The much-needed mind shift in the board room

Enterprises should invest more time, energy and resources into looking into the future and adopting the scenario planning concept. C-level management should think ahead in a structural and continuous manner, not just to create plans B, C and D for the near and more distant future: they should dare to take bold decisions to support these plans today, even if these decisions hurt the business’ figures in this Q or the next one. The value of this approach is one of the key takeaways of the insightful webinar that Riskonet South Africa hosted about the upside of scenario planning and its value to strategic risk management.

Volker von Widdern, specialist risk consultant to the Riskonet organisation in South Africa, emphasises the great value of scenario planning, as it can offer a new perspective to enterprise leaders in our increasingly volatile world. With military conflicts, global and regional tensions and – as a result – rapidly changing market developments and outlooks, enterprise leadership should embrace scenario planning as a way to optimise the achievement of strategic goals while maximising the upside and limiting the downside.

Impact of uncertainty

As Volker von Widdern puts it: “Risk is often described as the impact of uncertainty on strategic goals. Uncertainty starts with unknown unknowns that become either known unknowns or unknown knowns. Scenario planning offers great value because it can narrow gaps in these areas.”

With this value in mind, Von Widdern offered his audience of 200 direct viewers the insights of two experts: Paul de Ruijter, an experienced scenario planning expert, based in The Netherlands, and Tjaart van den Berg, Enterprise Risk Manager at Sasol.

Profited from value

The experts brought ample proof of this value to the table. Numerous enterprises have profited from this value, in different markets, in smaller and bigger ways. When the Russians invaded Ukraine, some organisations were – thanks to their scenario planning efforts – better prepared and positioned than others for higher energy and grain prices following the Russian attack.

There is also the case of Rabobank, brought up in the webinar by Paul de Ruijter: “In 2003, Rabobank was already considering a housing crisis scenario with the entire top of the organisation and what was called the ‘Japan scenario’ within the bank, with interest rates at 0%. Both scenarios were unthinkable for most organisations in 2003. Because of this preparation, Rabobank saw the credit crisis and its consequences coming sooner than the rest. The options for dealing with it were ready. The benefits of this way of working? A profit of €2.8 billion in 2008, at a time when others were going bankrupt. This was the result of assessing the signals and flags in a timely and correct way, long before the home loan industry crashed.”

VUCA: Volatility, Uncertainty, Complexity, Ambiguity

Scenario planning is an excellent tool to optimise responses to VUCA. The degree of uncertainty, volatility and variability in today’s world makes scenario planning more relevant to the board room than ever. “Look at what has happened to interest rates in the last three years. Central banks have increased interest rates to deal with inflation and the impact of the Ukraine crisis. Early indicators showed that the rate hikes would be moderate – but they turned out to be severe. Classic inflation is not the reason for the increase, it was the increase of oil and food prices. Anybody who would have included the high interest rate in its scenario planning two years ago would be well-positioned to reap business opportunities. Their management should have asked themselves the question: what if interest rates and loan cost go up way more than moderate? How can we proactively plan how we fix the high borrowing cost?”

A costly thing

That may be a costly thing to do. “Management should be prepared to act boldly and courageously, even if it means making the company’s performance in this quarter or the next one less rosy.”

In that way, looking into the future and acting upon it to reduce a company’s risk tolerance if there is an opportunity to minimise risks requires courage and the guts to act – and spend capital. For enterprises that have only just started to embrace scenario planning, the benefits of even a limited scenario planning exercise can be great – and very real. “In the webinar, it was interesting to see how relatively simple templates, such as the impact of a scenario in the medium or long term and whether there would be a positive or negative impact, quickly identified new perspectives.”

A role in board rooms

Von Widdern strongly believes that scenario planning will play a strong role in the future in an increasing number of board rooms. Scenario planning should be in the toolbox of any risk manager and his CEO, CFO and CIO. “Scenario planning and enterprise risk management are well aligned because they both seek to consider the impact of material future events on strategic goals. The better organisations are aware of the range of positive and negative outcomes and the relative speed and impact of these outcomes, the better they will be able to prepare and optimise their responses.”

For scenario planning to have an impact, a mind shift is required. Forget the quarterly targets and earnings; accept the need for more long-term planning. As Volker von Widdern puts it: “Look beyond all short term. Try to be more visionary, look at your strategic goals and think more of what you need to do to offer your enterprise stability in the longer term.”