Scenario planning: insuring against the future

One of the on-going challenges for CRE executives in managing corpo­rate portfolio performance is trying to forecast the future needs of the company. We all know that it is not possible to predict the future. But this is no reason to be caught out – it is possible to plan for a number of futures.

This is the basic premise behind scenario planning – painting pictures of a number of possible futures based on key inputs that are likely to result in different futures. The portfolio implications can then be analysed linking the size of the portfolio to company needs based on these futures. Based on this range of needs, alternative exit and procure­ment strategies can be identified and negoti­ated into new contracts. These can then be implemented as required, as the actual future unfolds.

This portfolio scenario planning is fo­cused on modelling two key dimensions – firstly, the key uncertainties that will im­pact future company needs. And secondly, the control which the company can exercise over its business needs and the portfolio it controls. To be robust, this planning process will require meaningful input from senior management with deep industry knowledge as well as bigger picture future thinkers.

Rules of the game

Step one of the process looks at what is known and what is fixed. This part of the process essentially determines the ‘rules of the game’ based on relatively certain inputs over which there is limited or no control by the company in the short term. Inputs and considerations reflect on the company’s cur­rent products and service, its core compe­tencies and priorities, as well as those of the competitors in the market.

This analysis is set in the context of the life cycle of the products and markets, as well as the company’s resource base, includ­ing workforce and management, systems and processes, intellectual property, existing owned and leased assets and, ultimately, the company’s financial capabilities. Moving into the portfolio analysis requires an over­view of the current portfolio of properties and leases as well as the current market con­ditions, identifying how these support the core requirements of the business. At the end of this step it is expected that there will be a clear understanding of the company, its resources and competitive po­sition in the industry.

Key uncertainties and scenarios

Key uncertainties are the focus of step two. What are the uncertainties about the future and what may happen, over which the com­pany has no control? This is by its nature fu­ture-based thinking and is often considered too fuzzy to be meaningful. It is important to maintain the right perspective. What are the key future uncertainties inputs that may emerge in medium- and longer-term hori­zons that will significantly impact the busi­ness?

These uncertainties may include aspects such as global unrest and cultural tensions, demographic changes, shifts in trends and tastes, new emerging technologies and meth­odologies, the price of fuel and other key inputs, existing and emerging competitors, future financial and economic constraints, and the like. Each or all of these aspects may have significant impacts on the business landscape in which the company operates.

Based on these uncertainties a number of scenarios combining various uncertainties are developed and articulated as word pic­tures. These should be developed as realistic scenarios, should not be limited by current thinking, trends and existing limitations but should be limited to three or four. These scenarios are not an attempt to definitively predict the future but rather to create word pictures of the various future business oper­ating landscapes.

It is then in response to these scenarios that the projected business portfolio needs and the existing owned and leased assets can be mapped. Ideally, this analysis should graphically reflect both the size and time parameters of the existing sub-portfolios into the future. Included will be lease ex­piry dates; renewal, expansion, cancellation and contraction options; new project com­mitments; and projected obsolescence and planned asset exit dates. The three or four future scenarios business demands are then over-laid onto the existing and the planned portfolio commitments. Imbalances then be­come immediately apparent.

This is the main advantage of this process – clearly being able to view the future im­plications of the portfolio of properties and leases mapped against the different demand scenarios. The short-falls and excesses in the portfolio are clearly evident, enabling clearer real estate strategies and objectives to be structured to be able to respond to a number of futures.

Options and strategies

Step three is still about the future, but looks at those decisions that are under the control of the company. This is all about ideas and possibilities and requires an open mind and innovative thought processes. But it is im­portant that the options and strategies emerg­ing should clearly reflect those actions over which the company will be able to exercise control now and as it moves into the future. These are the portfolio instruments and ar­rangements that can be called on in order to respond to the various futures identified as, and if, they unfold.

These portfolio responses may cover a range of aspects and alternatives, including possible non-asset based solutions; innova­tive leasing instruments including contrac­tion, cancellation and call options; new project roll-out plans; own-versus-lease strategies; workspace re-design for flexibil­ity and adaptability; and multi-use strategies across sub-portfolios.

The outcome of stage three is therefore a shopping list of realistic portfolio options over which the company is able to exercise control into the future. The problem is, how­ever, recognising the company’s financial limitations because all these options will soak up financial resources in various lumps. The planning process now moves into option prioritising and portfolio optimisation

Portfolio optimisation

The final step in the process links back into the certainty of the present and those re­sponses over which the company has con­trol and is able to act. This requires detailed analysis of each of the options and strategies identified in step three. The analyses look at the risk and reward of the options and the ability to be able to respond to the require­ments of all the various futures. The total financial implication of the combination of chosen strategies needs to be determined. Provided the financial requirements are within the company portfolio financial re­source constraints, this should represent the optimum portfolio plan.

This stage therefore determines those im­mediate actions that need to be put in place to be able to respond to the various future scenarios. It is important that the strategies making up the optimum portfolio plan are able to respond, to lesser or greater extents, to all the identified possible futures. It is a mistake to structure the plan to respond to only one of the futures – this means that the planning process has fallen into the trap of predicting the future. And we all know that this is not possible.