BPM Accelerates as Short-Term Forecasting Slows

Many companies are sidestepping the consequences of earnings misses by holding back on guidance and, instead, focusing on improving performance management for the long haul.

Coca-Cola made a splash in December when its CEO informed investors that the company would no longer provide any quarterly or annual earnings-per-share guidance. Critics dismissed the move as foolish, but "daft like a fox" may be a more accurate characterization. Coke's new stance doesn't necessarily indicate that the company lacks visibility into its short-term performance. Rather, by focusing on long-term expectations, Coke can duck some of the blows Wall Street dishes out to organizations that miss short-term earnings forecasts by even small margins.

Forecasting is certainly more art than science, most corporate financial analysts agree, and it's a difficult art at that. The markets have recently been walloping companies for anything less than perfect vision. Yet focusing on the reluctance of Coca-Cola and other public companies to share earnings expectations masks the fact that businesses are using the downturn to significantly improve their forecasting and business performance management (BPM) capabilities.

Only 34 percent of financial services companies provided specific earnings guidance during the past 12 months, according to a late-2002 Ernst & Young analysis of that industry. But the companies that withhold forecasts may have sharper insight than they're letting on, says David Axson, senior vice president of The Hackett Group, an Answerthink company based in Hudson, Ohio. "With the stock market's short-term volatility, companies are getting punished -- even though they may be performing well -- simply because they missed their estimate," Axson claims.

The current economic and geopolitical environment has exacerbated long-standing problems with generating accurate top-line forecasts. When revenues and profits soared in the late '90s through early 2000, missing projected earnings per share by one cent was less of an issue. "Two years ago, the world changed," says Dave Catrambone, director of corporate financial planning and analysis for Network Appliance Inc., a network storage company in Sunnyvale, Calif.

"I think the challenges of forecasting have also changed," Catrambone adds. Companies now must address the potential impacts of unexpected events that could have major economic consequences, such as a 20 percent reduction in imported oil, major companies dropping off the face of the earth and gruesome terrorist attacks on civilians.

"There are a lot of external variables at play in today's economy, adding to the unpredictability of the sales cycle," says Chris Scherpenseel, president of FRx Software, a Microsoft Business Solutions company based in Denver. "The economy has driven companies to focus on demand creation through performance and productivity." That makes revenue -- which is always more challenging to predict than costs -- even more difficult to forecast. And, Scherpenseel notes, "incomplete or unsupported information makes organizations, employees and investors nervous."