Finance discipline for optimized performance

April 15, 2021

A blog post by David Cutbill, principal, Deloitte & Touche LLP

Right now, there is increased marketplace volatility and inability to account for different predictions and forecasting future performance, limited value in historical reporting, an inflexible forecasting process, and an inability to understand capital and cash needs across businesses.

Recent events have exposed the need for enhanced financial disciplines that enable flexible, real-time management and decisions against an increasingly unpredictable future. When financial performance and future planning rests on the shoulders of the finance function, creating a culture and operating discipline now that optimizes performance in the long term is vital. Doing so when the present and future are unknown is possible with new models that enhance financial discipline and enable organizations to get a better handle on the future of finance.

Developing robust scenarios: The first step to optimizing finance discipline

New finance disciplines start with the process of developing scenarios and resilient scenario planning. From there, agile capital allocation and predictive modeling and forecasting for future capital enables more structured and flexible decision-making and a better understanding of business ecosystem dynamics, both in the current and possible future environments. To do that, scenario planning must come first. In times of uncertainty, predicting the future is difficult, but scenario planning gives organizations more confidence in decisions taken now, enabling actions that may also improve resilience and financial discipline.

What are scenarios, and why are they useful?

Scenarios don’t predict the future. They are stories about what the future may look like, not stories about how the future will look. Scenarios are hypotheses about what could happen, designed to shed light on new opportunities or hidden risks. They are flexible and agile—created through a rigorous process using uncertainties at the foundation.

Scenarios about what may happen in the future are designed to take better actions today. They take the long view, enabling better forecasting while remaining agile in the face of different realities and developments. Scenarios may help organizations explore how trends could shape the world in the long term. They may spot emerging needs and issues that conventional modeling could miss and better identify actions to improve resilience to the rapidly changing landscape. Scenarios may also show how the shifting business landscape can affect investment or capital allocation choices.

Example of scenario planning in the time of COVID-19

To illustrate the discipline of developing scenarios, we use an example of macro scenarios developed during the pandemic. We begin with two of the most critical uncertainties driving the overall impact of COVID-19 as a starting point:

1. What is the overall severity of the pandemic?
2. What is the level of collaboration within and between countries?

These also lead to other uncertainties that can inform possible scenarios. Other uncertainties include the health care system response to the crisis, economic consequences of the crisis, and the level of social cohesion in the reaction and response to the crisis.

The next step is taking these uncertainties and imagining different scenarios around the possibilities from each uncertainty in a given period of time. Here are four different scenarios created that include an underlying narrative for each scenario together with their significant societal and economic implications:

Source: The world remade by COVID-19

• The passing storm: Low severity of the pandemic with significant collaboration. This looks like a passing storm, where things go back to normal fairly quickly, and the impact is not as severe as other scenarios.
• Good company: Moderate severity of the pandemic, with marginal collaboration. In this scenario, governments struggle to manage the crisis, but companies and the private sector step in to assist, shifting the balance between government and private sectors. As a result, the public develops more trust in private companies.
• Sunrise in the east: Higher impact and severity of the pandemic, with significant collaboration. In this scenario, the world faces a severe pandemic. East Asian countries, having more experience with pandemics, handle the crisis better. Due to significant collaboration between these countries, they emerge from the pandemic with more of a position as leaders on the global stage.
• Lone wolves: This scenario sees a pandemic that is out of control, with very little global coordination. In this crisis, with a pandemic so severe, governments and companies move to adopt more isolationist policies.

Examining the implications of possible scenarios for an organization

Extending these scenarios to inform implications in a given industry can help to further refine the individual scenarios and drive the next step in resiliency planning. To see what this may look like, take one possible scenario and the potential implications for a given industry. As an example, here are potential implications for the “Good company” scenario in the retail and consumer products industry:

• Consumer values: Extreme frugality; family orientation
• Consumer lifestyle: Restrained spend; trading down; economically prudent
• Purchase drivers: Lowest cost at acceptable quality
• CP landscape: Bifurcation between surviving big brands and step change in private brands’ growth
• Retail environment: Shift toward everyday low price and value-driven channels
• Industry structure: Major consolidation across retailers, manufacturers, and food service businesses
• Role of technology: Focus on cost-cutting by leveraging digital FTEs and automation (such as RPA)

In part III, we will discuss leveraging these different scenarios to inform more agile capital allocation to mitigate downside risks while also freeing capital to explore the opportunities created from uncertainty and disruption. Read Part 1 of finance discipline.