In defiance of forecasting accuracy
Yes you are reading it right – this is not a typo. We will not be putting up a defence for accurate forecasting – rather build up a case in defiance thereof! Counterintuitive as it may sound, there is a growing body of corporate wisdom that is finding little merit in driving accurate forecasts. Rather the thought is to invest in organizational resilience in an inescapably digital world to respond to various stimulus on a near real time basis. We are writing an ode to the forecasting accuracy and moving into a world of dynamic decision making.
Two reasons attribute to this change in mind set:
a. External factors: Digital is now getting embedded as the life “chip” in our corporate DNA. Rapidly, radically, repeatedly, reliably. With the front end of the business delivery getting increasingly digital (think of tourism industry) and the new digital business models emerging every day (think of Netflix), the enabling functions have but no choice in making their makeover. In this digital age, the horizons of planning have shrunk to keep pace with the dynamism of customer demands. This has resulted in long range planning becoming more an academic exercise for external representation, while operational planning is scheduled through smaller sprints keeping pace with the changes in market stimulants.
b. Internal factors: Digital world demands digital dexterity in a highly interconnected eco-system. A Blockchain denominated trading cycle relies on an ongoing consensus model to make it tick. An IoT linked Supply chain builds its worth through real time exchange of information backed up by a deep learning analytical model. At the heart of such systems is the concept of real time agility to make sense of the data traffic and rehash the forecast to seize a new emerging opportunity or build barricades for an impending alert. In this world, bemoaning about the accuracy of forecasts seems to have become an academic construct, what seems more important is the ability to rapidly roll out a change to the last estimate.
Some of the key actions that organizations can undertake to get ready for this reality are discussed below. While a change of this magnitude will need careful planning and execution, life will not run in slow motion and early starters will have an advantage.
- Re-define business cycles - with an increasing appreciation that business cycles will now get measured in days and not quarters / years, organizations needs to consider redefining their operating routine of planning cycles for business. Some of the businesses such as e-Commerce have long started planning in days – it is a matter of time before others catch up. Being able to nail down the key drivers that matter for a ~ 80% reliable forecast and being able to have data inputs on a regular basis to influence the drivers – is likely to be far more important than worrying about a longer horizon forecasting accuracy. This may need a rewiring of the internal finance systems and data protocols and a decided change in mind set.
- Drive a change in mind set – Planning and Forecasting teams are habituated with elongated forecasting cycles that run into weeks and months and lose relevance within days of rolling out due to the nature of modern business cycles. Fretting over missed forecasts is a part of classical FP&A DNA. The digital world is likely to demand organizations to build up a mindset of a recent immigrant in a new country – who has to fend for him/herself every day! This requires a practice of identifying the key metrics, setting up a rigor of measurement every day, developing a deep understanding of key metric drivers – and be able to contextualize the forecast to the pattern of the day. Making this mental switch is a key success factor.
- Invest in digital solutions – Running an agile forecasting cycle and being able to refresh forecasts real time requires investment in digital solutions that promote integrated business planning and data mining. Arguably many of the inputs for forecast refresh will come from external unstructured data – and hence the ability to integrate the external insights into the internal routines becomes a key ingredient. Many of the ERP vendors offer cloud based integrated planning solutions and stitching the ecosystem together will require some planning and efforts. There may not be a discussion for a business case for this – not being able to do real time forecasting may make the business go out of business altogether !
- Manage external world – the external world of regulators, bankers and investors may require forecasts in different horizons as per their respective norms. Managing these external demands would require organizations to be on their toes on the long term strategic vision and being able to narrate a story that explains the forecasts and variances. The challenge will be to blend these two approaches – a longer term visionary forecast for certain stakeholders with an operating level agile forecast to run the business. Leaders need to be able to display the traits of a master story teller – backed up by data and analyses that blends the two approaches seamlessly. Not an easy task to do – but definitely a skillset to build for the future.
- Focus on resilience – at the end of the day, what truly matters for a successful forecast is the ability for it to feed into the organizational resilience. No matter how much of science is invested behind making an agile forecasting system, if the organization is not able to leverage it to benefit all its stakeholders, the purpose itself will be lost. That is why organizations should consider investing its efforts in contributing to resilience building in the organizational culture. This is a C-suite task and requires mature allocation of capital based on what it takes to build the bench strength and agility to respond to needs of the market. CXOs of the future are likely to need to focus more on resilience building than worry about missed forecasts – at least on an operational level.
In the last decade, enterprises have spent time in building models around analytics – focused largely on what has happened (diagnostic). With the rapid changes in business models, the demand now is for a focus on what will happen (predictive) and what should the organizations do (prescriptive). The discipline of financial forecasting also needs to reflect this change. The new age CFO will need to demonstrate digital savviness and drive a sense of urgency in the organization to focus on the right parameters looking ahead – and be able to predict with precision on the day next and secure organizational resources to respond to the stimulus. That is not just an ask, but an imperative in the digital future.
Authored by Soumen Mukerji, Partner, Deloitte India