Time to get forecasting again

Apr 03 2009 by Nic Paton Print This Article

There are many reasons for the global downturn, both macro and micro, but the inability of management teams to adjust their thinking to a new and more brutal reality after two decades of focusing almost solely on growth has certainly not helped.

In an increasingly fast-changing and difficult world many senior management teams have simply been unable to adapt how they think about and forecast for their businesses, research by consultancy KPMG has suggested.

It found nearly half – 45 per cent – of business directors appeared to be failing to make the strategic changes required to their decision making that would help them cope more effectively with the crisis.

In fact, even now, many were taking a "head in the sand" approach and continuing to pursue the same options for their organisation as they had been 12 months ago.

Fiona McDermott, business modelling partner, at KPMG, said: "Accurate and relevant forecasting has been a victim of the credit crisis, as the usual variables that previously went into a forecast are shrouded in uncertainty.

"Sales volumes, prices and availability of finance can all change dramatically in a short time. Businesses can't even be confident that their main suppliers and customers will be around for very long," she added.

"This has a dramatic impact on a business' ability to develop strategy, after all, it's pretty hard to look six months or a year ahead, when you're not even sure what the next day is going to bring.

"As a result, some managers may be tempted to believe that forecasting is a waste of time. In fact, it's more important than ever to understand the short and long term business impacts of critical business decisions," McDermott continued.

The difficulty for many management teams has been that, after two decades of planning for growth, many directors either had no blueprint to help them answer the "what ifs" involved in decision making in a downturn or, if they had once had one, it had been forgotten or lost when the previous management generation left or retired.

Reacting to falling sales, for example, was one of the primary challenges faced by most sectors right now.

This required making tough decisions about scenarios ranging from cost cutting and cash maximising, to site mothballing and closedown.

These then each had their own series of follow-on questions, such as what were the costs of a redundancy programme, how much could be raised by the sale of an asset or part of the business, what actions were competitors taking, what were the fixed costs of a mothballed operation and how easy would it be to restart production when the upturn came?

A further challenge when it came to adapting planning processes to today's new environment was the need to streamline and simplify the data gathering process to enable the business to be more fleet of foot, argued McDermott.

"Many companies' forecasting processes are unwieldy, involving the pooling of large and incompatible chunks of data from around the business, which must somehow be consolidated into a useful tool," she pointed out.

"What you don't want is a process where it takes three months to produce a forecast and another three to redo it once you realise the assumptions that you originally made no longer apply. We are increasingly involved in designing and building bespoke forecasting models that can fit into existing systems," she added.

A business' ability to respond to changing demand patterns by adjusting its offering in a low sales environment could be the difference between survival and failure, she stressed.

For example, if budget ranges were performing better than premium ranges manufacturers needed to consider increasing production of the value offering.

This however in turn would throw up a series of questions that forecasting could help to analyse: could the workforce simply switch to producing the budget range or would training be required, was the plant and machinery flexible enough to switch between both types of product, did the sales margins on the budget range provide sufficient income to allow for this shift in production or had sales of the premium range fallen to such an extent that any cash generated by the budget range would be worthwhile?

Similarly, a retailer would need to consider whether its supplier could deliver an increase in the budget range, whether to alter the price of the premium range to try clear stocks or pay for its storage until consumers start buying such goods again (if non perishable) while closely analysing competitors' actions, in particular their pricing.

Effective forecasting, McDermott argued, could also help to assess the advantages of continuing to trade – even at a loss – through the short term in order to be in a position to benefit in the longer term when the upturn came.

After all, KPMG's research found two thirds of business directors believed the worst will be over in less than two years.

"These are tough times requiring tough decisions and a business as usual approach is not a viable strategy," said McDermott.

"By deploying a dynamic, flexible forecasting process businesses are better able shape both immediate and longer term strategy and to react swiftly to a constantly changing environment by considering new options," she added.

This inability of many management teams to adapt quickly enough to new circumstances was highlighted last month by M-I columnist and thought leader John Blackwell.

He argued that managers would have no option now to adapt if they wanted to survive.

"What's required is for managers to become visionary challengers – people who question assumptions and suggest radical alternatives (even being brave enough to suggest alternatives that others might consider impractical)," he argued.

"These will be charismatic change leaders who set direction, inspire, deliver against defined business outcomes, and move the organisation forward. In this environment, strong management (and especially change management) is a core competence at all levels and nurtured as a professional discipline, not an 'art'," he added.