Making uncertainties manageable - Risk-based Planning
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Ralf Heim, a corporate development manager, discusses incorporating risks into multi-scenario planning. He argues that traditional business planning uses deterministic assumptions that do not account for risks and multiple possible scenarios. Multi-scenario planning can model different influencers like market growth, competition, and exchange rate volatility across various scenarios to assess their total risk profile and effect on plans. Integrating data from sources like data warehouses, market reports, and workshops with experts can help generate more realistic scenarios. Risk-adjusted planning and dashboards can provide a more informed view of risks and support better decision making.
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Making uncertainties manageable - Risk-based Planning
- 1. MULTI-SCENARIO PLANNING INCORPORATING RISKS Ralf Heim Corporate Development Manager cundus AG
- 2. Actual Revenue in 2013 behind Plan 23 Jahreshauptversammlung 2012 The Volatility of the exchange rate shouldn‘t have been a surprise A WELL-KNOWN SITUATION? If that‘s the case… Why did we made such offensive strategy decisions? Also the competition from India has been discussed before
- 3. World of Planning World of Risk Management Planning and Risk Management don‘t speak the same language! THE „ARTIFICIAL TRUTH“ OF BUSINESS PLANING
- 4. THE BORDERLINE OF „DETERMINISTIC PLANNING“ 72,2 22,5 19,2 30,5 Asia America Europe InMotion Group Revenue in bn. €
- 5. THERE IS >1 SCENARIO FOR MARKET GROWTH 72,2 22,5 19,2 30,5 Asia America Europe InMotion Group Revenue in bn. € Market Growth 3 13 23 33 3 13 23 33 3 13 23 33
- 6. THE EFFECT ON THE TOTAL RISK PROFILE 72,2 22,5 19,2 30,5 Asia America Europe InMotion Group Revenue in bn. € Market Growth 3 13 23 33 3 13 23 33 9 39 69 99 3 13 23 33
- 7. MODELING THE TOP INFLUENCER INTO THE PLAN 72,2 22,5 19,2 30,5 Asia America Europe InMotion Group Revenue in bn. € Market Growth Competition 3 13 23 33 3 13 23 33 3 13 23 33 9 39 69 99
- 8. THE EFFECT ON THE TOTAL RISK PROFILE 72,2 22,5 19,2 30,5 Asia America Europe InMotion Group Revenue in bn. € Market Growth Competition 3 13 23 33 Exchange Rate Volatility … 3 13 23 33 3 13 23 33 9 39 69 99
- 9. INTEGRATION OF RISK ACTIONS 72,2 22,5 19,2 30,5 Asia America Europe InMotion Group Revenue in bn. € Market Growth Competition 3 13 23 33 Exchange Rate Volatility … 3 13 23 33 3 13 23 33 9 39 69 99 Action 1 Action 2 Action 3
- 10. THERE IS A LOT OF DATA THAT CAN BE USED DWH-INTEGRATION DWH CROWD-SOURCING MARKET DATA RISK ASSESSMENT WORKSHOP
- 11. UNITING THE „MARKET EXPERTS“ AT ONE TABLE cundus Broadwith Planning Gartner predicts the market to grow between - 1% to 5% Market Risk/Chance Evaluation Market Growth Estimation -1% 0% 1% 2% 3% 4% 5% Market Risk/Chance Evaluation Market Growth Estimation 14% 14% 14% 14% 14% 14% 14%
- 12. … AND CHANGE THE „WAY OF INTERACTION“ cundus Broadwith Planning Gartner predicts the market to grow between - 1% to 5% Market Risk/Chance Evaluation Market Growth Estimation -1% 0% 1% 2% 3% 4% 5% We expect a 1%-growth. And a 3% growth is more realistic then -1% Market Risk/Chance Evaluation Market Growth Estimation 14% 19% 23% 18% 14% 7% 5%
- 13. „SHAPE THE FUTURE“ & MATERIALIZE KNOW HOW cundus Broadwith Planning Gartner predicts the market to grow between - 1% to 4% Market Risk/Chance Evaluation Market Growth Estimation -2% -1% 0% 1% 2% 3% 4% 5% Due to conjun- cture forecast we see -2% more realistic then 4% Market Risk/Chance Evaluation Market Growth Estimation We expect a 1%-growth. And a 3% growth is more realistic then -1% 8% 12% 21% 17% 14% 7% 4% 17%
- 15. Plan 2014 revenue (TEUR) Risk-adjusted Planning DASHBOARD
- 16. Plan 2014 MCS result Delta 21 72 revenue (TEUR) 48 98 32 7 Risk-adjusted Planning DASHBOARD
- 17. Plan 2014 MCS result Delta 21 72 32 7 48 98 Risk-adjusted Planning DASHBOARD
- 18. Plan 2014 MCS result Delta 21 72 32 7 48 98 Risk-adjusted Planning DASHBOARD
- 19. Plan 2014 MCS result Delta 21 32 7 72 48 98 Risk-adjusted Planning DASHBOARD
- 20. KEEP THE FOCUS WITH MULTI-SCENARIO PLANNING… 23 cundus-Bandbreitenplanung auf HANA Asias Risk Profile looks pretty broad. We face high uncertainty there Risk-adjusted Planning DASHBOARD Okay. Lets build some market entry barriers, but also lower the quantity of this model Agreed. Especially in the coupe-market our new competitor might steal our share
- 22. Cockpit KPIs Date Market Growth Asia America Europa -1% 0% 1% 2% 3% 4% -1% 0% 1% 2% 3% 4% -1% 0% 1% 2% 3% 4% New Competitor Asia America Europa -5% -4% -3% -2% -1% 0% -5% -4% -3% -2% -1% 0% -5% -4% -3% -2% -1% 0% A Resource Prices B C -2% -1% 0% 1% 2% 3% -2% -1% 0% 1% 2% 3% -2% -1% 0% 1% 2% 3% …. B C … … … … … … … … … … … … … … … … … … A 4% 2% 1% -4% -2% 0% 3% 0% 2% … … … Revenue EBIT 14 54% in bn € 2.1 Confidence 46%
- 23. THERE IS A LOT OF DATA THAT CAN BE USED DWH-INTEGRATION DWH MARKET DATA WISDOM OF CROWDS ESTIMATION WORKSHOP RISK ESTIMATION SIMULATION SCENARIO CUBE COLLABO- RATION RISK MANAGER SCENARIO EXPLORER VALIDATION DASHBOARD EXCEPTION ENGINE
- 24. Industries (Excerpt) Yield Planning Techn. Inventory Planning Forecast Traffic load Stresstest- calculation Market Develop- ment Forecast CoRep-Data- Analytics Creditor Rating Sales Planning Corporate Risk Management Churn Prediction Demand Planning Resarch & Development Controlling Corporate Forecast Contract-bsaed Margin Volumen SCOR- Planning Chemistry & Pharma Banking Aviation Utilities Demand Forecast Investment Planning Net Capacity Planning Energy Generation Energy Trading Forecast Demand Planning Margin Simulation Collaborative Forecasting R&D-Invest- ments Distribution Planning Material and Inventory Mgm Manufac- turing Why Risk-adjusted Planning will gain importance!
- 25. Make Risk Management operational! Use the existing Risk Management Budget for a better integration into business planning and with that – into business decision #1 Success Factor: Understanding the Markets 74% of international CEOs are ranking the ability to understand market and their risk better #1 Factor for winning markets Avoid expensive Mistakes! React even in running „flight mode“. Simulate occuring risk and see potential reactions Promote Planning to be a Decision Enabler! Make Planning more then just a Plan vs. As-Is Comparison. Use the Scenarios to let Planning become a decision enable Increase Decision Competence in your Management! Building Scenarios has also „educational benefit“. The highest learn curve is the modeling of Scenarios Why Risk-adjusted Planning will gain importance!
- 26. … AND INTO THE INCREASE IN PLANNING MATURITY Stage 2 Stage 1 Stage 5 Stage 3 Stage 4 Kommunikationsprozess IT-Unterstützung des Prozesses Berücksichtigung von Szenarien Ad-hoc Diskussion Telefon / undokumentierte Meetings Absprachen entlang des Planungsprozess Word & E-Mail- Anhänge / Planungsordner Entscheidungen integriert und dokumentiert Integrierte Kommentare Weitgehend integriert und dokumentiert Kollaborative Prozessunter- stützung Berücksichtigung von Szenarien erst bei Eintritt Dreipunkt- schätzungen Planungswerk- zeug mit Szenarienverw. Nachgelagerte Betrachtung von Einzelrisiken (Wechselkurse) Risikoadjust. Szenarioplanung Abbildung Workflow Entscheidungs- prozesse teilweise abgebildet
- 27. - Albert Einstein More than into the past, I am interested in looking into the future – since this is where I want to spent the rest of my life „ „
- 28. OUR TEAM HERE IN INTERLAKEN 3rd RICHMOND FINANCE DIRECTORS‘ FORUM Ralf Heim Corporate Development Manager, cundus AG Corporate Strategy and Positioning of innovative Solutions in BI Ralf.Heim@cundus.de Jürgen Roider Senior Manager, cundus Switzerland AG Business Development and support of strategic accounts in Switzerland Jürgen.Roider@cundus.de Selim Oral Managing Director, cundus Switzerland AG Over 20 years experience in Business Intelligence in Switzerland in leading positions Selim.Oral@cundus.com
Hinweis der Redaktion
- Dear Finance Officers, I hope you a great first day at the Finance Directors Strategy Forum. I want to start the upcoming session by introducing 2 persons to you. My Name is Ralf Heim and I am Corporate Development Manager at cundus. My mission is to develop innovations helping us to follow our mission: Enabling Managers to better decisions. The 2nd person is a little bit more prominent then I am. Maybe you already recognized this gentleman. Right… this is Gerry Kasparov. The picture is one of the most famous ones in the world. It shows Gerry Kasparov in his game against deep blue. A Game hyped to be the „Man vs. Machine“ decision. The Game of one of the smartest persons of our time against a Software. At the beginning Kasparov made his moves pretty fast and confidence. But after some moves, he was getting slower and nervous. The number of scenarios and potential reactions was increasing. And… while for Kasparov had to think of endless actions, potential reactions and their impact on the game… ForThe computer just faced some 1000 Data Sets. In a critical situation, Gerry Kasparov lost control and made one wrong move leading to the first victory of a computer against a chess grandmaster. Due to Experts Gerry Kasparov lost for three reasons: The Computer was able to handle complexity better. Endless Scenarios vs. 1000 Data Sets It wasnt a game one on one. Gerry playd against many experts developing the software At a critical moment.. Under pressure… Gerry lost the overview over the potential scenarios and made the wrong move For me personally… in my youth… this was an inspiring moment. I made the decision that I wanted to work in the Area of Intelligent Applications… that I want to use the power of the computer to solve complex problems. Back today, over 15 years later, our computers are more than 1000x faster than Deep Blue was in 1997. Still, we haven‘t arrived there yet. Even in those fields, where the world is most complex and dynamic - in Business Planning – we still work with our „bare hands“. [4 min.]
- In our Projects, we often meet planners like Gerry Kasparov. Very intelligent persons, which know their Business and their market very well. And still, they often have to defend for plan deviation. In this case, our Gerry is Sales Manager at the InMotion Automotive Group. At the Annual Business Meeting, Gerry has to defend for the high plan deviations, especially in Asia. The Reasons are explained quickly: The exchange rate volatilities have harmed the asian business and the new competitor took a significant percentage of the market share. The CFO is not amused, but understands the arguments. Suddenly, some voices from his team appear. The Risk Manager states, that he has informed about the exchange rate developments in his risk report in Q1. Then somebody from the strategy departments speaks up: The Competition from the India Automotive Company has been issued in the Market Watch Report. Then – the CFO poses the important questions: If we knew all that, why didn‘t we react? Why didn‘t we plan with those developments? Why didn‘t we build up market entry barriers, hedge exchange rates, made better offers for our customers. Why didn‘t we use our knowledge? [6,5 min.]
- The Reason for the planning deficit of the InMotion Gorup was found quickly: Planning and Risk Management dont speak the same language. Even though, both have the similar mission to make an „uncertain future manageable“, they lack the same speak. The Plan here is the result of a complex process. In Bottom Up, Top Down or Bi-directional processes, numbers have been calculated, discussed, modified, validated and approved, discussed, improved, etc. A lot of knowledge was created in this process. Still, the result is very simple. As the result we see a table like this. Simple numbers. We are missing a lot of intelligence, which was created in the process. The results are just point estimations. In the best case, we find a comment at the site explaining the final opinion. We call this the „artifical truth“. Instead of accepting and managing the complex scenarios of the future, we neglect them by randomly chosing 1 Scenario. The Risk Management works different. Systematically, it collects the internal and external risks. It evaluates the risk in sth. which is called an issue-impact matrix, measuring the potential damage and the probability of occurence. At the beginning of a year or a quartal, it publishes the risk with potential measures in a risk report. Maybe our Gerry at InMotion Group even received the report. Even if he did, he couldn‘t connect the dots towards this report and his planning. Risk Management is just one example. We face further potentials. Marketing, Strategy Department, Business Development and many more departments own valuable data. At cundus, this got us thinking. So we startet a research project and the university of Duisburg-Essen. Our Mission: To use the advances of today computers to better support Business Planning. To learn from chess computers & many more intelligent applications, to see how we can get new ideas for Business Planning. For our research, we’ve received three Awards so far… [10 min.]
- Lets start with an easy example. Here we see the Revenue in bn. € of our InMotion Group divided by 3 Regions: Asia, America and Europe. Asia makes 22,5 bn. €, America 19,2 bn. € and Europe 30,5 bn. €. This sums up to 72,2 bn. €. So now lets assume, that… [11 min.]
- … there are more than just one Scenario for Market Growth in the different regions. So we build distributions. A distribution displays the risk profile of a KPI or in other words – its degree of uncertainty. A Distribution has two axis. On the horizontal we display the Scenarios. For example a Revenue of 50 bn. € in Asia. On the vertical we display the likelyhood of a scenario. This gives us an integrated perspective on the risk profile of a KPI. And here want to take a short break. Because here the advantages of Scenario-based Thinking clearly become visible. Just compare the Value of 72,2 with the risk profile you can see the „degree of decision support“. A number like 72,2 doesnt tell you much. When you are in a decision, you can just derive on insight from this number: „Am I on track or not“. This doesn‘t have much to do with decision support. Whereelse, a risk profile can tell you a bit more. It can tell you, how much this KPI is under risk. For example, you can define borderlines. Like here, we defined a Value @ Risk Area, which we painted red, in which we see those revenue scenarios in which wont cover the costs any longer. Additional, the broadwith of the distribution indicates where to focus on. Asia for example deviates inbetween x and y. This makes it a better objective for top management attention then the predictable european market. The Distribution focusses you on the point, where your attention can have the greatest impact. [15 min.]
- Now we aggregate the three regions to the Group Revenue. This is something we do with „Monte Carlo Simulation“. The Monte-Carlo-Simulation is famous for being applied in physics, engineering or… e.g. in financial trading algorithms. To make it easy: The Monte-Carlo-Simulation is to display uncertainties. The easiest example is the dice game: You throw a dice. This dice has the numbers 1 to 6. If its a fair dice, all numbers have an equal likelyhood. So if you throw the dice 1000x and take the sum, you‘ll probably end up at 3,5. Because, 1,2,3, 4,5,6 are all equally distributed. The Monte-Carlo-Simulation does sth. Similar. Depending on the distribution it combines different results of Asia, America, Europe to shape the resulting distribution curve of the Group. We do the same with the scenarios for Influencing Factors like Market Growth or… [17 min.]
- New competitors… also here we integrate the scenarios for the market growth with those of our market share – considering competitors. As you see, the new competitor heavily influenced our distribution. In this example, the possibility to make more then z bn. € Revenue strongly decreased to a market entry of a new competitor. [18 min.]
- Also the next risk shows its impact There are 2 simple reasons for what we want to achieve with the tool. First, we want to make Planning a Decision Support Tool. Today Plans doesn‘t really support decisions. They just tell you, if you meet you are on track or not. So, if you need to be better or not. The Planning tool doesnt support you, in what you can do better or how to improve your KPIs. [20 min.]
- So how can we use Scenarios to enhance our Decision. Last year, I spoke to a Retail CFO at a SAP Conference. He poses an interesting use case. He said“ for me would be most relevant, that I can chose the Scenarios I want to avoid… This could be the red area here. We prepared that case.. We integrated our Planning Solution with SAP GRC – a Risk Management Software. We had now total integration. The system connect the dots. The complexity lays within the engine. Imagine the following: By clicking on one bar, you can drill down into the underlying scenarios in the regions and from there, you can see, what r And we can get back to one single view on normal numbers. [23 min.]
- A lot of data, we already have within different data sets in our company. We just have to find the right data nuggets. GRC-Software, CRM, etc. Another important factor is market data. 90% of available data was constructed in the last 3 years. But the most important factor: [26 min.]
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- A Technique learned at the European Central Banks
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- 42 min. So how can we use Scenarios to enhance our Decision. Last year, I spoke to a Retail CFO at a SAP Conference. He poses an interesting use case. He said“ for me would be most relevant, that I can chose the Scenarios I want to avoid… This could be the red area here. We prepared that case.. We integrated our Planning Solution with SAP GRC – a Risk Management Software. We had now total integration. Imagine the following: By clicking on one bar, you can drill down into the underlying scenarios in the regions and from there, you can see, what r
- 46 min. Wir haben Ihnen heute den Anwendungsfall der Absatzplanung am Beispiel Automotive vorgestellt. Grundsätzliche ist die Methodik aber auch für zahlreiche Anwendungsfälle wie Investitionscontrolling, Chemie-Produktportfolio-Bewertung bis hin zu Anwendungsfällen wie Stresstest-Kalkulation in Banken und Zentralbanken denkbar. Dazu haben wir auch bereits Gespräche geführt.
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