Unlocking the hidden value of forecasting
*Alec Finney, principal at Rivershill Consultancy, explains how forecasting discrepancies can enable better business decisions*
By on Jan 10, 2011Alec Finney, principal at Rivershill Consultancy, explains how forecasting discrepancies can enable better business decisions
Its the classic forecasting conundrum: Senior management presents an idealized target that forecasters are expected to match, without sacrificing the principles and rigor of their craft.
The result: Top-down targets and bottom-up forecasts frequently dont alignand forecasters take the flak for it.
Sometimes, the bottom-up forecast from skilled, intelligent, dedicated people doesnt meet the [top-down] number, and we have to deal with that in an adult way, said Alec Finney, principal at Rivershill Consultancy, at eyeforpharmas Pharma Forecasting Excellence summit in Zurich.
The bad way to deal with it is to say to the forecaster, Re-engineer your forecast to make those two numbers the same.
And yet thats often what forecasters are asked to do.
The tension that ensues has led to some negative myths about forecasting, such as the myth that the time, energy, and money that goes into forecasting doesnt match the output or that senior managements desired level of forecast accuracy is always attainable if the forecasting team was better.
In fact, Finney argues, its the structure and expectations surrounding the forecasting system that need an overhaul.
Discrepancies, if grappled with seriously, can illuminate problems or opportunities and enable better business decisions.
We have to get the hidden value of the [forecasting] process into the quality of business decisions we make, said Finney.
(For more on bottom-up versus top-down forecasting, see The advantages of total market forecasting; for more on aligning forecasts, see Forecasting: Aligning marketing and operations.)
Accuracy isnt everything
To unlock this hidden value, a mentality shift is in order.
Forecast accuracy has been a dominant theme for the past decade.
Forecasting departments buy more and more data and slavishly follow their KPIs, all to generate whats perceived as a more accurate number.
Of course, Finney reminds us, theres always noise in a data set, and often seasonality, and fluctuations that make shooting for a perfectly accurate forecast an unrealistic endeavor.
Concentrating totally on accuracy is like trying to melt an iceberg by heating the tip, said Finney.
Instead, companies should recognize that forecasts are meant to be the things you love to hate, the squeaky wheel that questions your ambitions and assumptions and, in so doing, pushes you to a more sound place.
The forecasters job is to mitigate those unrealistic expectations, Finney said.
It sounds dreadfully unsexy [and] dreadfully mundane to say to a project champion, How on earth are we going to get that rate of compliance when it has never been achieved anywhere in the history of this therapy class or these products?
But thats what forecasters are supposed to do.
Getting senior management buy in
Creating this expanded space for and understanding of forecasters can be a sticky proposition.
The first key, says Finney, is to get senior level sponsorship.
If we havent got the senior stakeholders understanding about whats going to be delivered, what the process is and what the outputs will be, we may as well not start, Finney said.
Once senior management has bought in, Finney says its crucial to understand the current mood that surrounds forecasting inside a company.
The way Finney and his Rivershill Consultancy team accomplish this is through an internal audit.
They contact everyone involved in the forecasting processcreators, approvers, users, financial planners, etc.and ask them to fill out a questionnaire that prompts discussion about key topics, such as the forecasting environment, for instance, and how analysts feel.
Do they have the right tools and the right training?
Do they feel they have a space at the table? Are they listened to?
They ask about the business process: Who owns it? How well is it documented? What are the clear rules and responsibilities? Whats the internal governance? Is there a quality assurance process in forecasts before they go to the portfolio review committee?
They ask about capacities and capabilities: Do people have the right skills and the right knowledge to deal with risk effectively?
We need to know whats right and whats not working, and whether [people] are getting the information they need to make decisions, Finney said.
Strategy is more important than implementation
To turn this cacophony of opinions into a coherent strategy, Finney and his team analyze the questionnaires for inconsistencies, polarization, and outliers.
Everything might be fine except for one person, and if thats a senior vp in charge of a particular business process, youve got problems, Finney said.
The team then turns the analysis into a benchmark of what the company excels at, what it struggles with, and areas where it gets by but could improve.
Finally, the team creates a set of prioritized actions and discusses with the company how best to implement those changes.
Finney stresses that strategy is ultimately more important than implementation, uprooting the old saying that a bad strategy well implemented is better than a good strategy poorly managed.
If you have a poor strategy and a good implementation plan, you can hardwire all the bad things that a bad strategy can give you into the way your business works, Finney said.
Nonetheless, its important to work with a company to make sure the implementation plan is in line with its priorities and business vision.
The result, Finney says, is a coherent strategy overhaul that, unlike piecemeal changes, creates a more effective forecasting system.
Were bringing forecasting down from the ivory tower, where its an intellectual game, Finney said, and making it something that can really impact how a business proceeds.