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Future Ready: How to Master
Business Forecasting:
Practice and Principles
Steve Morlidge
• Unilever 1978 – 2006 roles include:
• Controller Unilever Foods UK ($1 billion turnover)
• 2002 – 2006 Leader Dynamic Performance Management Change Project (part of Unilever’s Finance Academy)
• Outside Unilever
• Chairman of BBRT 2001 – 2006
• BBRT Associate 2007 -
• 2006 - Founder Director Satori Partners Ltd
• 2005 – PhD Hull University (Management Cybernetics)
• 2007 – Visiting Fellow Cranfield University
• 2009 Nov - Publish book ‘Future Ready: How to Master Business Forecasting’
Steve Player
Steve Player serves as the North America Program
Director for the Beyond Budgeting Round Table (BBRT)
and works with BBRT member companies to implement
continuous planning processes.
He has over 25 years experience with improving
performance management and implementing strategic
planning processes. He is also the Managing Director of
Beyond EPS Advisors, a Dallas, TX-based business
consulting firm, and founder of the Activity-Based
Management SMART.
He is the co-author/editor of five books including Future
Ready: How to Master Business Forecasting and
currently writes a the “Finance Transformation” feature for
Business Finance Magazine for which he interviews
CFOs from leading organizations on innovative finance
and planning processes.
Previously, Steve was the Managing Partner of Arthur
Andersen's Advanced Cost Management Team.
IMA’s 92nd Annual Conference © 2011 Institute of Management Accountants. All rights reserved.
4
Agenda
• Seven Common Symptoms of Forecasting Illness
• Six Key Aspects
• Five Advanced Practices
Seven Common Symptoms of
Forecasting Illness(Pitfalls to Avoid)
Common Symptom #1Semantic schizophrenia:
confusion about the aims, purposes and characteristics of good forecasts
Common Symptom #2Single point tunnel vision:
an unhealthy obsession with a particular forecast number
Common Symptom #3Delusions of accuracy:
the mistaken assumptions that it is possible to be perfectly accurate
and that lower errors are representative of better forecasts
Common Symptom #4Nervous system breakdown:
misguided attempt to improve forecasts by going into more detail and
analyzing forecasts obsessively
Common Symptom #5Visual impairment:
the failure to provide enough forward visibility and discern trends in
performance
Common Symptom #6Lack of coordination:
the tendency to generate a proliferation of competing forecasts
Common Symptom #7Socio-pathological behavior patterns:
the unwitting encouragement of behavioral patterns that are
damaging to the forecast process and to the health of the
organization as a whole
Do‟s & Don‟ts of Rolling Forecasts
Bonus: 5 More
Best Practices
1. Track your trends for
forecasting over time
2. Constantly identify ways to
become more adaptive
3. Understand key drivers
4. Focus on threats and
opportunities
5. Engage in scenario playing
10 common mistakes & best
Practices
1. Forecasting to the wall
2. Confusing forecasts with targets
3. Demanding forecast accuracy
4. Relying on Excel spreadsheets
5. Excessive detail
6. Relying on “probability-based forecasting”
7. Immediately assuming a growth forecast
8. Treating forecasting as a “special event” rather than an on-going part of monitoring the business
9. Picking out time horizons for all forecasts with the same interval
10. Failing to learn from your forecast record
Actual FcstActual Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst
Actual Actual Fcst Fcst Fcst Fcst Fcst Fcst FcstActual Actual Actual
Actual Actual Fcst Fcst FcstActual Actual Actual Actual Actual Actual Actual
E
n
d
o
f
Y
e
a
r
Mistake #1–Forecasting to the
wall
Actual
s
1st Review
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Annual Planx+1
Year x Year x+1
2nd Review
3rd Review
4th Review
Forecast
Migrate from annual budgets
to 5-quarter rolling forecasts
Mistake #2 – Confusing forecasts
with targets
Forecasts = Targets
Where you think
you’re headed
Medium term
aspirations &
goals
Forecast vs. Target
Target 10%
Improvement
Projection your
plan?
Actual Trend – 4%
growth
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4
is
What
Identify your initiative to correct the
trend…
IMA’s 92nd Annual Conference © 2011 Institute of Management Accountants. All rights reserved.
18
Agenda
• Seven Common Symptoms of Forecasting Illness
• Six Key Aspects For Building an Effective Forecast
• Five Advanced Practices
Six Key Design Principles
1. Mastering Purpose
2. Mastering Time
3. Mastering Models
4. Mastering Measurement
5. Mastering Risk
6. Mastering Process
Incre
asin
gly
un
pre
dic
tab
le
incre
asin
g c
ho
ice
Operational
Forecasting
PROCESS
RESPONSE
Highly constrained
Prediction of what will happen
Detailed forecasts
RESPONSE
How do we service
demand efficiently?
Execution
PURPOSE
Incre
asin
gly
un
pre
dic
tab
le
incre
asin
g c
ho
ice
Strategic
Planning
ADAPTATION
Freedom of action
Alternative scenarios of the future
environment
Broad brush estimates
ADAPTATION
How do we structure the
business to compete
most effectively?
Creating Options
Operational
Forecasting
PROCESS
RESPONSE
Highly constrained
Prediction of what will happen
Detailed forecasts
RESPONSE
How do we service
demand efficiently?
Execution
PURPOSE
Incre
asin
gly
un
pre
dic
tab
le
incre
asin
g c
ho
ice
Strategic
Planning
ADAPTATION
Freedom of action
Alternative scenarios of the future
environment
Broad brush estimates
ADAPTATION
How do we structure the
business to compete
most effectively?
Creating Options
NAVIGATION
Choice of response limited
Best estimate of what will happen
(based on current assumptions)
Detailed enough (with ranges)
NAVIGATION
How do we deploy our
resources to best effect?
Decision Making
Business
Forecasting
Operational
Forecasting
PROCESS
RESPONSE
Highly constrained
Prediction of what will happen
Detailed forecasts
RESPONSE
How do we service
demand efficiently?
Execution
PURPOSE
Incre
asin
gly
un
pre
dic
tab
le
incre
asin
g c
ho
ice
Strategic
Planning
ADAPTATION
Freedom of action
Alternative scenarios of the future
environment
Broad brush estimates
ADAPTATION
How do we structure the
business to compete
most effectively?
Creating Options
NAVIGATION
Choice of response limited
Best estimate of what will happen
(based on current assumptions)
Detailed enough (with ranges)
NAVIGATION
How do we deploy our
resources to best effect?
Decision Making
Business
Forecasting
Operational
Forecasting
PROCESS
RESPONSE
Highly constrained
Prediction of what will happen
Detailed forecasts
RESPONSE
How do we service
demand efficiently?
Execution
PURPOSE
QUARTER
QUARTER
..while it is
necessary to have
a plan….
…the world often turns out different to
the way you expected so….
Forecasting is about decision making, because…
QUARTER
QUARTER
..while it is
necessary to have
a plan….
…the world often turns out different to
the way you expected so….
…you first need to
work out where
you are heading
(FORECAST)….
..and then what you have to
do differently to get back on
track (TARGET)
Forecasting is about decision making, because…
Key concepts
A target is what we would like to happen
which we achieve by producing
A forecast - what we think will happen
based on:
A set of plans: what we intend to do,
which we change to achieve our target
Key concepts
A target is what we would like to happenwhich we achieve by producing
A forecast - what we think will happenbased on:
A set of plans: what we intend to do,which we change to achieve our target
Specification for a forecastT = timely
A = actionable
R = reliable
A = aligned
C = cost effective
TARAC CARAT
Our need to be
able to forecast -
to see into the
future - is driven
by how quickly
we can react to
what lies
ahead…
imely
Our need to be
able to forecast -
to see into the
future - is driven
by how quickly
we can react to
what lies
ahead…
New actions
Major new initiatives
Adjust existing plans
Q1 Q2 Q3 Q4 Q5 Q6
Forecast horizon
imely
VARIABILITY
CR
ITIC
ALIT
Y
LOW HIGH
LO
WH
IGH
FREQUENT
ROUTINE
UPDATE
LESS
FREQUENT
ROUTINE
UPDATE OR
BY EXCEPTION
LESS
FREQUENT
ROUTINE
UPDATE
INFREQUENT
UPDATE
ONLY IF
NECESSARY
imely
The frequency at
which we forecast is
driven by the rate of
change in key
variables
VARIABILIT
Y
CR
ITIC
ALIT
Y
LOW HIGH
LO
WH
IGH
Economic
Relevance
Variability Speed of
response
Update
Frequency
Forecast
Horizon
Revenues High High High Daily Quarter
Labor Costs High Low Medium Twice monthly Six months
Fuel Costs High High Medium Weekly Quarter
Maintenance
SpendingMedium Medium Medium Twice monthly Six months
Advertising
SpendingMedium Medium High Monthly Six months
Aircraft Ownership
CostsMedium Low Low Quarterly Year
Airport Rates and
ChargesMedium Medium Low Weekly Six months
Other Operating Medium Medium Medium Twice monthly Quarter
FREQUENT
ROUTINE
UPDATE
LESS
FREQUENT
ROUTINE
UPDATE OR
BY EXCEPTION
LESS
FREQUENT
ROUTINE
UPDATE
INFREQUENT
UPDATE
ONLY IF
NECESSARY
imely
The frequency at
which we forecast is
driven by the rate of
change in key
variables
Mathematical
Judgmental
Statistical
Three Types of Model
Every forecast is based on a
model – and different
approaches have different
strengths and weaknessesctionable
Momentum forecast,
based on extrapolation
Intervention forecast,
based on judgement
Every forecast is based on a
model – and different
approaches have different
strengths and weaknessesctionable
TARGET ACTUAL
Average Net Error (Bias) <1% 0.8%
Average Gross Error
(Variation) +/- 5% <14%
Is this forecast
biased?
Is there too
much variation?
eliableForecasts are reliable
if they are unbiased
and have an
acceptable level of
variation
forecast
negative errors
positive errors
TARGET ACTUAL
Average Net Error (Bias) <1% 0.8%
Average Gross Error
(Variation) +/- 5% <14%
Is this forecast
biased?
Is there too
much variation?
eliable
Forecasts are reliable if
they are unbiased and
have an acceptable
level of variation
actual
negative errors
positive errors
lignedThere should be only one set of
forecast numbers…but the
unpredictable nature of the world
needs to be taken into account
ligned
The should be only one set of
forecast numbers…but the
unpredictable nature of the world
needs to be taken into account
1. Do things in the right
order, at the right
speed.
2. Do it often, and in the
same way
3. Observe the results,
separating bias
(hook or slice) from
variation.
4. Make adjustments,
improve the process
ost Effective An effective forecast process is
also an efficient forecast process
39
Agenda
• Seven Common Symptoms of Forecasting Illness
• Six Key Aspects
• Five Advanced Practices
Five Advanced Practices
1. Predictive Logic Diagrams
2. Advanced Measurements
3. Scenario Planning
4. Monte Carlo Simulations
5. Advanced Measurements
1. Predictive Logic DiagramsMedia
exposures
Potential
Customer
Universe
Response
rate
Total
Leads
Phone call
unproductive
Appointment ratio
Total
Leads
issued to
branch
- Salesmen reschedule appointment
- Branch not issued leads
- Customer reschedules appointment
- No results completion ration
Total
sales
calls
Unproductive sales
appointments
Close ratio
Gross
salesFinance Unsuccessful sale
Released to
productionInstallation
Average selling price Net revenue
42
2. Advanced Measurements
7.4%
2.0%
6.9%
1.3%2.6%
9.0%
12.8%
10.1%
2.2%
-13.7%
-7.7%
-5.1% -5.6%
-11.8%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Ap
ril
Ma
y
Ju
ne
Ju
ly
Au
gu
st
Se
pt
Oct
Nov
Dec
Ja
n-0
6
Fe
b-0
6
Ma
r-0
6
Ap
r-0
6
Ma
y-0
6
Beyond Budgeting 11th Annual Conference © 2012 All rights reserved.
43
3. Scenario Planning
Scenario Plan: Gulf War (Jan 2003)
$MM
EPS Impacts of Gulf War EPS Impacts of Mg Actions
Business Unit:__________
Pretax
Income $ Q2 Q3 Q4 l
Risks
•Lower Business Travel
•Weakness in Equity Mkts
•Competitor New Prod Launch
•Additional Technology Development
Opportunities:
•Early end to SARS epidemic
•Further economic recovery
•Improved credit quality
•Additional marketing opportunities
Risk an d Opportunity Assessment
Frequent scenario planning allows …and to create management
finance to forecast the potential “playbooks” to mitigate risks
impact of a range of uncontrollable and take advantage of emerging
events to the annual plan… opportunities
Scenario Planning – American Express
44
4. Monte Carlo Simulation
45
5. Advanced Technology
• We will now have Q&A
• We will send follow up emails on any questions
that we do not have time to cover today
• For information regarding joining BBRT or about
the BBRT 11th Annual Conference in Houston on
April 18-20, 2012 email
• For any other inquiries, please contact me at
Q&A….Join…Attend….
Hurricane Ernesto
TABLE OF CONTENTS
SECTION 1 „Why?‟Chapter 1 Part I Why Change? Everyone Knows the Trouble I‟ve Seen
Chapter 1 Part 2 Forecasting Disease, the Symptoms and the Remedy
SECTION 2 PrinciplesChapter 2 Mastering Purpose: the Cassandra Paradox
Chapter 3 Mastering Time: Delay and Decision
Chapter 4 Mastering Models: Mapping the Future
Chapter 5 Mastering Measurement: Learning to Love Error
Chapter 6 Mastering Risks: How the Paranoid Survive
SECTION 3 „Praxis‟Chapter 7 Mastering Process: The Mother of Good Fortune
Theme #1 Recipe for success, tips and traps
Theme #2 Coordination in a complex system: how different can we be?
Theme #3 ‘Whose job is it anyway?’ roles and responsibilities
SECTION 4 TransformationChapter 8 Implementation: Beginnings and Endings
Chapter 9 Beyond Forecasting: The Biggest Barrier
Chapter 10 Beyond Budgeting: A New Management Model?
Chapter 11 Conclusion: Reconnection
Glossary
Appendix 1 – 30 Questions: a summary of Design Principles
Appendix 2 – Important concepts in Systems and Cybernetics
To Learn More• Join the Beyond Budgeting Round Table
• Visit www.bbrt.org
• Complete the Beyond Budgeting diagnostic to assess your readiness to
change
• Read Future Ready: How to Master Business Forecasting
(Wiley 2010) by Steve Morlidge and Steve Player
• Attend our upcoming BBRT training sessions
• Attend the 10th Annual Beyond Budgeting
Conference in Chicago on April 27-29, 2011.• E-mail Heather Bryce for details on discounts –
Future Ready: How To Master Business Forecasting
A practical guide to help executives
navigate through turbulent times
