Preparing forecasts is an integral part of most jobs these days, even if it is just how much available capacity there might be on the machine tomorrow, and how best to fill it.
Most forecasting I see is based on the financials, and is one of two methods: The ‘spreadsheet method’, where 4.5% is added across the board, and bingo, a forecast. Easy. The second method is driven by numbers of a different sort: the Net Present Value equation, the present discounted value of forecast future cash flow, which is more often than not driven by spreadsheets with hurdles imposed.
Neither is much good by themselves.
More recently, a range of pretty sophisticated modelling tools have become generally and cheaply available, which despite their sophistication, still have to be fed data and assumptions to spit out an answer.
Effective forecasting takes in a range of qualitative factors, some of which can be massaged into the algorithms, with the caveat that they then have some sort of relative weight applied.
- A realistic assessment of the resources required to reach an objective. Of increasing importance in this calculation are the capabilities of the people required to deliver the outcome.
- An assessment of the strategic, competitive and regulatory environment in which the forecast lives. Generating forecasts without due consideration of a range of factors external to the business, over which they have little if any control, becomes little more than wishful thinking.
- An assessment of the impact the successful initiatives will have on the external environment, particularly competitors. I see way too many forecasts that ignore the simple fact that competitors will not sit still while you eat their lunch. Failure to adequately anticipate and accommodate their reactions in the tactics to be deployed, and their forecast outcomes, is just plain dumb.
- A continuous and rolling After Action Review process. This process ensures the impact of tactical actions can be assessed, and the lessons applied to following forecasts. A forecast should be a ‘living’ document, something that accommodates, adjusts and builds on the facts and changing circumstances as they emerge.
Back in the day when I ran large marketing departments, forecasting was a key part of any project plan. When product managers came to me with their forecasts, I was not so much concerned with the numbers, as I was with the assumptions included and the relative weights of those assumptions. I also insisted that any forecast had three components, a best case, worst case, and forecast case, prepared separately, with different weights allocated to the variables. This gave us a range with which to work, and importantly, ensured some thought had been put into the implications of the ‘pear-shaped’ outcome.
The disturbing thing was always how inaccurate our forecasts were, no matter how hard we worked. This does not mean we did not try hard enough, simply that telling the future is a challenging task, not to be undertaken lightly.
Once again, my thanks for the header to Scott Adams and Dilbert.
