three d’s for improving your forecasting process · is room for improvement. cfos today have the...
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BUSINESS PERFORMANCE SERVICES
Three D’s for Improving Your Forecasting Process
ADVISORY
ContentsDecisions 2
Data 3
Discipline 5
Conclusion 7
1 Forecasting with Confidence: Insights from Leading Finance Functions, KPMG International, 2007, page 2 2 Ibid., page 6
Forecasting with Confidence, a 2007 study commissioned by KPMG International and conducted by the Economist Intelligence Unit, reported that almost half of surveyed organizations believe the reliability of their financial data is merely adequate or worse; a majority think the same of their nonfinancial data.1 Further evidence abounds. Without reliable data, forecasting is not only a waste of time, it is also potentially damaging to your business.
The failure of forecasting is particularly painful given the ever-heightening need for
it: product and service life cycles are shorter, competition can come from anywhere
in the global marketplace, and every company must be flexible and forward-looking
to survive. What’s more, the tools and technology to enable better forecasting have
matured. Business performance measurement (BPM) applications, now in their second
or third versions, are gaining greater integration with major enterprise resource planning
(ERP) applications. And these tools are at the disposal of the chief financial officer
(CFO), who now takes an increasingly strategic role in the business.
What are the stakes in forecasting? Successful business performance is closely tied
to better practices in forecasting. For example, share price growth is 12 percentage
points higher for the most accurate forecasters; and improved reliability in forecasting
leads to improved ability to recognize opportunities (68 percent) and to manage risk
(66 percent), according to the same study.2
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 070630
2 T H R E E D ’ S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S
Given the imperative for accurate forecasting, the availability of better tools and
techniques, and the recent empowerment of CFOs to implement change, why aren’t
companies more successful in their forecasting efforts? Tools and techniques alone
cannot produce successful forecasting. Companies have struggled to forecast with
reliability because they haven’t focused sufficiently on forecasting fundamentals—
what we call the three D’s: decisions, data, and discipline.
Decisions: You need a reason for forecasting, and the reason is leadership’s targeted
desire to obtain forward-looking information that can facilitate specific business decisions.
Data: You must find a way to acquire and maintain accurate, relevant, and timely
data that support business decisions.
Discipline: The forecasting discipline includes a commitment to managing the business
in a forward-looking manner, embedding the forecasting process in the organization,
and consistently using forecasting as an element of strategic decision making.
Almost every company attempts to forecast in some form or other, but among KPMG’s
survey respondents, only 22 percent qualified as leading forecasters.3 Clearly, there
is room for improvement. CFOs today have the opportunity to increase their fore-
casting effectiveness by using the three D’s.
DecisionsWhat makes forecasters effective? And why do effective forecasters do better in
the marketplace?
Effective forecasters know what they’re looking for and why. They’re looking for
answers to their most pressing questions—whether about north Atlantic weather,
the price of silicon, or Chinese investment regulations—to help them make good
strategic decisions. They do better in the marketplace because they’ve committed
to using forecasting consistently and they put that commitment into practice as they
lead the company.
Taking a page from business reporting history, the first financial data warehouses were
built in the late 1990s to help managers answer “any” question, which added up to
confusion and complexity. It wasn’t until data marts (subsets of data warehouses)
were developed to answer specific issues—for example, the spending habits of seg-
mented buyers—that the potential of the financial data warehouse came to fruition.
Forecasting Tools and TechniquesThese tools and techniques, listed from strategic to tactical, are available to CFOs:
•Automationthroughinformation technology (IT) systems and tools
•Morescenarioplanningand sensitivity analysis
•Rollingforecasts
•Reductionindetailandgreaterfocus on key business drivers
• Improvedqualityofinputdata
•Simplificationandstandardizationof processes
•Managementincentiveslinkedto forecast
•Formalmeasurementofforecast accuracy
• Improvedspeedtocollectand consolidate forecast data
• Involvementofoperationalmanagers
•AutomationthroughITsystems and tools
•Trainingofstaffinforecasting (both finance and nonfinance areas)
•Cleartimetablesforforecasting
•Focusonforecastsduringperiodic performance reviews
•Frequencyofforecasting
3 Leading forecasters produce forecasts that are within 5 percent of actual results.
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 070630
T H R E E D ’ S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S 3
It is fruitless to task finance with mobilizing people, processes, technology, and
controls in a forecasting effort without a sound understanding of the business lead-
ership needs—the questions and decisions that will drive the success or failure of
the business. The need for effective forecasting will not come from outside the
business—from regulators, for instance. Leadership must recognize the potential
value of effective forecasting and set about engineering a forecasting process that
will address the particular questions the business needs to answer. Leading compa-
nies know how to target top-of-mind issues—such as navigating market uncertainty,
establishing governance and controls, increasing shareholder value, and building trust
externally—and they focus forecasting efforts to aggregate and filter helpful informa-
tion in these areas.
Is your forecasting process designed to address your strategic business issues?
As the forecasting questions become more complex and difficult every year, is
your process configured to carry you forward?
DataBusiness leaders are hungry for insightful information, which in turn depends on
high-quality data. It’s not surprising that more than one third of companies (34 per-
cent) believe that improving data quality is a leading way to improve their faith in
their forecasts.4
It is obvious that predicting the future is more difficult than reporting on what has
already happened. Many of the questions a forecasting process targets require that
both financial and operational data be complete. While this is not a simple effort by
any means, successful forecasting processes have the following key characteristics
relative to data. They:
• Exploit currentefforts
• Create transparencybacktothedatasources
• Incorporate externalkeyperformanceindicators(KPIs)anddatasources.
Leaders Exploit Current Efforts
Managing the business based on data and information is not new and finance is
not being asked to attempt something that the organization is not already doing.
To support this core activity, many companies are undertaking data standardization
and access initiatives for the purposes of risk management, reporting accuracy and
transparency, improved decision making, and better customer relationships.
Business Goals Should Drive ForecastingThe goals of forecasting for different com-panies will be as varied as their strategic business goals. For example, forecasting questions and answers could reflect any one of these strategic goals:
•Achievenextfiscalyear’stargeted return on investment
•Plancapitalexpendituresforthenext 18 months
•Understandnewmarketsandhowto contribute to profitability in the next fiscal year
•Achieveend-of-yearbudgetgoalstwo to four months out
•Understandthestrengthofthesales pipeline
•Providealternativescenariostoaccount for weather-related risk
•Anticipateandcontrolcoststhrough global sourcing
•Ferretouthiddeninefficienciesthat accompany sales growth
4 Ibid., page 12
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 070630
4 T H R E E D ’ S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S
As a first step, understand and leverage your own company’s current efforts around
data management to ensure that you are not only creating but also maintaining the
key pieces of data that you need for forecasting. In practice, much of the data you need
(1) probably exists but isn’t refreshed appropriately, (2) may reside in multiple systems,
or (3) is not in the form you need. As data warehouses are being standardized for all
kinds of purposes, a key requirement is for them to serve the forecasting process.
Leaders Create Transparency Back to the Data Sources
Assuming you have identified the historical data needed to support forecasting, first
determine if it exists in your company and how you can best gain access to it—
whether it resides on a database, a spreadsheet, or in some analyst’s head. Second,
test the data for transparency: Can you see source detail? Can you slice the data to
accommodate your needs?
If the data doesn’t exist, determine a method for accurately calculating or compiling
it, and, just as importantly, agree with stakeholders on that method. A “single version of
the truth”5 is required for forecasting, but that version is valuable only if the method
used to determine it is accepted by the business.
Leaders Incorporate External KPIs and Data Sources
Whether or not you have all the available forecasting information to answer a busi-
ness question, you can enhance the richness and in many cases the reliability of the
forecasting by incorporating external data sources. For example, if you don’t have
adequate sales forecasting, you can improvise by using industry trends or other
third-party data to benchmark target sales numbers. Similarly, external cost trends
and industry averages can help to quantify or even qualify a forecast of expenses.
Creating standardized relationships between internal and external financial and opera-
tional sources can provide both insight and consistency in your forecasting.
5 In computerized business management, single version of the truth (SvOT) is a technical concept referring to how data is selected for analysis. Selection from two or more equally valid representations of input data may be arbitrary, but henceforth “sets in stone” one and only one version of the truth.
See also Julia King, “Business Intelligence: One version of the Truth: Getting there takes more than sophisticated business intelligence software. It takes data quality and political battles, too.” Computerworld, December 22, 2003.
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 070630
T H R E E D ’ S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S 5
KPMG’s research has shown that automation through IT systems and tools, reduction
in detail and greater focus on key business drivers, and improved quality of input
data are three of the top five factors that provide the greatest benefit in improving
forecasting confidence.7
How well does your forecasting effort leverage data quality initiatives that are
already taking place in your organization? Have you achieved a single version
of the truth in your forecasting calculations and metrics? Are you exploiting
external KPIs and data sources?
DisciplineAccording to Forecasting with Confidence, leading forecasters take accountability more
seriously than less-successful forecasters do, are more likely to enhance forecast quality
through scenario planning and sensitivity analysis, leverage information more effectively,
work harder at forecasting, and benefit their shareholders more.
Once leadership commits to forward-looking decision making and management of
the business based on ongoing capture and analysis of relevant data, it cannot
proceed without a well-designed and sustainable forecasting machine.
That’s where discipline comes in—the discipline to:
• Create aconsistentfocusonthebusinessissues
• Develop asingleversionofthetruth
• Rely consistentlyonforecastintelligencetomakemanagerialdecisions
• Embed forecastingintotheculture.
Forecasting should be part of a larger process related to strategic execution in orga-
nizations. Its interaction with other major planning and managerial processes—such
as strategic planning, budgeting, capital appropriation, monthly and quarterly analysis,
and the like—is critical to optimizing its value to the organization.
Driver-Based Forecasting
Rather than building financial plans solely on static, detailed internal data that is merely self-reflecting, leading organizations focus on the key dynamic internal and external business drivers that concern management —such as customer demand, competitor activity, and economic conditions. Although more difficult to obtain, map, and predict, these measures provide greater value and insight into the business environment than strictly internal details can. In fact, two of the four areas where organizations see most forecasting errors are ones where such external data might help: consumer demand (38 percent) and economic drivers (29 percent). The most accurate forecasters do look further afield: 68 percent of them use market reports, for example, against just 55 percent of their peers.6
6 KPMG International, op. cit., page 147 Ibid., page 42
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 070630
6 T H R E E D ’ S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S
Forecasting today resembles quality control in the early 1990s. Quality control depart-
ments were typically large and well staffed, but no matter how hard inspectors tried,
they couldn’t improve quality until they made everyone in the business quality focused.
Similarly, leadership today needs to move forecasting out of finance and into the
business so that it’s embedded in day-to-day activities and part of everyone’s job.
That’s a fundamental cultural change, one that requires us to look at ownership of
forecasting.
Although implementation of forecasting is properly the domain of finance, owner-
ship of the process belongs with the recipient of the results, which is the business.
In a 2006 budgeting and forecasting survey conducted by KPMG, 78 percent of
respondents said the business owned the budget. While finance was the driver of
the process in the majority of cases, finance was the owner of the process in only
19 percent.
Forecasting with Confidence (page 33) echoes this view: “Leading forecasters
embrace forecasting as a core business process, one that engages operational deci-
sion makers across the business. They tap into their managers’ knowledge in real time
so their forecasts mirror actual frontline events, and managers remain engaged in the
debate about potential courses of action. In this way, operational managers own and
are accountable for their forecasts, and they value the process as a crucial manage-
ment responsibility.
“Involving the right people in the process also breaks down organizational silos and
enables managers to understand how their decisions affect other parts of the organi-
zation. As a result, enhanced dialogue, openness, and a level of integration between
various parts of the business emerge that enable business managers to use the
discipline of forecasting to improve performance.”
The survey data provide some support for this notion: among the more accurate
forecasters, 40 percent are more likely to have operational and line managers do the
work, versus 34 percent among the less accurate. Within leading organizations, senior
managers sponsor and value the financial planning exercise, are visible and active in
reviews, provide clear direction and coaching, and follow up on the actions arising
from the process.
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T H R E E D ’ S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S 7
In addition, “making the budget” has been a key driver of behavior and compensation
at many organizations. Those companies that have chosen to manage the future as
aggressively as the past are striving for the proper balance between “making the
numbers” and positioning for long-term success—and they’re aligning compensation
with their new management discipline.
Understanding what you need to measure and having accurate data available can
move your forecasting process forward. However, for the process to excel, all
levels of the organization need to collaborate with a common purpose and focus.
not addressing the discipline aspect of forecasting severely limits the overall
achievement of goals.
How much discipline has your organization developed in looking ahead at the
business climate? Developing a single version of the truth? Using forecast
intelligence as the basis for managerial decisions? Working across silos and
embedding forecasting into the culture?
ConclusionEvery business tries to anticipate the future; successful businesses take an active,
aggressive role in shaping it. A well-designed and information-rich forecasting process
is a prerequisite for this effort. The design, detail, and structure of your forecasting
process will be specific to your company’s strategy and goals. Customized and
accurate forecasting—focused on the critical issues driving your business’s success—
reveals your single version of the truth.
With a heightened demand for better business foresight, the availability of
more-evolved tools, and greater potential on the part of the CFO to implement
cross-functional change, organizations have the opportunity to develop and leverage
their single version of the truth—if they keep the proper focus on decisions, data,
and discipline.
Many companies still live in a world where understanding what has already happened
is a challenge, let alone what might happen next. Companies that engage in a process
to shape where they are going and where they can outpace their competition have a
distinct advantage. Aggressively pursuing a value-rich forecasting process is increas-
ingly a requirement for success, not a luxury.
Tools exist. The CFO has permission. now you have the opportunity to take the
upper hand by keeping the focus on decisions, data, and discipline.
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 070630
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© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 070630
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