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7 Sins that Undermine Your Clients’ Forecasts
June 19, 2012
Alan Radding, Big4.com Guest Blogger
(A book is the best way to build a consulting practice: ask about ghostwriting your book.)
Business forecasting is part of the basic blocking and tackling expected of every consultant involved in business, finance, and financial systems. Leading consulting firms keep white papers and web pages handy to show prospective clients how they address the forecasting challenge.
KPMG, for example, emphasizes its 3-D (Decisions, Data, Discipline) approach. BearingPoint calls it demand management and planning. At Accenture its CIO organization teamed with the Finance and Human Resources organizations to create the Integrated Forecasting Solution that promises to link revenue and contract cost information to supply and demand data.
To help you get your clients’ forecasts in gear, IBM suggests avoiding what it calls The Seven Sins that undermine forecasts. This paper by Steve Player and Steve Morlidge is summarized below.
Seven to avoid:
- Semantic confusion—difficult to cope with unexpected or unwelcomed forecast outcomes, usually the result of managers under pressure to conform their forecasts to that of their peers or top management. The problem results from semantic confusion, mistaking a goal (what management really wants) with a fact-based forecast.
- Visual impairment –unexpected developments, especially early in the fiscal year—maybe an unusually slow start to the yea—impair or confuse your vision and lead you to skew your forecast,. This results from a lack of flexibility and adaptability to changing conditions in the external marketplace.
- Delusions of accuracy—obsession with the accuracy of its forecasts. It’s nice when your forecasts are on target but hitting them 100% of the time is unrealistic. Failure to acknowledge or take into account normal variations in the marketplace in its quest for extreme forecast accuracy prevents the company from managing risks and hinders it from capitalizing on unexpected opportunities. Encourage your client allow for some healthy flexibility.
- Systemic overload—pressure to provide ever greater detail and additional analyses increases the workload without necessarily increasing the accuracy of the forecast or, more importantly, the quality of the analysis and insights that result. To the contrary, the volume of detail can obscure things like identifying key drivers. The underlying fallacy here is that more data is always better, which, when it comes to forecasting, is not the case.
- Prosperity syndrome –where forecasts always trend upward to reflect optimistic growth regardless of your client’s industry or underlying economic conditions. This can be another facet of shaping a forecast to please management’s expectations. The need here is for managers and their consultants to recognize a built-in and natural growth bias. It also requires an honest assessment—this is where you as the consultant come in—of your client’s key differentiators and how they will play going forward. An overly optimistic forecast could cloud executives to potential shortcomings in their product.
- Lack of coordination—this occurs when the forecast is compromised by various corporate functions engaged in conflict and one-upmanship. Again, this is where the outside consultant can play an effective peacemaker and honest broker role. One symptom of this is the dueling spreadsheets syndrome, when each group brings a spreadsheet presenting similar data differently for the purpose of promoting their agenda. This results from the failure of management to rally the organization around a single vision and strategy and to build and integrate a forecasting system that the entire company believes in and accepts.
- Asocial behavior—here analysts routinely manipulate and distort their forecasts even when doing so clearly is not in the best long-term interest of the company. This is also known as sand-bagging, stretching, and playing the game. Again, this results from a management that creates incentives ranging from kudos to bonus compensation, which rewards cagey game-players while punishing top performers. The solution is to create a culture that rewards people for the value they actually create rather than for pleasing forecasts that may or may not pan out.
As the outside consultant the most valuable role you might bring is that of the honest observer who can identify these sins and the underlying situations before they get out of hand.