How scenario modeling can help you weather a crisis

On Thursday 22 July, CFO South Africa and Oracle partnered on a webinar in which Wayne Heather (pictured), Oracle executive director of enterprise performance management (EPM) product marketing, and Johan Pretorius, MTN general manager of EPM, explained how scenario modeling helped their respective companies achieve success during times of crisis.

Wayne shared what Oracle has been seeing in different industries and how the company has been helping some of its customers during these strange times. 

“Disruptive events are not new,” he said. “They’ve come around in many shapes, including the recession and 9/11. What we’ve found is that EPM really becomes front and centre in finance organisations during these times to help them remodel their business and be agile.”

What makes Covid-19 different?

Oracle started by looking at Covid-19 and what makes it different from other disruptions, highlighting a few key things: 

• High uncertainty
• High unemployment rates
• Largest stimulus packages in history

He also pointed out that none of the previous disruptions has had such a big impact on every industry at the same time. “No one knows what the other side is going to look like or when we will get there.”

Resilience + agility = survival

Because of the uncertainty, Wayne said that how you model though this crisis, how you survive, how you conserve cash, and how you plan and reimagine the business to come out the other side is very important. 

He explained that resilience and agility is very important when planning the future of your business. “According to a McKinsey report that has taken a look at many previous crises and what companies have done, it shows that resilient companies use the crisis as an opportunity to go forward. So if you’re agile or resilient within your finance office, you can probably understand your revenues and your cost impacts.” 

Once you have this understanding, you can add more resources to those revenue-generating operations within your business and start cutting costs in other places. 

Focus areas during the crisis

Back to the present, Oracle asked its clients what they were focusing on during the crisis: 

• More or less 75 percent are in the process of forecasting for multiple scenarios.
• Reimagining their businesses by developing KPIs that specifically address the issues driven by the Covid-19 economic downturn.
• Changing their long-term forecast assessment strategies to short-term rolling forecasts to change what they’re doing and to conserve cash. 
• Performing range-based forecasts rather than point-based forecasts. 

Managing uncertainty

In order to manage the uncertainty around the impact of Covid-19, companies have to try and model for different outcomes based on the things that they don’t know, like:

• How long will the pandemic last?
• Will we run out of cash? 
• Are debtors withholding payments?
• What shape will the recovery take?
• What is the impact on the supply chain? 
• How are customers’ behaviours changing?

“Being able to model those different scenarios and using simulations to help you iterate through hundreds of different variations of those models is something that our customers are looking at,” Wayne said. 

Industry cases

Wayne then highlighted the impact of Covid-19 on a few different industries:

Due to its capital intensive nature, companies in the oil and gas industry are looking at alternate funding options. There’s been a massive volatility in the oil market because people aren’t traveling as much and there’s an overstock of oil. Some companies in this industry are considering divestitures. 

The healthcare industry has seen a massive uptake in Covid-19 claims around medical aid. It has also been adversely affected by the unemployment, which has resulted in a decline in memberships. Companies in this industry are suffering revenue impact, but are also getting an increasing demand on Covid-19 patients and claims. 

The travel and transport industry is going through massive turmoil at the moment because people are working from home and aren’t flying anymore. People say that the travel industry will only get back to normal in 2023 and unemployment in the industry is massive. 

Companies in the retail and distribution industry are being forced to change their business sales models as a people are moving to online shopping. A lot of stores are closing as their sales channels move online. 

The real estate industry is dealing with massive rental defaults, which goes back to retail stores closing and not paying rent.

In the higher education industry, a lot of universities are not going to be offering physical classes until 2021, so they’ve moved their whole business to online. There’s a lot of incidental revenue around their campuses that they will be losing. 

Moving to short-term scenario modeling

Before Covid-19, Oracle customers would typically do long-range planning by looking at corporate initiatives, M&A activities and treasury initiatives. “Once they’ve set that high-level long-range plan, they push that down into the financial operational plan, which would typically be on an annually forecast basis,” Wayne said. 

However, this behaviour has changed since Covid-19, as companies are modeling in a shorter term instead. “They are modeling different scenarios for different entities or units within their business, be it different geographies or departments, and then quickly try to consolidate those to push it back into the planning and reporting cycle.” 

How is crisis planning different? 

Instead of modeling traditional marketplace assumptions, companies are focusing on revenue and the things that can impact that revenue, like supply chains, government stimulus, and tax credits. 

“The frequency of strategic modeling in times of crisis has also increased from yearly to monthly, weekly and sometimes daily,” Wayne said. “That gets pushed into the planning really quickly to understand what is realistic from a change perspective within the business, because it’s not good setting high-level strategies if you can’t push that down and get feedback from the group in terms of what’s possible and what’s not.” 

He added that, having that tightly integrated back office where strategic finance and planning is integrated, has delivered massive value to Oracle’s customers.

Surviving 2020

After introducing the MTN brand, Johan explained how the company’s CEO and CFO worked on a new strategy for MTN that focused on growth called BRIGHT. 

“After a period of decentralised leadership, the core reasserted its importance as the group started to leverage its reach and size,” he said. “For finance this also served as a reawakening as the subscription of cloud solutions offered by Oracle forced the rethink of the business processes and their impact.”

MTN compiled and rolled out a standardised chart of accounts that linked the group and its operations, as well as the financial and management reporting processes. Direct links between the business planning processes enabled MTN to rethink and reimagine the disclosures, reporting and information presented and used for decision making. 

Operating in a high risk environment

According to Johan, the secret of operating in a high risk environment is balancing the high risks with an appropriate reward. “Emerging markets with high growth rates are not easy to do business in, however, they present the opportunity to establish first mover advantage and to leverage learnings from other regions. Standardisation is critical in this process.”

He explained that in the past, 80 percent of time was spent on compiling reports. However, using standardised template processes and definitions, the analyses and exception handling came back into focus. “Starting with reporting also highlighted the data deficiencies, process enhancements required and bottlenecks. We were able to consistently measure and report on risks.” 

Reacting to Covid-19

With the new standardising initiatives well underway during 2018 and 2019, 2020 rolled around and no amount of planning and prudence could prepare finance and reporting teams for what happened next.

“Covid-19 presented a whole new realm of possibilities when it comes to unforeseen business impact,” Johan said. “Unlike financial or political crises, it has an inherently human impact. While government and business reactions have differed across the globe. The underlying human fear is the same.” 

Like all corporates, MTN’s knee jerk reaction was to conserve capital and cut expenses. “This wasn’t only limited to financial prudence,” Johan said. “As employees, we received bucket loads of sanitisers and had been asked to work from home. However, in isolation, these measures are not enough.”

Johan explains that a strong strategy should underpin your roadmap out of a crisis. “Because our own bases were covered early, MTN was able to raise our heads and see the external needs early in the pandemic.”

MTN’s strength during the crisis was its ability to respond to the human desire for connection in a time of isolation.