Updated: May 29, 2021
The two-sided economic shock faced by the Canadian energy sector is driving the possibility of permanent systemic impacts in communities and businesses. Predicting what and how severe those potential impacts could be is a challenging task, but necessary to understand in order to plan for a successful, long-term recovery. To deal with market uncertainty and develop the appropriate strategies required for survival, more companies are actively turning to scenario planning. While scenario planning was used as a tool pre-pandemic, its acceptance and usage was limited. This has certainly changed now as more companies look ahead to plan for what the future could hold.
I recently spoke with a number of oil and gas producers, pipelines, oilfield services and power and utility companies to gain insight into how scenario planning has evolved to assist businesses through COVID-19, and how it’s set to change going forward. While not all have experienced an uptick in application, many high-performing companies have shifted the way they do things to accommodate for more frequent and ongoing scenario planning practices to understand how best to move forward.
Leadership changes that are driving successful scenario planning
A senior executive at an energy infrastructure company said, “scenario planning was once viewed as a nice to have and is now viewed as critical.” Many others said the same, adding that leaders have shown an increased interest and engagement in exploring future realties. There’s been a greater acceptance and understanding that scenario planning needs to be done frequently to review different scenarios with enhanced speed and agility — moving from an annual process to an “in-the-moment” approach.
Additionally, risk management is no longer considered a backroom exercise, but as an integrated process that needs to be part of the strategy formulation. Organizations explained how risk is being approached differently and more creatively to explore an increased number of future options — both worst and best case. Considerations include multiple waves, wider and more extreme options and more dramatic possibilities. Scott Matson, former CFO of Horizon North Logistics shared, “businesses need to run scenarios on an expanded basis with wider riverbanks.”
Enhanced business benefits from scenario planning
The changes to action more frequent, enhanced scenario planning allows these companies to drive several benefits as illustrated in my new benefit model below.
Beyond greater nimbleness, innovation, assessing uncertainty and educational learning, there are four benefits of scenario planning that stood out consistently in our conversations:
Strategy validation and testing: Ensure that all elements of the strategy are being properly tested, exploring what may be missing or how to make it more relevant for potential future states. Scenario planning forces companies to take a step back to consider where they want to go and how to get there. For energy companies, it also helps to test the business portfolio — often a mix of different procuring upstream wells, pipeline and refining assets — to understand how it’s weighted for future success.
Complex decision making: Improve the quality of decisions by having a more fulsome understanding of the consequences supported by facts and data. Matson said, “scenario planning helps you with the known-knowns, known-unknowns and unknown-unknowns. CEOs often go on gut and this forces you to think beyond that by understanding the riverbanks.”
Risk management: As a midstream executive said, “scenarios are about understanding your external risk.” Scenario planning can help expand the possibilities of future risks — including those that are strategic, potentially high-impact or those that could damage the organization — and help build shock absorbers so that they are better prepared for risks as they arise.
Option analysis: Help the organization consider a broader set of ranges and boundaries — both internally and externally. The CEO of Cona Resources indicated how scenario planning has helped the organization consider a “reasonable band of ranges, sometimes modelling the most dramatic.” Another company explained how scenario planning prevents business units from putting forward the cases that strictly benefit their business, forcing the organization to think more holistically and enterprise wide.
The practice and application of scenario planning to deal with today’s complexities and uncertainties is gaining traction — and rightfully so. It helps create a long-term strategy that is validated and stress tested for uncertain markets, while helping executives to prepare for a wide set of unforeseen risks (like COVID-19) that could happen in the future. Regardless of sector, all companies should consider making changes to their strategy approach to reap the benefits of scenario planning for long-term recovery and future success.
Authored by Lance Mortlock (Senior EY Strategy Partner & Haskayne School of Business Visiting Professor).
Thank you to all of those who shared their thoughts and experiences. For more information on how to evolve your scenario planning strategies, please connect with me directly. And look out for my new book “Disaster Proof” in the New Year, which explores scenario planning in a post-pandemic future.