Tag Archives: rolling forecast best practices

Catching up with David Axson

Performance Management professionals around the globe know David Axson. David is an exceptional consultant, public speaker and author. His bestselling book Best Practices in Planning and Performance Management can be found on most bookshelves. In the past year David has gotten a bit quiet. We were able to catch up the other day.

Christoph: In the past, you used to jet around the planet, write books, blog and speak at a ton of conferences. But you have gotten a bit quiet lately. Where have you been hiding the past year?

David Axson: Good question – I joined Accenture in June 2011 and obviously spent a few months getting settled in, however things are getting interesting again with the Accenture engine behind me I am now leading thought leadership efforts for our finance consulting team globally.  From a market standpoint I am spending a lot of time communicating with CFO’s of large global companies about the real power of analytics, big data and perhaps most importantly how finance can be a true value generator within the business. 

Christoph: In your last book The Management Mythbuster you take a humorous look at popular management practices such as lean management, six sigma and budgeting. Most of them have not lived up to the hype that once surrounded them. Are there new management fads that we need to be aware of today?

David Axson: Well at the moment it seems like the solution to every problem is cloud, big data, analytics and mobility. We need to move beyond the broad topics to get very specifc about how these mega-trends can be applied practically to drive growth and profitability.  We need to explain to a CEO, CFO, CMO or general manager what these trends mean to them and their organizations otherwise the hype will remain unfulfilled. 

Christoph: Speaking of management fads, how do you feel about Big Data? If we trust the opinion of some industry analysts, big data is likely to create millions of jobs while also fixing a ton of problems. Do I need to worry about big data? Can big data feed my family?

David Axson

David in action. Professionals love his workshops and keynote speeches

Christoph: Without a doubt, analytics is an important discipline for most companies. Today, have the ability to collect more data than ever before and we also have the tools to put that data to good work. Where do you see the real opportunity for companies today? How can they leverage analytics for their advantage?

David Axson: Focus, focus, focus.  I have moved beyond analytics to the notion of applied enterprise performance analytics whereby an analytics strategy looks at the impact analytics can have on specific business decisions such as market selection, product and service portfolio management, customer profitability, operational excellence and the like.

Christoph: Analytics is a relatively young discipline. It did not appear in the curriculums of universities and colleges in the past. What type of new skills do managers need today and what can they do to acquire them?

David Axson: Well analytics embraces a number of disciplines such as statistics, operations research, portfolio management and financial analysis.  They key now is how these skillsets get applied through the analytic tools that are now becoming available.  Managers need to understand how to translate the potential of analytics into reality.  One technique I use is to explain how analytics can be applied to drive positive impact on specific line items in the P&L and balance sheet.  

Christoph: When we speak about analytics, we also need to speak about technology. What is the most popular analytics tool today?

David Axson: Not sure it is that simple, it is about applying the right tools for the right job. IT needs to help the business match tools to tasks.  It’s a bit like doing a DIY job, you don’t just a hammer for everything.  

Christoph: You not only write books, but you also love to read them. What’s on your Kindle today?

David Axson: Just finished The Signal and the Noise by Nate Silver – excellent read about statistics, analytics and forecasting in a real world context. 

Christoph: Can we expect another book from you in the future?

David Axson: Funny you should mention that.  Talking with my publisher about a new book focused on Enterprise Performance Analytics that takes a very pragmatic approach to applying analytics to decision making. Watch this space! 

Christoph: Thanks for the interview, David!

I had the pleasure to work with David for over five years and ended up delivering keynote speeches with him in over 20 countries. You can find out more about David on his Amazon.com page.

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Lessons from the discovery-driven planning approach

Discovery-driven planning

A few weeks ago I researched ideas for improving current planning and forecasting approaches. I stumbled upon a methodology that I had long forgotten. It is called ‘Discovery-driven planning’ and it was developed by Rita Gunther McGrath and Ian C. MacMillan. The idea was first published in the July 1995 issue of the Harvard Business Review. While I do not want to go into any details of this approach, I do highly recommend reading the original article. It is very inspiring and thought-provoking. Today, I want to look at some lessons that we can apply to our forecasting and planning processes. However,

The basic idea

Discovery-driven planning is a multi-step planning approach designed for new ventures. It encourages planners to move away from the traditional process of just creating financial projections. One of the core idea of the discovery-driven planning methodology is to develop a set of detailed assumptions around the projections. They should also be quantified and tested against the plan. What it does is the following: Rather than just saying “These are the results we are expecting” you now have a platform for answering a critical question “What has to prove true for our plan/ forecast to work?”. You should rank the assumptions by importance and/ or the level of uncertainty. The process of developing this should be quite valuable itself and one should be in a position to identify critical problems or opportunities. Once the assumptions have been created and tested, they should be assessed on an on-going basis.

Enhance your processes

It’s difficult to disagree with this idea. It’s not rocket-science but it makes perfect sense. Yet, we hardly ever use this approach. Our plans and forecasts are developed as if we could predict the future. Yet, we all know that this is not the case. Various studies, for example, have shown that over 60% of all annual budgets are outdated within the first fiscal quarter. I therefore believe we can significantly improve our processes by incorporating critical assumptions. Not just at the top level but also at the individual contributor level. The resulting process could look like this, for example:

Discovery-driven planning

The development, testing and discussion of assumptions is now a critical part of the process.

An example

Let’s assume we are a sales manager. We have to develop a sales forecast for the next quarter. Following a best practices approach, we only look at our best customers in detail. We spend time developing the forecast – revenue numbers by customer, by product family, by month. Perfect. The numbers look great when we compare them against budget. And our boss is happy with the look of the forecast.

Discovery-driven planning

The traditional approach. This looks great, doesn’t it? But are the numbers realistic?

Most processes stop right there. A good manager would probably ask a few tough questions here and there. But developing assumptions allows us to go further than that. Incorporating this into the process as a step could help us identify risks and opportunities. Below is a simplified example:

AssumptionsNow we can easily see that there is significant risk. And we now have to ability to act on this. The sales manager, for example, could sit down with product management to validate product release dates.

Next steps

Discovery-driven planning represents a very interesting and pragmatic approach. I highly recommend that you read more about this topic. The idea of incorporating assumptions and their test into our daily planning and forecasting exercises could be quite powerful. It’s not rocket-science. Some companies already do this. However, it is usually done at a high level (GDP growth above 2.5%). Managers at all levels can benefit from this idea.

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How to improve your forecasting templates through initiatives

Forecasting  concerns

Despite its tremendous importance, forecasting remains one of most disliked processes in many companies. Part of the problem are the forecasting templates themselves. They are extremely complex and cumbersome. Today, I want to look at a simple technique that can improve the usability of the forecasting templates while also increasing the ability to gain insights from them. A few months ago, I provided another technique that involved the time-horizon. Let’s take a look!

Forecasting templates

Typical forecasting templates follow a certain pattern: Across the columns we can find the different months of the fiscal year. The rows feature hundreds of G/L accounts:

Budgeting Template

Graphic 1: The traditional forecasting & budgeting template

Let’s be honest: this type of template is really difficult to use. First of all, there is an excruciating amount of detail. The structure also does nor provide a solid picture of our business. Think about it: Business managers do not think in terms of G/L accounts. You don’t believe me? Thought-leader David Axson once proposed to try this approach at home to see how difficult it really is. This is what our personal forecasting template would look like (oh…please….don’t try this at home….):

Forecasting Template

Graphic 2: The family forecast?

We can argue about this, but I doubt that our families would appreciate it. My wife Jen would certainly send me off to see a shrink…

Initiatives

Let’s stick to the example of the personal forecast. If you think about it, most of us intuitively follow a different approach. We use projects and initiatives to structure our thoughts. Many people typically start budgeting or forecasting by creating a list of initiatives they are planning to do. Then they figure out the associated amounts:

Family Budget

Graphic 3: Initiative planning at home. A better approach.

This forecasting template provides us with a mental framework that is easy to follow. The naked account list on the other hand does not provide us with any help. We simply think about amounts without being forced to ask ourselves more intricate questions like why, what, where, etc.. And this is what often makes the process so difficult, especially for non-financial people.

Revisions

The beautiful thing about using initiatives in forecasting templates is that it makes revisions a lot easier. Let’s say we want to cut our expenses by 5%. Using the traditional line item approach, this will become a difficult if not random exercise (how would you know in the first place?).

Budgeting Template

Where do you start? Most of us would probably be tempted to reduce a few numbers here and there. The data is just too complex. Contrast that to the approach in the next screen shot. This is a lot easier to deal with. The initiatives provide context. All expenses that are not related to a project have been captured in the ‘Sustain Operations’ bucket.

BudgetingTemplate

You can immediately sit down and review the different initiatives. Questions like: “Which initiatives are really critical?” come to mind. Ranking them provides additional context.

Next you could drill down on each initiative and review the different expense types. Notice that the use of initiatives speeds up the process while also providing better insights.

Your forecasting templates

Take a look at your corporate budget. Where can you incorporate initiatives and projects in your forecasting templates? Granted this approach does not work in all situations but it is a relatively simple thing to do. But most cost centers can probably benefit from this approach.

P.S.: The screenshots were created with Cognos Insight.

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Spotlight on Forecast Accuracy

Forecast accuracy in turbulent times

Forecast accuracy is one of those measures many finance professionals think and talk about. Turbulent times require companies to produce reliable and solid forecasts. Accuracy is a useful measure that helps finance managers assess the quality of the process (to a certain degree!).

In late 2011, my good colleagues Mark, David and I conducted a survey amongst 160 UK finance professionals. One of the things we wanted to find out was whether accuracy is being measured at all. And guess what – we were pleasantly surprised to see that the majority of all companies do measure and also communicate accuracy. Only a few organizations face difficulties doing so (they utilize spreadsheets as their main tool).

Forecast Accuracy Survey

“We stand very little chance of forecasting successfully unless we measure our performance continuously and correct our forecasts accordingly.”, Steve Morlidge & Steve Player, authors of “Future Ready”

Accuracy Insights

About a year ago, I posted a series of articles that focused on forecast accuracy. If you are interested in this topic, I would like to invite you to read and share those entries.

The basics

There is a set of posts that cover the basics of this topic. You can find a bunch of examples in there as well.

Experiences

Experiences are also important. You can find out what some experts are saying about this topic.

If you have any experiences with forecast measurement, please leave a comment. As solid as the above mentioned survey results look, experience shows that many finance professionals are looking for more information about this topic.

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Forecast Analysis – An Effective Dashboard

FORECAST ANALYSIS

Last week I argued that a detailed variance report is not very helpful before and during the forecasting and budgeting process. That post continues to be one of the most popular ones recently. But why not take the basic ideas a few steps forward and create a dedicated forecasting dashboard? A dashboard allows us to view the critical information that we need to get our job done (i.e. create the forecast or the budget) in a single place. Conducting forecast analysis with this dashboard becomes easy and is less time-consuming than analyzing hundreds of variances in a spreadsheet.

A COGNOS 10 DASHBOARD

My colleague Paul took the ideas from the last post and he created an awesome forecasting dashboard in Cognos 10. Take a look (click on the image to enlarge):

forecast analysis

Forecast Analysis with IBM Cognos 10 - Business Insight

This forecasting dashboard is geared towards a revenue forecast. The widget in the upper left corner provides a quick overview of year-to-date product sales. You might notice the use of micro-charts: the sparklines display the sales trend for each region. The accompanying bullet charts show the current status against plan (YTD).

The other widgets provide a balanced mix of historical data (revenue, deal-size, expense ratio) and leading indicators (Win/ Loss Ratio, Customer Satisfaction). But there is also other important forward-looking information. Take a look at the lower left corner: We can view upcoming marketing events along with the anticipated number of participants and the expected sales pipeline. That is helpful for assessing future sales.

EFFECTIVE FORECAST ANALYSIS

This forecasting dashboard can help prepare for the actual forecasting process. It provides a better picture of the business than any detailed variance report can. And think about the time savings as well. The latter requires a lot of effort to be consumed. The dashboard on the other hand is efficient and effective. Last but not least, the dashboard can be utilized on a daily basis.

So, that is a forecasting dashboard built with Cognos 10. I love the look and feel. It is simple, clean and easy to interact with.

 P.S.: The type of information to be included in such a dashboard obviously varies by company and industry.

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How to reduce detail in your forecasts

Rolling Forecasts are quite popular today. But to implement them properly it is usually imperative to reduce the detail in the forecasting models. Less detail speeds up the process and helps to increase the accuracy.  A recent post on this blog looked at some of the problems with too much detail. The big question though is to where and how to cut detail. While people tend to look at the chart of accounts first, many organizations actually have great success with making a few modifications to their timescale.

THE BIG SCALE

Take a look at the photo below. It symbolizes one of the key issues with forecasting: the further out we look the more diffuse our view gets. While we might have a good idea of what is going to happen next month, it is usually more difficult to do the same for the months after. That’s just the way it is.

Rolling Forecasts - The time horizonUnfortunately, most forecasting templates do not reflect this fact of life. Take a look at the original time-scale from a customer that I used to work with. The organization wanted to look beyond fiscal year end. However, all months were treated equally:

A traditional time-scale (208 data points)

Notice how much detail is being generated. And detail requires effort. As a business person, I will have to sit down and try to provide an amazing amount of detail. This could take a while. The basic assumption of this template is that business people are able to precisely quantify when something is going to happen no matter if it’s tomorrow or next year. That is dangerous and it’s simply not possible. Here is an example: I might know that a certain customer will purchase my product next month. But I will most likely not be able to precisely identify the same thing for next year. The forecast will therefore most likely be wrong from a timing perspective. Why the detail then?

A DIFFERENT TIMESCALE

How about changing the timescale? Take a look at the final redesign in IBM Cognos TM1:

Rolling Forecast Model

Less detail. Probably more accurate (112 data points)

The new version reduces the detail by almost 50%. And this approach pays tribute to the fact that the further out we look the more diffuse our view of the future becomes. Overall, we could argue that this template will produce more accurate forecasts while also making it easier for the business. This is a lot easier to work with! My client implemented a similar timescale with excellent results.

YOUR MODELS

Take a look at your current models. Is there an opportunity to alter the timescale? How much detail could you get rid of? If you want to embark on implementing a Rolling Forecast, you should most definitely look at this approach. Please let me know your thoughts and experiences.

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Simplicity is the ultimate sophistication

Have you ever been to a giant buffet? Try to remember what it was like. We usually get excited when we see the various options and we ‘cruise the aisles’ to identify what we want. If you are like me, you have a hard time deciding and you end up wandering around taking a little bit of everything but nothing of anything. By the time you leave, you feel bloated and promise yourself to go easy next time. Chances are you won’t even remember what you ate.

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