Tag Archives: Rolling Forecast

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 Various studies, for example, have shown that over 60% of all annual budgets are outdated within the first fiscal quarter.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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Why continuous forecasting is more enjoyable

The case for continuous forecasting

Time for a confession. I really hated forecasting back in my old job. Kind of crazy since I was working with clients on improving their planning, budgeting & forecasting processes. Yet, I absolutely hated doing my own forecast. What was wrong? First of all, the template was terrible. Way too much detail. It took me hours to get it done. Luckily, I only had to do this 2-4 times per year. But that was also part of the issue. Every time I received the updated template I had to start from scratch and enter a ton of data. Also, I had to re-orient myself and figure out how the template worked this time. And then there was the reconciliation between my project plans and the prior forecast. To sum it up: The ramp-up time was simply too long. It was awful. But there is a better approach: Continuous forecasting

Fire-drill

Indeed, the typical process for updating, distributing, collecting and aggregating forecasting templates can take up to a few weeks in many companies. Part of the issue is that the forecast templates are often unavailable to the user community. Analyst need to maintain and update hundreds of spreadsheet templates between forecasts (formula fixes, structural changes, data loads). The process looks something like this:

Traditional Forecasting Process

The traditional spreadsheet-driven process

At the start of a forecast cycle, templates are distributed. Many business people feel overwhelmed at that point. Starting from scratch is always tough. You have to orient yourself, your have to build numbers up etc.. As a result, business people feel that forecasting resembles a fire-drill.

Forecasting software

But there is a much better approach that many of my clients have implemented. Modern planning & forecasting software allows us to keep our forecasting templates online nearly 24*7. Forecasting software like IBM Cognos TM1 automates and significantly enhances all those manual tasks such as formula fixes, data loads, aggregations, etc.. Overall maintenance is a lot easier and the templates can be online allowing the users to work with their forecast data around the clock. Forecasters can therefore perform quick incremental changes to their forecast instead of performing time-consuming, infrequent larger data input exercises. But what is the advantage of doing that? Very simple: Incremental effort is always easier and faster than ramp-up tasks. Think about your personal life: If you spend ten minutes per day cleaning up for desk or office, everything will be in good shape. But if you let things slip for a week or two, cleaning up suddenly becomes a daunting task. This is what the process can look like:

Continuous Forecasting

The continuous forecasting process

Continuous Forecasting

Does this work? Absolutely. I have experienced this myself. After every client visit, I spent a few minutes updating my forecast. A lot of my clients have implemented this approach. Clients typically experience three main advantages:

  • The more often you work with a system the more comfortable you become. Users tremendously benefit from that. Their efficiency increases.
  • The actual forecast process is a lot faster for the business users. Finance is able to reduce cycle-time.
  • Forecasts tend to be more complete. In the case of an urgent ad-hoc forecast (imagine something critical happened), the business is able to compile a near complete forecast in within a short period of time.

But the Finance department now has to carefully manage this process and clearly communicate timelines and expectations to the business. Submission deadlines need to be crystal clear.

Let me clarify one last thing: A continuous process does NOT mean I can simply aggregate my data every night and obtain an updated forecast. No, I need to communicate to the business WHEN I need the data. But due to the 99% availability I can collect my data very quickly.

Continuous forecasting can be a powerful approach! Would love to hear your thoughts and experiences. Good or bad. If you are interested in this topic, why don’t you join of our Rolling Forecast workshops or IBM Finance Forum?

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The reputation of business forecasting is not positive – Time for change!

Business Forecasting

The budgeting and business forecasting processes often have a poor reputation in many companies. Part of the issue is that the people involved in the process do not see a lot of value in it. Last year in November, two of my colleagues and I conducted a survey amongst 162 senior finance professionals in the UK.  One section of the short questionnaire focused on the value and the perception of the business forecasting process.

Good is the enemy of great

The survey asked finance professionals two different questions:

  • How do you rate the value that you get out of the forecasting process?
  • How does the business rate the value they get out of the forecasting process?

Here is what we found:

Business Forecasting

Business Forecasting: Low satisfaction & value

The results are sad – not necessarily surprising, though. Only 37% of the finance people rate the value they receive from the forecast process as good or outstanding. The rest feel it is just adequate or poor. It gets worse when we look at the business users. Less than 27% feel they receive good value.

Some people might be tempted to say that the results are not that bad. Be careful, though. Business forecasting is a critical process in turbulent times. And it is time-consuming in many organizations. We should therefore not be satisfied with ‘adequate’ or ‘poor’. Imagine we would apply the same standard to our personal life? It would be a very sad life, indeed. Or think about professional athletes – they would not put up with ‘adequate’ materials or training plans. That would put them in the lower performance bracket.

Time for change

Take a look at your business forecasting processes. How satisfied is finance? What about the business? We should not accept ‘adequate’ or ‘poor’ for an answer. The stakes are too high. And we should not waste our valuable time managing low-value processes.

It’s time for change! In one of the upcoming posts,  I will write about some of the reasons that lead to the poor perception of the business forecasting processes. In the meantime, you can find ideas for improving your processes on this blog. Alternatively, pick up the fantastic book Future Ready: How to Master Business Forecasting. The authors Steve Player and Steve Morlidge have done a fine job of providing insightful best practices.

Remember the words of management researcher Jim Collins: “Good is the enemy of great.”

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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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Business Analytics news for the week

Business Analytics news

This has been an extremely busy but exciting week. It seems like the whole world is full of energy. Here are a few things you might want to be aware of.

CFO.com Webinar Forecasting

If you are interested in forecasting, make sure to register for the upcoming CFO.com webinar ‘Forecasting in turbulent times‘. Together with Tom Willman (Principle, The Hackett Group), I will discuss trends and best practices for improving your forecasting processes. The webinar is scheduled for Thursday, March 15th.

cfo.com

Cognos Insight & TM1 10.1 launch

Yesterday was the official launch event for Cognos Insight and TM1 10.1. I was blown away by how many people participated. As a track host, I was especially excited to see so many questions coming through. In case you missed it, you can still watch most of the sessions on demand. I highly recommend the keynote. Robby Meyers from DirecTV gave a fantastic demo of Cognos Insight. Make sure to watch that one. It’s great to see how a successful company like DirecTV leverages Cognos Insight.

Analyticszone.com

There is a great new website and community entirely dedicated to Cognos Insight. Make sure to check it out. The new site provides you with a bunch of great stuff: sample Insight models, tutorials, discussion forums etc.. You can also download a revised version of the famous IBM Cognos Blueprints. Yes, they have been redesigned to work in Cognos Insight. Make sure to also upload your files and share your experiences!

Analyticszone.com

Updated iPad app

There is an updated version of the Cognos iPad app. You can downloaded it directly from the iTunes store. The latest version has a slightly different look and feel. It also feels snappier. There are also a bunch of other enhancements under the hood. And there is also additional demo content in there. The upgrade takes about a minute. And….can you imagine how awesome all your Cognos report will look on the new resolutionary iPad?

Harriet & Christoph – the story continues

Want to see me as a bobble head? Some of you may have watched the Cognos Insight demo at the IBM BA Forum in October 2011. My colleague Harriet Fryman and I demonstrated how the business and IT can get along using Cognos Insight. Our creative team took that story and has created a series of hilarious bobble head movies. The latest edition was released last night. In the prior video, Harriet put Sleep-eeze into my coffee. Time to get even! The other parts are also available on You Tube.

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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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Better Forecasting And Budgeting Starts With Analysis – IBM Cognos 10 in Action

FORECAST ANALYSIS

Much has been written about developing better forecasting and budgeting templates or improving the overall process. But to my surprise there is hardly any focus on the role of analysis. I have seen many organizations where managers ‘survive’ the forecasting and budgeting cycle without ever spending time performing meaningful analysis of their data. They simply focus on getting the numbers in to satisfy finance and senior management.

This is a wasted opportunity. People should use that occasion to gain insights about their business. Lack thereof is likely to result in forecasts and budgets that are not meaningful. Some of you might say: ‘Wait a second! Managers do obtain some reports.’ True. They get the classic variance report with a ton of detail. But working with this is time-consuming and it is extremely difficult to identify critical trends and to see the big picture.

Forecasting Report

A traditional variance report. What does it tell us?

BETTER FORECASTING WITH ANALYSIS

Using a Business Analytics platform like IBM Cognos 10, you can make is easier for managers to gain critical insights. Here are a few ideas that you might find useful. Let’s look at the example of a sales manager for a European division of a global company. This manager has to forecast revenue and associated expense.

1. GO VISUAL

First of all, toss those detailed variance reports. Line of Business managers will most likely not obtain any information from them. Human beings do much better processing visual information. You can find a lot of information about this topic on this blog. So, try to swap out those hundreds of data points with a few meaningful charts. Your teams will be thankful.

2. CONSIDER EXTERNAL DATA

The variance report does not really tell us anything about our business potential. We could therefore consider looking at external data such as market trends. More and more of my clients do that. It helps them with assessing their overall position and it also helps them set realistic but ambitious targets. The example below shows that market growth in Europe is a bit limited compared to North America and Asia.

Market Size chart

The situation in Europe is not looking good

3. STUDY HISTORY

History is not necessarily a predictor of the future. But we should not ignore it. We might be able to identify seasonality and to detect general trends. Pick the critical measures. Line charts are usually a great choice to display this type of data. The example below shows that revenue is cyclical and that the general trend is positive:

Revenue Reporting

On the rise: Revenue trend for Europe

 

4. CHANGE YOUR PERSPECTIVE

One of the nice things about modern Business Analytics tools like Cognos 10 is that we can view data from multiple different angles. Use that capability to your advantage! Try to explore different perspectives. Look at the example above. Now, compare this to the view below. Same data. Just a simple change in Cognos 10:

IBM Cognos 10 dashboard

A different perspective

Our biggest months used to be in summer time. But that has shifted towards year-end. Same data – different perspective. Explore!

5. BENCHMARK YOURSELF

It makes sense to learn from others as well. We could do some internal benchmarking as well. In our example, we could look at deal sizes (looks like Europe’s deals are growing nicely and they are above company average):

Deal size chart

The average deal has grown bigger

Ok. That sounds good. But does the deal size come at a cost? Once again, let’s do some internal benchmarking and look at the ratio of expenses and the associated revenue. It looks like Europe is slightly higher which might explain the higher deal size.

Expense Ration chart

Every penny that is earned in Europe requires higher expenses

That information is valuable. It also leads us to think further and to ask some critical questions (Does it make sense to review our spending? Does the higher spending lead to bigger deals?). We should obviously not stop right here.

6. LOOK AT LEADING INDICATORS

What about other non-financial data as well? For revenue budgeting, I might also want to look at a leading indicator like customer satisfaction. And I might also want to look at our track record of winning deals (win-loss-ratio). Take a look:

Customer satisfaction chart

Customer satisfaction is rising again. A leading indicator for sales?

BETTER INSIGHTS

This is a simple example. The manager is now equipped with a few key insights:

  • Market growth is low
  • Our revenue trend is still positive
  • Buying patterns have shifted
  • Our strategy of investing in selling activities has increased the deal size
  • Customer satisfaction is increasing which could lead to higher sales

These are valuable insights. And it did not take much time to obtain them. The old variance report would not have provided that insight and it would have consumed a lot of time.

Try to incorporate a few of those ideas in your forecasting and budgeting processes. Doing this with spreadsheets is obviously difficult and probably explains why so many organizations are stuck with the traditional approach. Business Analytics software like IBM Cognos 10 makes it a lot easier to do that.

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Rolling Forecasts Keep on Rolling

Am I surprised? Yes. Maybe I shouldn’t. Our rolling forecasts events were popular in the past, but they keep getting more and more popular.

ROLLING FORECASTS TODAY

Rolling Forecasts are indeed an important topic. And why wouldn’t they? Business and life in general is turbulent these days. No doubt about that. Just think about all the stuff that has happened this year. Major events like Tunisia, Egypt & Fukushima almost seem far away given the significant rate of change these days. And most of these events have a profound impact on the world economy. Think about Fukushima: it happened in Japan but the ripple effects created a serious tremor in Germany (the German government decided to completely pull out of nuclear energy within the next few years). Volatility and uncertainty have therefore increased the need to improve forecasting and decision making processes in almost every business.

THE FALL SEMINAR SERIES

Rolling Forecast Popularity

The number of participants is significantly increasing

We have been running a lot of rolling forecast seminars around the globe for the past few years. The workshops are very interactive and feature a ton of hands-on best practices. We used to run them as roundtable events with a huge focus on personal interaction and discussion. But the latest series is different. My colleague and friend Mark Rolfe just blogged about it earlier this week: we have been getting so much interest that the events are no longer roundtables. We just can’t find any tables that can fit 50-150 people. The events are that popular. This week, we had over 40 people in London. Next week, we are expecting well over 40 people in Bratislava. While I personally prefer the smaller sizes (more interaction), I am certainly happy to see that companies are interested in improving these critical processes.

HAVE YOU JOINED?

The trend is very interesting. It seems to me that we are about to see a profound change in the way we run our businesses. The traditional annual budget process is just not working anymore. The huge popularity of these events reflects this trend.

Are you interested? Please get in touch with me. You can find a description of the seminars on this blog. Also, take a look at the upcoming events in Europe. My colleague Tim O’Bryan can provide you with information about North America.

P.S.: We are conducting a small survey amongst the participants. Look out for some interesting results in late November.

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Improve your forecasts – 6 things we can learn from weather forecasters

Back in April, I posted an interview with a master forecaster: Franz the Frog. Interestingly enough, this post is one of the most popular entries on this blog. But all jokes and irony aside: Weather forecasters are indeed world champions in forecasting and there are some lessons that we as finance professionals can learn from them. Let’s take a look:

LESSONS FROM MASTER FORECASTERS

1. Forecasts should be objective: Have you ever seen a subjective weather forecast? Well, it may feel like that sometimes. But weather forecasters do not publish what they think the public or the managers of the TV stations or newspapers want to hear. That would be dangerous. No, they strictly publish what their algorithms and forecasting processes show them. We can therefore rely on them (except for the obvious and inherent forecast errors that can occur).

2. Forecast discussions should look forward not backward: Huh? Well, weather forecasts focus on the future. Have you ever seen a weather person spend 75% of his time explaining past variances, apologizing and arguing about assumptions? No. Weather forecasts are strictly forward looking. The focus is on what lies ahead and not on what happened in the past.

3. Forecasts should be flexible: How often do we we get an updated weather forecast? Once per quarter? Once per month? No, the weather is too volatile for that. The forecast would be outdated within a few hours. People might be unprepared for a snowstorm, for example. Instead, weather forcasters continuously update their models when new information arrives. That way we can all rely on the most current and accurate forecast. We don’t have to worry too much about being caught in dangerous weather.

4. Forecasts should speak a clear language: Weather forecasts are being presented in a simple and concise manner: “Heavy winter storms expected with up to 20cm of fresh snow.” This type of presentation allows us to quickly make decisions (stay at home). The message is not hidden in hundreds of lines of technical details.

Today's forecast is detailed. The further out we look the less detail we have.

5. Detail is adjusted based on the predictive ability: What is easier to forecast – the weather tomorrow or the weather in two weeks? Stupid question: the weather tomorrow. Weather forecasts acknowledge that they cannot predict weather much further out than a few days. And they adjust the level of detail based on that insight. Today’s forecast shows detail by the hour. The forecast for next week is just a general trend (‘rising temperatures expected’). This approach obviously reduces the effort involved in creating the forecast. Most importantly, this approach avoids the trap of setting wrong expectations (“I thought it would be sunny in three weeks from now!”) More detail does not mean higher accuracy.

6. Forecasts are compiled with the help of modern technology:

Technology drives efficiencies and increases effectiveness

What type of instruments and tools do weather forecasters leverage? Weather frogs, old fashioned thermometers, wet fingers, flight patterns of birds? No, they rely on modern technology. They continuously push the envelope and upgrade their equipment. This tremendously speeds up their work while also reducing mistakes and increasing the accuracy. They actively look for new ways to improve their processes and techniques.

YOUR FORECASTS?

Think about your forecasts. How do they stack up when compared to these six characteristics? Are there areas where your forecasts can improve? If you are interested, join of of our Rolling Forecast workshops to learn more.

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