequisites, Key Benefits of Scenario Planning, Types of Scenario Planning, Overcoming Hurdles to Scenario Planning and Five Required Structural Elements

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    • 1. An Overview of ScenarioPlanningAPQC’s Financial Management Webinar Series: May 2013
    • 2. 2012 ® Axiom EPM All rights reservedTODAY’S SPEAKERAs Chief Strategy Officer of Axiom EPM www.axiomepm.comPeri is responsible for leading product and go-to-market strategy for theAxiom EPM. He brings over 25 years of financial and performancemanagement experience largely within the context of enterprise software.His most recent role was at SAP, where as Vice President of BusinessAnalytics he was responsible for the launch of numerous analyticapplications designed for banking, healthcare, retail and other industries.Prior to SAP, Peri was responsible for Business Objects’ EPM Center ofExcellence. He also served on the executive management teams of SRCSoftware and Sendero Corporation where he managed the industry strategyand product management functions respectively. His thought leadershipwork has been published in the Journal of Performance Management andother publications.Peri received his Bachelor’s in Business Administration from the University ofWashington and an MBA from Keller Graduate SchoolPeri Pierone
    • 3.  Scenario Planning & Uncertainty Scenario Planning Prerequisites Key Benefits of Scenario Planning Types of Scenario Planning Overcoming Hurdles Five Required Structural Elements Closing RemarksU N I F I E D P E R F O R M A N C E M A N A G E M E N TMay 21, 2013Agenda
    • 4. 2012 ® Axiom EPM All rights reservedScenario Planning and Uncertainty The notion of uncertainty is at the crux of both finance and riskmanagement domains Even so when it comes to strategic planning, budgeting and forecasting,most practitioners are content with completing the “the budget” or“the forecast” without addressing the issue of uncertainty There is false sense of security when underlying assumptions aretreated as facts vs. assumptions – masking both exposure andopportunity Over 90% of organizations we surveyed take at least 2 months tocomplete a budget – most take more than three months, many morethan 4 – thus its difficult to perform scenario analysis Only 8% of organizations surveyed doscenario planning regularly
    • 5. 2012 ® Axiom EPM All rights reservedPrime Conditions for Introducing Scenario Planning Uncertainty is high relative to managers’ ability to predict or adjust Too many costly surprises have occurred in the past The company does not perceive or generate new opportunities The quality of strategic thinking is low (i.e., too routinized orbureaucratic) The industry has experienced significant change or is about to There are strong differences of opinion, with multiple opinions havingmerit Competitors are creating advantage by using scenario planning“Scenario planning attempts to compensate for two common errors in decisionmaking – under prediction and over prediction of change. Most people andorganizations are guilty of the first error.”Paul J.H. SchoemakerProfessor Wharton School, Univ. of Pennsylvania
    • 6. 2012 ® Axiom EPM All rights reservedKey Benefits for the Organization Understand and define the key drivers of the business Quantify the sensitivity to key drivers, creating importantinstitutional knowledge Properly treat financials as outcomes rather than inputs in theplanning process Eliminate (at least in part) bias or aspirational thinking that is notgrounded in reality Test the strength and flexibility of a strategy under adverseconditions Manage risk and uncertainty more effectively by modelingscenarios that break with current trends Become more expansive and imaginative in its thinking Consider possibilities that would otherwise havelikely been ignored
    • 7. Types of Scenario Planning#1 – Single Variable Sensitivity Analysis Easiest to set upand process Useful inquantifying theimpact of aparticular DV Can be a greateducational tool Primary criticism isits simplicity –market variablesseldom move on astand-alone basis
    • 8. 2012 ® Axiom EPM All rights reservedTypes of Scenario Planning#2 Two Variable Example – Nine Box
    • 9. Types of Scenario Planning#3 – Multi-Variable Storyline Scenario Planning• Employs two or more key variables typically based on a particular narrative• More formalized and more plausible• It should include factors the organization is quite certain of ones it isn’t• Takes more time and energy to create
    • 10. 2012 ® Axiom EPM All rights reservedTypes of Scenario Planning#4 - Initiative Based Scenario PlanningForecasting Methods Include:Examples:• Driver-based model• Volume & Mix• Variable Labor, efficiency benchmarks• Capital constraints• Open new geographic region• Expand productive capacity• Back office automation• Divestiture of finance subsidiaryAnalysis Contains:1. Income Statement2. Balance Sheet3. Cash Flow4. Key RatiosConsolidated ResultsInitiative #3Initiative #2Base CaseGiven current trends,what is our financialoutlook 3-10 years?InitiativesAs we prioritize growth orcost containmentinitiatives, what is theincremental impact?ScenariosWhat is the impact on ourbaseline projections giventhe initiatives we’veproposed?Initiative #1Initiative #4Base Case(Conservative)
    • 11. 2012 ® Axiom EPM All rights reservedForecasting Methods Include:Examples:• Driver-based model• Volume & Mix• Variable Labor, efficiency benchmarks• Capital constraints• Open new geographic region• Expand productive capacity• Back office automation• Divestiture of finance subsidiaryAnalysis Contains:1. Income Statement2. Balance Sheet3. Cash Flow4. Key RatiosConsolidated ResultsInitiative #3Initiative #2Base CaseGiven current trends,what is our financialoutlook 3-10 years?InitiativesAs we prioritize growth orcost containmentinitiatives, what is theincremental impact?ScenariosWhat is the impact on ourbaseline projections giventhe initiatives we’veproposed?Initiative #1Initiative #4Base Case(Conservative)Types of Scenario Planning#4 - Initiative Based Scenario Planning
    • 12. Types of Scenario Planning#5 – Stochastic Based Scenario Planning Rather than a discreet scenario – stochastic analysis focuses on hundredsmaybe even thousands of scenarios Using a random # generation process (e.g. Monte Carlo) against a keyvariable(s) for the purpose of producing a distribution of results Resulting in probabilistic outcomes (e.g. mean, STDs, confidence intervals)
    • 13. 2012 ® Axiom EPM All rights reservedWe are not set up for itWe’d like to but haven’t gotten around to itWe occasionally run scenariosWe process what if scenarios oftenAxiom Survey Results Scenario Planning7.8%56.9%21.6%13.8%0.0% 20.0% 40.0% 60.0% 80.0%Regarding Scenario Planning which best describes your organization?
    • 14. 2012 ® Axiom EPM All rights reservedHurdles to Scenario Planning*8%14%23%45%54%Management hasnt shown interestOur budgeting process is zero basedDont have a good handle on our driversOur model was never properly set upWe dont have enough time0% 10% 20% 30% 40% 50% 60%1. Bandwidth Constraints (we don’t have enough time)* Axiom EPM Survey Results February 2012
    • 15. 2012 ® Axiom EPM All rights reservedFinding the TimeI. Reducing budget cycle times by:a) Streamline the input required –take a more calculation richapproachb) Enable more robust driver-basedapproachesc) Improving the efficiency of thebottom up – top down processd) Have the budget processbecome part of a rolling forecastprocesse) Reduce the size of your chart ofaccounts9%44% 45%3%< 2 Months 2-3 Months 4-6 Months > 6 Months0%10%20%30%40%50%How Long Does It Take to Complete theBudget?* Axiom 2012 Survey Results0% 20% 40% 60%50 - 100201 - 300# of Accounts in BudgetThere is a correlation betweencycle times and COA size!
    • 16. 2012 ® Axiom EPM All rights reservedHurdles to Scenario Planning*8%14%23%45%54%Management hasnt shown interestOur budgeting process is zero basedDont have a good handle on our driversOur model was never properly set upWe dont have enough time0% 10% 20% 30% 40% 50% 60%1. Bandwidth Constraints (we don’t have enough time)2. Technology Deficiency (our model was never properly set up)3. Configuration Deficiency (our model was never properly set up)4. Data Deficiency (our model was never properly set up)* Axiom EPM Survey Results February 2012
    • 17. 2012 ® Axiom EPM All rights reservedHurdles to Scenario Planning*8%14%23%45%54%Management hasnt shown interestOur budgeting process is zero basedDont have a good handle on our driversOur model was never properly set upWe dont have enough time0% 10% 20% 30% 40% 50% 60%1. Bandwidth Constraints (we don’t have enough time)2. Technology Deficiency (our model was never properly set up)3. Configuration Deficiency (our model was never properly set up)4. Data Deficiency (our model was never properly set up)5. Lack of Institutional Knowledge (we don’t have a good handle on our drivers)* Axiom EPM Survey Results February 2012
    • 18. 2012 ® Axiom EPM All rights reservedDriver-Base Analysis for P&C InsuranceInsurance Income Statement:INVESTMENT INCOMENet Investment Income EarnedNet Realized Capital Gains (Losses)Net Investment Gain (Loss)OTHER INCOMENet Gain (Loss) from Agents’ or Premium Balances Charged OffFinance and Service Fees Not Included in PremiumsAggregate Write Ins for Miscellaneous IncomeTotal Other IncomeDividends to PolicyholdersNet Income, after Dividends to PolicyholdersFederal & Foreign Income Taxes IncurredNET INCOMECombined RatioROEKey Drivers:• Number of Agents• Applications Per Agent• Policies In Force• Rate Changes• Commission Rates• Customer Retention• Producer Retention• Consumer/Producer Price Index• Loss Frequency• Loss Severity• Claim Cycle Time• # of Claims• # of Adjusters• # of Underwriters• # of Customer Service Reps• Adjuster/UW/CSR Productivity• Attorneys Rates• Medical Examination Rates• Competition• Regulatory EnvironmentUNDERWRITING INCOMEWritten/Earned PremiumsLosses IncurredLoss Expenses IncurredOther UW Expenses IncurredAggregate Write Ins for Underwriting DeductionsNet Underwriting Gain (Loss)
    • 19. 2012 ® Axiom EPM All rights reservedDriver Based Planning Revenue / COS / MarginGross Margin AnalysisModel: A4 2013MYJAN FEB Unit Forecast Wholesale Pricing Manufacturer’s Cost Per Unit Stats –Options, Freight, PortProcessing, Incentives etc.Audi A4
    • 20. 2012 ® Axiom EPM All rights reservedHurdles to Scenario Planning*8%14%23%45%54%Management hasnt shown interestOur budgeting process is zero basedDont have a good handle on our driversOur model was never properly set upWe dont have enough time0% 10% 20% 30% 40% 50% 60%1. Bandwidth Constraints (we don’t have enough time)2. Technology Deficiency (our model was never properly set up)3. Configuration Deficiency (our model was never properly set up)4. Data Deficiency (our model was never properly set up)5. Lack of Institutional Knowledge (we don’t have a good handle on our drivers)6. Process Conflicts (our budgeting process is zero based)7. Cultural Conflicts (management hasn’t shown interest)* Axiom EPM Survey Results February 2012
    • 21. 2012 ® Axiom EPM All rights reservedWhich Scenario(s) Should I Consider?1. Consider naming a scenario team that has crossfunctional representation2. Conduct a Scenario Planning workshop3. Identify those factors that:a) Have the most influence in theorganizationb) Have the most uncertaintyassociated with them4. Consider starting with a straightforward sensitivity analysis5. Group together variables into astoryline (e.g. #3, #6, #8)6. Model and back test the relationshipbetween drivers and outcomes toimprove the accuracy of your modelLevel of UncertaintyLevel ofImpactVariable 2Low HighLowHighVariable 3Variable 6Variable 9Variable 5Variable 7Variable 1Variable 1Variable 8Variable 10Variable 41 23 4Driver Variable Matrix
    • 22. 2012 ® Axiom EPM All rights reservedDriverAssumptionsBaseline V1 V2 V3 …VnBusinessLogic Layere.g. (Price * Volume – (Regional Discount Factor *Volume) * Shipping Fee) – Return % = Net SalesCollaboration, Inputs andOverridesDatabaseScenarioStorageScenarioPresentationBaseV1 V2 V3 …Vn12345Five Structural Elements to Scenario Models1. Driver Assumptions• Internally oriented andexternally oriented driversneed to be identified andstored distinctly• History retention of driverinformation recommended• Automating the datacapture is a best practice• The ability to quickly cloneand alter driverassumptions is critical
    • 23. 2012 ® Axiom EPM All rights reservedFive Structural Elements to Scenario Models2. Business Logic Layer• The most critical aspect ofyour scenario planningmodel• Goal: Define algorithmsthat emulate theorganization• BLL should be transparentto stakeholders• Select technologyplatforms that enable thiseasilyDriverAssumptionsBaseline V1 V2 V3 …VnBusinessLogic Layere.g. (Price * Volume – (Regional Discount Factor *Volume) * Shipping Fee) – Return % = Net SalesCollaboration, Inputs andOverridesDatabaseScenarioStorageScenarioPresentationBaseV1 V2 V3 …Vn12345
    • 24. 2012 ® Axiom EPM All rights reservedFive Structural Elements to Scenario Models3. Collaboration & Inputs• Seldom is every lineitemed governed by a rule• Regardless of the bestbusinesslogic, stakeholders can andshould be able to providesubjective input• Workflow processesshould govern who hasrights to makeadjustments and overridesDriverAssumptionsBaseline V1 V2 V3 …VnBusinessLogic Layere.g. (Price * Volume – (Regional Discount Factor *Volume) * Shipping Fee) – Return % = Net SalesCollaboration, Inputs andOverridesDatabaseScenarioStorageScenarioPresentationBaseV1 V2 V3 …Vn12345
    • 25. 2012 ® Axiom EPM All rights reservedBaseFive Structural Elements to Scenario Models4. Database Scenario Storage• Rapidly created scenarioneed to find a home in thesystem• It is important that all data(incl. models andmetadata be stored with ascenario)DriverAssumptionsBaseline V1 V2 V3 …VnBusinessLogic Layere.g. (Price * Volume – (Regional Discount Factor *Volume) * Shipping Fee) – Return % = Net SalesCollaboration, Inputs andOverridesDatabaseScenarioStorageScenarioPresentationV1 V2 V3 …Vn12345
    • 26. 2012 ® Axiom EPM All rights reservedBaseFive Structural Elements to Scenario Models5. Scenario Presentation• It is critical that scenarioscan viewed side-by-side, with full drill-down• Operational drivers shouldbe presented along withfinancial information• Flex-based analysissuperimposing actualdriver values intoscenarios is great formodel tuningDriverAssumptionsBaseline V1 V2 V3 …VnBusinessLogic Layere.g. (Price * Volume – (Regional Discount Factor *Volume) * Shipping Fee) – Return % = Net SalesCollaboration, Inputs andOverridesDatabaseScenarioStorageScenarioPresentationV1 V2 V3 …Vn12345
    • 27. 2012 ® Axiom EPM All rights reservedCase Study:Volume & Workload PlanningAbout Dignity Health:• 5th largest health system in US• ~50 hospitals across NV, CA, AZ• 3000 users plan for 6000 cost centersApproach:1. Patient Detail sourced from EDW2. Construct a driver-based planningmodel based on patient volumes3. Model and test market and growthassumptions4. Analyze volume/mix in context ofdepartment Workload Plan5. Model various reimbursement mixesin Net Revenue Plan6. Construct and compare scenariosInpatientCardiologyOncologyOrthopedicOutpatientOP SurgeryOP PsychERRadiologyCardiologyOncologyOrthopedicCignaCardiologyOncologyOrthopedicVolume PlanWorkload Computed byService LineWorkload Plan Net Revenue PlanReimbursement ratesmodeled by Service LineUnified Data Sources includes PatientDetail and Finance Data.
    • 28. 2012 ® Axiom EPM All rights reservedAxiom EPM’s Scenario Planning Platform Functionally rich platform for Scenario-Based EPM Driver-based models created from easy to use business logic layer Rapid scenario creation tools
    • 29. 2012 ® Axiom EPM All rights reservedSummary Understand and quantify the sensitivity to key drivers, creatingimportant institutional knowledge Properly treat financials as outcomes rather than inputs in theplanning process Eliminate (at least in part) bias or aspirational thinking that isnot grounded in reality Produce higher quality strategic plans, budgets, and forecaststhat take less time to develop Test the strength and flexibility of a strategy under adverseconditions Become more expansive and imaginative in its thinkingScenario Planning helps the organization:
    • 30. Key Success FactorsAbout Axiom EPMOur UniqueUnified Platform1Steve EspositoDirector, FinanceStrategizePlanMonitorAnalyze& Predict“While Axiom EPM provides the planning sophisticationand control I need; it doesn’t require a highly specializedskill set to manage and deploy.” Unifies decision support into a singlesolution. Designed with Finance ownership andusability in mind. Can scale and evolve as needs change.
    • 31. 2012 ® Axiom EPM All rights reservedStrategyManagementCapitalPlanningFinancialBudgeting &ForecastingSales PlanningProfitabilityMeasurementABMConsolidationsReporting &AnalyticsStrategize | Plan | Monitor | Analyze | ExecuteStrategy Management:• Long Range Planning• Metrics Management, KPIsCapital Planning:• Planning & TrackingReporting and Analytics:• Financial Consolidations• Financial & management reporting• Comments CollectionKey Differentiators – TechnologyPerformance Management UnifiedBudgeting & Forecasting:• Robust Driver-based modeling• Detailed Staff PlanningSales Planning:• Sku Level Demand ForecastingProfitability Management – ABM:• Customer, channel, product profitability
    • 32.  Direct access to support (e-mail, phone), 24/7 support. Encourage customers toinfluence our product roadmap. Foster a strong user community.“It is evident that Axiom EPM wants their clients tobe successful and gives them every tool possible tobring that to fruition.” Shana RossFinance ManagerA Commitment toCustomer Support2Key Success FactorsAbout Axiom EPMEXCELLENTGOODNEEDS IMPROVEMENTPOORTimeliness Professionalism ProductKnowledgeAccuracy Overall4.96 4.96 4.92 4.90 4.92May 2013 Support Survey
    • 33. 2012 ® Axiom EPM All rights reservedKey Success Factors3rd Party Analyst ValidationCraig Schiff, CEOPerfect 5.0!“We’ve been doing this for ten years, and this is the first timeanyone has ever received a perfect score. And it’s not like only oneor two of their customers rated them; I would say about a quarter toa third of their customer base provided customer satisfactionratings. Clearly their customers love them and it’s a good choice foranyone looking for a comprehensive and unified solution.”
    • 34. 2012 ® Axiom EPM All rights reservedVisit our website:www.axiomepm.com/scenario-planning- Download Our WhitepaperLearn more:Peri Pierone, Chief Strategy Officerppierone@axiomepm.comContact us:More Information

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