When making decisions, managers should not rely only on information about what happened in the past. They also need information about what they believe will happen now and in future. Effective decision-making is driven by information, information about the past and information about the future. This information is often created through the process of forecasting. Without this information, management is no more than guesswork.
In today’s volatile and uncertain environment, it is difficult for any organization to survive without some sort of ability to anticipate. Simply forecasting better is not enough. You have to know what actions to take if the picture your forecast point is negative. Thus you need to clearly understand the link between forecasting and decision-making. Bad or poor forecasts can misinform decision-making and derail the company.
It is a known fact that no one can predict the future with certainty. Instead, good forecasting is about systematically and logically amassing information to give managers forward visibility of likely outcomes, potential risks and opportunities. If your organization’s forecasting process is not granting you the clear visibility you need to make informed decisions, this is a sure sign that the process is broken and needs repairing. While the importance of forecasting is well documented, in practice it is rarely performed well, sometimes with disastrous consequences.
In their book Future Ready: How to Master Business Forecasting, Steve Morlidge and Steve Player point out seven common symptoms of forecasting illness that need fixing and these are:
- Semantic Schizophrenia. This refers to confusion about the aims, purposes and characteristics of good forecasts. Organizations suffering from this condition often find it difficult to cope with unexpected or unwelcome forecast outcomes. In these organizations, bad news is not welcome. Instead, leaders want to hear only good news. Thus instead of producing forecasts that reflect the truth, employees tend to produce forecasts that reveal what managers want to hear to avoid being yelled at. These employees believe they are always fighting a losing battle hence producing forecasts that makes the managers happy. If they deliver forecasts with bad news, the level of stress associated with this is astronomical hence delivering good news only minimizes these stress levels.
- Single Point Tunnel Vision. This is an unhealthy obsession with a particular forecast number. Everything that lies outside this particular forecast number is considered wrong and the more precisely it is stated, the more wrong it will be. In these organizations, executives are always debating about what the forecast numbers should be. There is no thinking outside boundaries and assumptions are not challenged often resulting in poor judgement and decision-making.
- Delusions of Accuracy. This is the mistaken assumption that it is possible to be perfectly accurate and that lower errors are representative of better forecasts. Managers are obsessed with achieving forecast accuracy and people feel that they will be punished for getting forecasts wrong. When forecasting, it is important to know that forecast errors are inevitable. There will always be error and sometimes the error will be greater as a result of the factors that are outside the control of the individual performing the task. It is therefore critical to make a distinction between error that is the result of random fluctuations and error that may be the result of poor forecasting. Good forecasts have a reasonable margin of error factored in.
- Nervous System Breakdown. This is a misguided attempt to improve forecasts by going into more detail and analyzing forecasts obsessively. Are your organization’s forecasts way too detailed? Is there always pressure to provide more details and more analysis? In today’s world of big data, it is imperative to understand that having more data does not always mean better decision-making. At the same time, more and more analysis does not mean revelation of the truth. Remember all forecasts are made up of assumptions rather than facts. Thus if the majority of your assumptions are wayward, no matter how much analysis you do, wrong decisions will be made with devastating consequences.
- Visual Impairment. This refers to the failure to provide enough forward visibility and discern trends in performance. Organizations that suffer from this problem focus entirely on the year-end forecast numbers to the marginalization of everything else. There is significant inability to see beyond the year-end, track trends and therefore make reasonable projections. This inability to see beyond the financial year-end often results in these organizations becoming vulnerable to shocks in the early months of the new financial period since they do not have sufficient time to take defensive action. This problem is particularly prevalent where financial incentives are tied to the achievement of annual goals.
- Lack of Coordination. The tendency to generate a large number of competing forecasts. In these organizations, there is enormous conflict, chaos and continual fire fighting between the different functions of the organization. For example, the way sales, operations and finance view the future is considerably different which in turn results in employees from these functions exhibit uncoordinated behaviour which makes it difficult for the organization to function effectively and efficiently towards the achievement of strategy. When your organization has a number of competing forecasts, performance cannot be sustained.
- Socio-Pathological Behaviour Patterns. This refers to involuntary encouragement of behaviour patterns that are damaging to the forecast process and to the health of the organization as a whole. In such organizations, there is widespread manipulation and distortion of information. Employees withhold knowledge until the truth becomes impossible to disguise or deliberately provide misleading information to managers and other decision makers. Forecasts are biased for fear of recriminations. In turn, unknowingly, managers reward bad behaviour by mistaking fabricated forecasts for good performance. This problem is predominant in environments with a culture that unwelcomes nasty surprises, punishes employees for telling the truth and rewards them for lying.
What are the other common symptoms of forecasting illness you have experienced?
I welcome your thoughts and comments.