Scenario analysis for protecting and developing organisations

We're breaking down our new scenario analysis guide. This offers a practical framework for risk professionals to help them utilise scenario analysis within their organisations. 

Background

Using scenario analysis to analyse and generate responses to complex situations originated as a military technique. Oil company Shell also popularised using them within the civilian sector in the 1970’s, when the energy market began to experience instability. Since then, they have been continually used by military planners and have also attracted a dedicated, but somewhat limited following within the civilian sector.

Since the global COVID-19 pandemic – which was largely unexpected and unprepared for – it’s no surprise that more organisations are taking a greater interest in scenario analysis. War has also sadly returned to Europe (in Ukraine) and with this the march of ‘globalisation’ has stalled, if not reversed. If this wasn’t enough turbulence for organisations to endure, we’re seeing the emergence of technologies that could replace humans, and the widespread realisation that human activity is impacting the planet in unsustainable ways.

Guidance on scenario analysis for organisations

We’ve partnered with ORIC and Airmic to produce a brand new guide on scenario analysis, which you can access on our risk portal. Our portal provides a plethora of risk-related resources for professionals.  

This guide provides a practical framework around the use of scenario analysis in various forms, to help organisations make decisions across several areas likely to be of interest, whatever sector they work in.

Categories for strategic planning

Our guide provides a set of categories for different types of scenarios:

• The ‘event driven’ category – this enables an organisation to consider key up-and-coming events that may drive significant changes in the environment which they operate in.  
   
• The ‘financial driven’ category – this is primarily for individuals that hold finance positions and is perhaps one of the most common forms of scenario analysis currently practiced. It allows organisations to explore the financial viability and financial sustainability of any venture. 
   
• Similar to the ‘financial category’ and usually having a financial core is stress testing, however the emphasis is on business survival in the face of potential extreme situations. Stress testing has become widespread, particularly in financial institutions where it is a regulated activity. 
   
• The ‘behavioural’ category – this is perhaps the category that needs the most development within organisations, given modern companies need to be so much more mindful of the impact operations have on both employees, other stakeholders and society as a whole. 

Operational risk 

As we dig deeper into the use of scenarios for financial reasons, we enter the domain of operational risk. Organisations can have a set of standard scenarios they use and update to assess the strength and comprehensiveness of their internal controls. Here, as much of the control environment is common across organisations, accessing a library of maintained scenarios such as the ones developed by ORIC gives organisations an easy path to best practice.

Back-casting

The term ‘back-casting’ is used to describe a somewhat different approach to using scenarios - organisations start with defining a desirable future and then work backwards to identify events to make this a reality. Here, scenarios are not about predicting the future nor creating a future, the view is that developing scenarios exposes a range of plausible futures.

Using scenarios for resilience exercises 

This section in our guide is an important one, as many organisations have recently realised that rapid change (which characterises modern society) requires direct action to manage their risks, while also maintaining a robust resilience performance. 

Scenarios are developed as exercises that can run, either as desktop exercises or actual events, where all or just some of the organisation gets involved. Participatory exercises do present quite a commitment, but on the other hand they are often exercising responses to events that could end the life of an organisation. You can find more information on running these types of exercises on our risk portal. 

Where would scenario analysis be most helpful? 

When working with Airmic and Oric to produce the guide, we were mindful of two distinct environmental areas where scenarios and their analyses could be particularly helpful:

Climate-related changes - We identified climate-related changes as a key driver to pivot organisations towards sustainability, which we see in part through the organisational lens of Environment, Social and Governance (ESG). 

Creating better workplaces – We’re a leading player in the drive towards better workplaces, and see scenario analysis as playing an important role in the social area of the ESG lens. As experts in human resources and wellbeing, we would recommend scenario analysis for HR professionals who are currently working through what ESG means in relation to their area. 

How BW can help

We can help your organisation with any scenario analysis needs it may have, including framing or facilitating their development, running them for resilient development purposes and more. 

View the scenario analysis guide here on our portal, and you can get in touch with our experts via our services page.