July 28, 2014

Forecasting misunderstood

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Anyone who has ever been involved in working with the financials of a company, in any capacity, has had to deal with forecasting.  Whether establishing the AOP or identifying manpower requirements, there’s a need to project (meaning “predict”) future needs, associated costs, and their impact on revenues since Revenue – Cost = Profit.

Harry's Forecasting Stone

Much like Gary’s stone, there’s often a failure to understand what forecasting is.  Gary’s stone isn’t doing any forecasting – it’s reporting actual conditions.  Reporting is a statement of the facts, forecasting is a prediction of the future.

When asked to forecast, however, a lot of managers will tend to drag their feet and stall, especially if there’s bad news involved.  In the worst cases, they’l sandbag estimates and deliver less-than-accurate forecasts until the situation has passed, and all that’s left to “forecast” is the actual cost history.

This situation is usually indicative of an environment where planning is scarcely more than an afterthought, and fire fighting is the norm.  Forecasting has to do with long-term vision and strategy, measurement, and learning.  Focusing on reporting without planning leads to delayed information and chronic “hot buttons” that require immediate attention.

When this occurs, the PDCA cycle is simply broken.  The end result is a system where the people in the organization are in a constant state of “Do!” and “Act!” without any sense of why they are doing anything, or if their efforts have actually caused an improvement.  There’s certainly no ability to measure against plan since it never existed, and everything is left to subjective interpretation.

What a forecast is: a best-guess assessment of likely events, that determine needs, which are expressed as costs.  They form the basis for determining what activities will occur, and generate a mark against which those activities can be measured.  A forecast is not an iron-clad, crystal ball prediction of future events.  Believing it is so causes the foot-dragging and unwillingness to make an estimate – not to mention senior managers who expect forecasts to be achieved to the penny.

So how can we create better estimates?  Look for my thoughts on that in an upcoming post.

 

 

 

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  • R Ganesh Muthiah

    Hi David, 
    I used to do a lots of Forecasting for contact center. mainly forecasting call value and resource plan.
    Reflecting the past, i you are right when saying most consultant or trainers teach us how to DO and Act. Seldom i’ve come thru article seeking managers to register the accuracy of their forecasting.

    I look forward for your next post on :”How to estimate better” Its was used to be a  subject close to my area of expertise.

    Thanks for blogging this topic.

    Regards,
    Ganesh

    • http://myflexiblepencil.com David M. Kasprzak

      Thanks again, Ganesh! When you have lots of accurate, past historical data to draw from, forecasting can be easier. When you are entering into unknown territory, it gets quite a bit more difficult. Still, if a forecast is perceived as just the best possible guess at a point in time, there’s a way to go about it so that learning is enabled and future forecasts have less inaccuracy.

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  • http://www.jamieflinchbaugh.com Jamie Flinchbaugh

    I think one of the problems with forecasting (semi-educated guessing) is that it is based on assumptions that we never test. There are some fundamental assumptions about the market that you must make for the past to be an accurate predictor of the future. The real problem is when those assumptions are no longer accurate. Too often, we look at the past as the only predictor of the future, without stopping to question which assumptions are still true, and which are not.

    Part of forecasting should be to make the working assumptions visible, and to challenge them with some frequency. When the assumptions change, so should your behaviors.

    • http://myflexiblepencil.com David M. Kasprzak

      Thanks for the response, and I agree absolutely. All estimates are based on underlying assumptions. As you said, it’s not the number that matters – it’s the reason behind the number.

      There are really poor situations where people won’t make their assumptions known, because all that occurs is criticism and ridicule. There’s never any guidance up front, only post-hoc blame when things go wrong. Of course, when things go right, the assumption are hailed as insight. Usually, though, they are just lucky guesses.

      Forecasting, combined with later reporting, should really be taken as an exercise in hypothesis testing, and an opportunity to learn.

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