Human or Machine Intelligence? Augmentation Key to Better Forecasting

Forecasting is an invaluable process for any business. A forecast can play a significant role in driving company success or failure. For example, high forecast accuracy helps a business anticipate changes in the market, identify growth opportunities, reduce risks, analyze  root causes of performance and proactively respond.

On the other hand, forecasts that are poorly designed, based on weak assumptions often result in unintended consequences.

Preparing highly accurate and reliable forecasts to support decision making is one of the major challenges faced by performance management teams across sectors and industries.

Traditionally, business performance forecasters have relied on past performance to predict future performance. In a perfect, static world the formula works well. However, as we all know the world is not static. The only thing that is constant is change.

Volatility, uncertainty, complexity and ambiguity are at an increasingly alarming level. Further, new technologies are transforming how we do our work now and in the future.

A number of manual processes have successfully been automated. Where businesses have previously relied on financial data alone to make strategic decisions, the dawn of the digital age has brought new meaning to non-financial data.

The new world of algorithm-powered machines

The traditional approach of forecasting is highly manual and time-consuming. People spend a significant amount of time gathering, compiling and manipulating data in spreadsheets.

Most of the time, the data used to predict the future and create forecasts is historical financial data residing in the company’s ERP systems.

Unfortunately, in today’s rapidly changing world the future doesn’t sufficiently resemble the past.

As the new digital era continue to unfold, more and more data (financial, operational and external) will increasingly become available to support business forecasting.

Given that the traditional approach of forecasting leverages data in structured format to prepare forecasts, with more and more unstructured data available, CFOs and their teams have to rethink the old school forecasting process.

In order to increase the agility of the business to proactively respond to competitor activities, customer, market and industry changes that threaten the achievement of set objectives, or trends that present specific opportunities, the organization should consider all types of data at its disposal and discern what is important and what is not for business performance forecasting purposes.

Artificial Intelligence, machine learning, deep learning and natural language processing are disrupting traditional business operating models and companies are increasingly tapping into these new technologies to drive forecasting processes. These highly powered machines use statistical algorithms and modern computing capabilities to collect, store, and analyze large quantities of data and predict what is likely to happen in the future.

The algorithms are fed with warehouses of historical company and market data and taught to mimic human intelligence. Overtime, through learning, forecasting accuracy is improved.

In addition, NLP algorithms are able to go through a myriad of documents including articles, social posts and other correspondences written in plain text and extract insights that can be injected into the forecasting model.

Humans and machines augment each other

It is no secret that machines have a superior advantage over humans when it comes to collecting, storing and analyzing large data sets in real-time. But does this imply that decision makers should rely exclusively on machine intelligence to drive business decision making? The simple answer is no.

When it comes to applying critical thinking and judgement, human beings are much better than machines. Humans are able to evaluate and translate the machine’s conclusions into decisions and actions. Take for instance the forecasting models that are used to predict the future, the best source of information for these models are the domain experts for whom the models are designed.

The domain experts have a better understanding of the models, what assumptions to base the models on including the ability to uncover flaws that others may miss. Software developers, data scientists, AI experts and automation engineers, among others rely on expert judgement of domain experts to hard-code data features in databases that are used to train predictive algorithms.

In one of my articles, Applying Design Thinking to Finance, I highlighted how companies are heavily dependent on analytical thinking in order to drive business performance.

The solution is not to embrace the randomness of intuitive thinking and avoid analytical thinking completely. The solution lies in the organization embracing both approaches, turn away from the false certainty of the past, and instead peer into a mystery to ask what could be

The fact that the past is not a reliable predictor of the future does not necessarily mean that it is not important. History has been known to provide major lessons to us. In the same manner, human judgement can be used to determine which historical data is suitably representative of the future to be included in forecasting decisions.

When data is abundant and the relevant aspects of the business world aren’t fast-changing, it’s appropriate to lean on statistical methods to prepare forecasts. However, even after the forecasting model has been designed and adopted, human judgement is still required to evaluate the suitability of the model’s prediction under different scenarios.

Important to note is that predictive models do no more than combine the pieces of information fed to them. These machines are good at identifying trends and imitating human reasoning. If bad or erroneous data, or good but biased data is presented to the algorithms, issues can arise.

Setting aside human biases

People make decisions based on logic, emotion and instincts. One of the challenges of preparing forecasts in a complex and constantly changing world is setting aside human biases.

Subconsciously, human beings have a tendency to base judgement and forecasts on systematically biased mental heuristics rather than vigilant assessment of facts. System 1 Thinking.

According to Daniel Kahneman in his book Thinking Fast and Slow:

  • System 1 is an automatic, fast and often unconscious way of thinking. It is autonomous and efficient, requiring little energy or attention, but is prone to biases and systematic errors.
  • System 2 is an effortful, slow and controlled way of thinking. It requires energy and can’t work without attention but, once engaged, it has the ability to filter the instincts of System 1.

Personal experiences built overtime make us overgeneralize facts and jump to conclusions. Instead of focusing on both existing and absent evidence, we act as if the evidence before us is the only information relevant to the decision at hand.

As a result, the risks of options to which we are emotionally inclined are downplayed, and our abilities and the accuracy of our judgement are also overestimated.

Further, a focus on the limited available evidence causes us to create coherent stories about business performance including causal relationships that are non-existent. We are quick to ignore or fail to seek evidence that runs contrary to the coherent story we have already created in our mind.

Such actions do not result only in overconfident judgement but also cause us to be overly optimistic and create plans and forecasts that are unrealistically close to best-case scenarios.

By addressing own cognitive biases and enabling collaboration between humans and machines, business forecasters will be empowered to create forecasts that enable faster and more confident decision making.

Machines can only assist and not displace the typically human ability to make critical judgement under uncertainty.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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