Unlock your corporate geek: better forecasting


Recent events in Japan and the Middle East reminds us of the business axiom that better forecasting will lead to enhanced decision making and improved bottom line results.  Practically speaking, however, improving a firm’s forecasts and predictive capabilities is not easy due to many factors, including:

  • Cultural and management behaviors that do not encourage the rigorous analysis needed for effective forecasting; 
  • The lack of analytical competencies that compromises forecasting efforts and;   
  • A propensity for executives to sandbag – under promise, over deliver –  against targets.

Given globalization, ever-tightening supply chains and razor thin margins, companies increasingly have little room for error when it comes to forecasting key variables.  In a just-in-time world, small forecasting errors in consumer demand, earnings estimates or input prices can lead to major swings in profitability and market capitalization.

Fortunately, improving forecasting is within the grasp of most organizations.  However, it does require effort as well as a more complete analytical methodology.  According to strategy+business magazine, companies can enhance their forecasting skill by focusing on a few simple rules:

Pay attention to the range

When making forecasts, most companies look for single estimates of a variable – say demand, revenue or profit – that have the highest probability of success.  However, this is a flawed approach as chances of hitting the target (without financial engineering) is virtually impossible given that the target is usually an average of different estimates.  A more accurate and realistic approach would be look at the range of possibilities that over- and under-shoot the estimate and assign a probability of occurrence to each of them.  A range of scenarios provides more guidance than one target and will usually lead to a more realistic forecast than a single estimate.

Study history

As the maxim goes, history tends to repeat itself over time.  Yet, most organizations record little of their history and how they coped with events. Surprisingly, few organizations go back to earlier forecasts to understand why they deviated from actual results.  Taking a historical perspective would help executives uncover analytical errors, identify management bias, and question faulty assumptions.  Furthermore, taking a historical view would help avoid over confident predictions as well as provide key insights around strategy development and planning.

Tweak the culture

In many firms, developing forecasting capabilities is hampered by cultural factors such as bias, groupthink and laziness as well as a dearth of analytical skills.  To improve forecasting, organizations must foster new cultural practices including: knowledge sharing up and across the firm, critical thinking and continuous learning.   Moreover, companies could demonstrate their commitment by increasing training activities and tweaking hiring practices to emphasize analytical competencies. 

Explore the black box

The emergence of sophisticated computer-based forecasting models has led to many managers placing complete trust in the accuracy of the models, at the expense of understanding the business drivers behind the model or conducting independent analysis.  A false sense of security is created when management is unaware that the underlying cause and effect relationships of the model change. As a result, bad models lead to wrong forecasts.  To confirm model and forecast validity, managers need to understand the business drivers behind the models as well as confirm the predictions through independent analytical exercises.

Engage the crowd

Several studies have demonstrated that the wisdom of crowds is just as good if not better than an expert forecaster in predicting a future state. One way to leverage the acumen of the many is through crowdsourcing strategies.  For companies, these initiatives could collate the insights of a team of forecasters, a sample of customers or a variety of constituency groups including employees or suppliers. 

At the end of the day, using a number of approaches is likely the best way of reducing business uncertainty and coping with the traps around forecasting.  While there is no magic solution, improving the forecasting process is a reward in itself in that it forces companies to identify and plan for different possibilities including potential Black Swan events.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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2 comments so far

  1. […] Given the unexpectedness of Black Swans, managers needs to cast a wide net to identify potential disruptions to the operating model. To be comprehensive, this list should encompass every potential interruption across multiple geographies based on what co…. […]

  2. […] Given the unexpectedness of Black Swans, managers needs to cast a wide net to identify potential disruptions to the operating model. To be comprehensive, this list should encompass every potential interruption across multiple geographies based on what co…. […]


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