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Uncertainty in business is nothing new, but in today's post-bubble economy, the stakes
are much higher. Missing something big isn't just about lost credibility -- it can
mean the end of the business.
Risk
As a finance professional, you know that a good financial model has to take into
account risk -- but what sort of risk? The risk that commodity prices are 10% more than
forecast, or the risk that all suppliers of that commodity in North America go bankrupt
in the same week?
Historical data doesn't cut it
The financial crisis has forced an abrupt change in the practice of risk management,
from sterile, "objective" computations based on historical data, to carefully
considered and rigorously quantified opinions by experts about "how bad it could
really get".
"... there has been a great deal of talk ... that this
widespread institutional reliance on VaR [Value at Risk] was a terrible mistake.
At the very least, the risks that VaR measured did not include the biggest
risk of all: the possibility of a financial meltdown."
read more about risk management in The New York Times
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html
The "Base Case" is dead
The customary approach to evaluating an acquisition, capital investment or business
opportunity is
to focus on a plausible, comforting view of the future embodied in a detailed "Base Case".
Risk or uncertainty is then handled as an add-on by looking at how variations in the
assumptions change the overall value, usually NPV. Most of the time, the variations
are small and the
results are reassuring. That's the problem.
A recent survey of CFO's by researchers at Duke University's Fuqua School of Business
sheds some light on the degree of change to be expected in this environment:
"The steep drop in capital spending is three standard
deviations below
what we would normally expect; advertising has been slashed by four
standard deviations. Employment is sharply lower -- 3.5 standard
deviations below normal."
read the Fuqua press release about the CFO Survey:
http://www.fuqua.duke.edu/news_events/releases/cfo_survey/
Scenario planning is a business necessity
Once a niche method for a few high-risk industries, scenario planning has been thrust
into the mainstream as leading companies realize they need timely, actionable
financial information that reflects current conditions and the full range of possible
outcomes. With this information at hand, contingency plans can be in place before
the unexpected happens.
"forward-thinking firms can provide inspiration ... more
companies should be using
"scenario planning" alongside their financial models, which do not produce a large
enough spread of possible outcomes to capture the flavour of today's uncertainties."
read the article in The Economist:
http://www.economist.com/business/displaystory.cfm?story_id=13184837
DPL is where your spreadsheet meets reality
With DPL you start from an Excel model, but then use an intuitive graphical environment to
overlay a map of the scenarios, as simple or complex as you choose. Contingencies become
an integral part of the analysis -- not a reason to abandon it as circumstances change.
DPL gives you the freedom to use what you know,
discard what you can't trust, and grab the analytical bull by the horns to build a
model of the future that stands up to your own skepticism.
Why waste your time building a model you don't believe?
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