What is in this article?:
- New Conditions Call for New Approaches to Forecasting and Planning
- Involving Operations in Forecasting
- Collecting Better Data and Improving Analytics
- Building Stronger Frameworks for Capital Allocation
- Taking a Broader Perspective
It has been more than three years since the global economic crisis battered investors, consumers and businesses alike. While there are signs of stabilization, the environment continues to be full of surprises, as witnessed by the recent battles over the U.S. debt ceiling. The situation in Europe offers little relief, with a series of sovereign debt concerns casting doubt on the fate of the Euro and the ongoing solvency of the European Union's weaker participants. With slow growth and high levels of employment in the United States, the outlook is for more uncertainty.
These volatile and challenging conditions make it difficult, if not impossible, for companies to adhere to traditional planning cycles. The old planning model was suitable for a more static environment, but given continuing turbulence and uncertainty around the globe, forecasts based on fixed assumptions are almost guaranteed to be wrong. Severe volatility greatly diminishes the accuracy of planning. Look at the wild swings in the price of oil, which affects everything from customer behavior to raw materials costs to distribution expenses.
Wrong assumptions lead to poor guidance for investors as well as poor business decisions. In an Accenture survey conducted in 2010, two-thirds of respondents said that planning accuracy decreased because of economic volatility, and only 11 percent of respondents said they were fully satisfied with their planning capabilities. That is hardly surprising when, at many companies, planning relies heavily upon guessing at percentage increases for various budget line items.
Fortunately, however, the financial planning process is itself evolving. Leading companies are now pursuing a more dynamic and effective approach to planning. In particular, new technologies, such as sophisticated analytics, are helping transform traditional planning from a one-time, once-a-year exercise to a fluid, ongoing process capable of absorbing information and making course corrections on an almost real-time basis. These companies are also working to broaden the planning perspective to include intangible investments, such as brand value, as well as investor expectations.
The key element in a faster and more flexible planning process is the ability to make rapid adjustments based on evolving external factors. The high-performing companies we surveyed use external information on customers, competitors, investor expectations, and regulatory changes and incorporate external benchmarks into their business targets.
Using external information, in turn, is essential to effective scenario planning. While scenario planning is a relatively new practice for many firms -- with only 29 percent of organizations in our survey using it for five years or more -- three out of four respondents that have scenario planning capability recently started using it more extensively in response to economic volatility.
Scenarios can help managers anticipate changes in the environment and, with proper links to business processes, can also help make decisions and course corrections more rapidly and effectively. Eli Lilly, as reported by The Conference Board Review, closely tracks such leading indicators as the incidence of chronic diseases. Every six months or so, it assembles its scenario planning team and looks at key questions tied to the future trends in healthcare and improving care for patients over the next 20 years, or how integrated the company should be in terms of research, development and distribution. Strategies are tested against current data and updated every year.
Once an evaluation of external factors is completed, a company can identify a series of actions that would be taken if certain scenario "triggers" are reached. For example, the emergence of new competitive threats or negative external economic factors might trigger postponement of discretionary or non-strategic initiatives, freeing up investment for higher-priority operational expenditures.
The most useful way to incorporate events is by monitoring a set of value drivers chosen for their volatility and material impact on the business, such as patent expirations for pharmaceutical firms or grain price fluctuations for food companies. Tolerance ranges can be defined for each value driver, and when the tolerance level has been reached, the organization should revise its plan and reallocate resources in order to close the expected gap.
Tesco, the U.K.'s largest grocery chain, has created its own weather team and uses proprietary software to better forecast temperatures and accompanying changes in consumer behavior. This helps reduce costs, avoid spoilage of food such as meat for barbecues, and manage inventories for spikes in demand. The system successfully predicted temperature drops during 2009 that led to a major increase in demand for soup, winter vegetables, and cold-weather puddings.