There’s no way of knowing exactly what the future holds. But understanding the possibilities ahead of you is not only achievable, it’s a wise business practice. For finance and operations teams, that’s where scenario modeling comes in.
A critical tool for forward-facing teams, daily, monthly or annual scenario modeling puts your data to work by mapping out the possible scenarios ahead. In doing so, it helps keep your organization agile—ready for whatever’s coming, with the tools and insights you need to pivot at the first signs of change.
Yet Vena has learned that many organizations didn’t prioritize scenario modeling in 2021.
Vena’s 2021 Industry Benchmark Report, The State of Strategic Finance—released in December 2021—showed that fewer than half of respondents were making scenario modeling a priority. In fact, based on a survey of 175 business leaders and finance and operations professionals, the benchmark results actually demonstrated a drop in scenario modeling usage from 2020.
Let’s delve deeper into the data to see why scenario modeling is being left behind—and look at why organizations should reprioritize scenario modeling in 2022 to get the most out of the year ahead.
The State of Scenario Modeling
Back when Vena released our 2020 Industry Benchmark Report we were surprised that, at the time, only 60% of survey respondents were embracing scenario modeling before making forecasting adjustments.
After all, scenario modeling allows your finance and operations teams to keep their finger on the pulse and opens up opportunities to increase performance, stay agile and better understand new opportunities around the corner. In doing so, it lets you plan for the best while preparing for the worst—something that can mean the difference between success and failure even in normal times. But in 2020, as we faced the beginning of a worldwide pandemic and the market and workplace changes that resulted, it seemed more critical than ever.
The fact that 40% of the organizations we talked to weren’t taking advantage of such a critical tool told us that they weren’t as prepared as they could be for whatever came next. And since 2020 led to 2021—a year just as racked with uncertainty and change—that didn’t bode well.
In 2021, though, we found that even fewer organizations made scenario modeling a priority.
The 2021 Benchmark
In fact, the numbers flipped from 2020 to 2021. Whereas 60% embraced it in 2020, only 40% of the organizations we surveyed were employing scenario modeling before making forecasting adjustments in 2021—meaning 60% weren’t. In addition, 70% still weren’t running scenarios or sensitivity analysis on uncertainties outside of their control.
The reasons for the shift could be sheer complacency. After all, with the pandemic still new in 2020 and the market rapidly changing, teams were scrambling for ways to break through the uncertainty. For at least some, wisely, that meant turning to scenario modeling to see what came next. But what happened when the uncertainty of the pandemic became the new normal in 2021?
For one, organizations experienced better financial health last year. Compared to the beginning of COVID-19, 56% of respondents said they were in a better position in 2021. And even if many of those improvements were out of their control—48% of companies cited market growth as the biggest driving factor for revenue growth—it’s likely some organizations became more complacent as a result, as they rode the wave of the market without a look ahead. Just as possible: the new reality and pressures of a continued crisis meant teams simply lacked the time and resources to keep up with scenario modeling the way they’d like.
Either way, scenario modeling got left behind. And without scenario modeling, organizations increase their risk for the future, unable to take full advantage of the data they have available to plan their course forward.
So what does that mean for 2022?
4 Reasons to Prioritize Scenario Modeling in 2022
The good news is that it’s clear that many of our survey respondents understand the importance of scenario modeling. In our benchmark survey, 41% of respondents said they were planning on prioritizing scenario modeling and/or what-if analysis in the year ahead. That’s a positive sign of things to come in 2022.
But if scenario modeling isn’t on your priority list for the new year, there are plenty of reasons it should be. These are just four:
1. It’ll Help You Deal With the Ongoing Uncertainty
We’ve had plenty of uncertainty over the past two years—but that doesn’t mean there’s not more possibly waiting around the corner. Scenario modeling helps you prepare for any eventuality and potential risk, so that even when things aren’t going as planned there’s still a plan in place.
2. It Allows You To Future-Proof Your Plans
Unless you have a crystal ball hidden in the supply closet, there’s no real way to know whether your current plan is going to be successful or not. But you can certainly test out your odds— running all of the possible scenarios to see whether your plan is as future-proof as it can be.
3. It Gives You More Information To Budget Better
If your company’s New Year’s resolution is to get more done with less (and whose isn’t), scenario modeling can help achieve it. By looking ahead, it lets you plan better, allocating funds more strategically to better accomplish your organization’s ultimate business goals.
4. It Helps You Identify New Opportunities for Growth
Risk can pay off when it’s approached wisely—and 2022 may be just the right time to take those risks. By letting you look ahead at possible outcomes, scenario modeling can help you decide which opportunities are the right ones.
In other words, scenario modeling can play a huge role in helping your organization thrive in 2022. But first, you have to make it a regular part of how you do business.
To read the full set of results, download your free copy of Vena's 2021 Industry Benchmark Report below.