Reimagining Forecasting in Uncertain Times

One of the key purposes of forecasting is to help organizations continuously anticipate the future, assess its likelihood, consider the implications and use all the available information and practical techniques to make confident decisions that maximize the potential of the business and improve enterprise performance.

Of course, this is not an attempt to simply predict and control the future as no one is capable of predicting the future with certainty.

Instead, it is about building an effective and efficient process that enables decision makers to evaluate alternative courses of action available to them to respond quickly to known knowns, known unknowns or unknown unknowns when they happen.

The novel coronavirus pandemic which started in Wuhan, China and rapidly spread across the globe has killed thousands of people, caused world’s financial markets to plummet, disrupted global supply chains, and forced businesses to temporarily or permanently shut down.

Operational and financial forecasts that a few months ago painted a rosy picture of the future have had to be thrown out of the window because of the Covid-19 crisis. Companies have come out in droves and announced revised earnings and profit estimates.

Several governments, academics, research bodies, businesses, and other organizations were caught unaware by this outbreak – demonstrating our inability to predict the future.

Considering our inadequate forecasting capabilities, should we therefore abandon forecasting completely? Can we confidently say forecasting is a waste of time and resources? The simple answer to both questions is a resounding No.

In order to make confident, reliable and timely decisions, decision makers require information about the past and information about the future.

Absent this information, or it is deficient or misleading, then decision-making on key organizational performance matters is no more than guesswork.

Unfortunately, in today’s increasingly unpredictable, and rapidly evolving world where things can happen at lightning speed, basing important future business decisions on historic information alone can misinform decision-making and result in lost opportunities and catastrophic business failure.

While it’s imperative to understand business trends, it’s also important for management and decision makers to appreciate that they cannot simply rely on the past to guide them in the future given their role is to make the future different to what it otherwise might be.

Forecasting is not supplementary to the annual budget

The traditional annual planning and budgeting process is certainly fraught with many shortcomings and for most organizations it is completely dead. Outdated and meaningless. Most businesses spend several months each year agreeing the budget and then monitoring actual performance against it.

They plan for a desired future in order to make it come about. Any deviation from budget or the initial plan is regarded as a variance and is therefore wrong. But many times, changes in the business environment invalidate the assumptions on which they based their original plan and quickly render the budget obsolete.

The budget is next updated with a forecast with a horizon that declines as the reporting calendar moves towards the fiscal year end. As a result, decision makers have limited visibility about the company’s future considering they are ill-equipped to look beyond the twelve-month planning horizon.

In one of his CIMA FM Magazine articles If the Coronavirus Outbreak Disrupts Your Budget, Bjarte Bogsnes reminds us:

In the world of business today, there is more on a long list of things that we can’t control. The only thing we know about our budget assumptions for next year is that most of them will be wrong.

In such an unpredictable world, we shouldn’t expect budgeting to produce predictable results. It assumes that we can sit down in the autumn and decide everything for next year — what to earn and what to spend and invest, all laid out at the lowest detail level. We believe this gives us control. It gives us nothing but an illusion of control.

CIMA FM Magazine, March 2020

So unlike in budgeting where we consider a single desired future outcome, in forecasting we know the future might not come about because the assumptions might be wrong or have been changed.

Thus, instead of continuing on the same path based on existing assumptions it’s imperative that we quickly change course if we are to avoid a catastrophic iceberg crash. Remember, the purpose of forecasting is not to predict the future with certainty but rather support decision-making.

A good forecast highlights a projection of the future with some ranges around it, an informed and reliable explanation of what is driving uncertainty and a cogent plan for the business to mitigate emerging risks or exploit the opportunities.

Talk about possibilities and probabilities, not certainties

In Super Forecasting: The Art and Science of Prediction, Philip E. Tetlock and Dan Gardner shed light on the dangers of organizing our thinking around Big Ideas, whether true or false, when making forecasts.

In this scenario, we tend to force complex business problems into preferred cause-and-effect templates and treat those that fail to fit as irrelevant distractions.

As a result, we get awfully confident and less reluctant to change course even if changes in the external environment are clearly nudging us to do so and have invalidated our initial assumptions and projections.

Since we never pause to evaluate whether the evidence at hand is flawed or inadequate, or if there is better evidence elsewhere we suffer from an illusion of knowledge or what Daniel Kahneman termed WYSIATI – What You See Is All There Is.

The problem with zoning on one Big Idea is that it distorts and doesn’t improve our foresight. Instead of viewing and processing new information with a fresh pair of lens, the additional information received is treated as unhelpful because it’s all seen through the same old pair of tinted glasses.

In forecasting, there are no certainties but rather possibilities and probabilities. To be able to produce accurate enough forecasts, it’s critical that we deploy not one analytical idea but many and seek out information not from one source but many. Then consider and aggregate alternative views.

Generating different perspectives (that is coming up with an outside view and inside view) of the business and integrating the two isn’t the end but a good beginning. It helps us understand what other forecasters think, and also what outside and inside views they have come up with.

Nonetheless, since teams constitute of individual members with different educations, training, experiences, and personalities – a smart leader should not expect consensus of opinion at all times but must treat its appearance as a warning flag that group-think has taken hold.

On the contrary, a display of differing judgments should be welcomed as evidence that the people around the table are actually thinking for themselves and offering their unique perspectives.

Forecast, measure, revise. Repeat

How predictable something is depends on what we are trying to predict, how far into the future, and under what circumstances. The further we try to look into the future, the harder it is to see.

In business, finance organizations rely on robust models to churn out short, medium and long-term financial estimates on company performance.

Most of the time after forecasts are produced, we hardly measure forecasting performance in order to improve the quality of our forecasting process.

All forecasts contain some level of variation or unsystematic error, but a reliable process maintains this variation at acceptable levels for the purposes of the decision business leaders need to make.

Without measurement, there is no revision. And without revision, there can be no improvement.

Certainly, this does not imply setting arbitrary targets such as plus or minus 5%. This approach of measuring the difference between actual and forecast outcomes and expressing that as a percentage is flawed.

One of the reasons being that errors are assumed to be evidence of poor forecasting, and success in meeting the numbers is viewed as good forecasting. Forecasts must have clearly defined terms and timelines.

People attach very different meanings to vague verbiage like “significant market share,” “certain,” “seriously possible,” “a fair chance,” and “likely.” Such ambiguous language renders forecasts untestable.

The same holds true for economic forecasts that claim undoubtedly that something will or won’t happen in future but fail to explicitly define the time frame.

In their work Future Ready: How To Master Business Forecasting, Steve Morlidge and Steve Player further highlight the importance of comparing ‘like with like’ when measuring forecasting performance.

That is, we should not attempt to compare the results from forecasts produced using different time buckets. For example, comparing the actual for Quarter 1 with forecasts made at the end of December, January and February.

Neither can we compare a forecast for Quarter 4 made in January with a forecast for Quarter 4 made in June. Although the time buckets are consistent, the forecast lead times are not the same.

We therefore should measure forecast error within forecast lead times using consistent buckets and consistent forecast lead times.

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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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