I was perusing through the usual financial and business sources when I came across this interesting article in the Wall Street Journal titled, “Trying Times for Forecasting”. The article focuses mostly on financial forecasts and I think we have written a fair amount about the importance of making sure financial results derive from the same sources of data, professionals, and market input as the S&OP forecast – in fact, with differences only in level of detail, all three should be the same forecast.
However, this article raises a couple of interesting issues from the macro level – i.e. the value of financial forecasts and the impacts of external forces that I thought would be fun to dig into a bit.
First, all the participants in this article, and I would probably argue all officers of public companies and some private companies, agree to the value of demand forecasting and guidance. Specifically they list three specific areas of value:
- A less volatile and more fully valued stock prices (big value, sweet spot on the fiduciary responsibility component)
- Credibility with Analysts (never underestimate the importance of your reputation)
- Confidence of stockholders large and small (directly related to #1 above)
Yet at the same time the value of accurate forecasting was highlighted, concrete examples were showing where companies were sharing less information less frequently thereby making the guidance less useful. Specifically companies are:
- Increasing the min-max ranges (revenue will be 100 give or take a 100)
- Discontinuing the more difficult yet more meaningful variables
- Minimizing specifics.
This somewhat contradictory dynamic (to put it as nicely as possible) probably explains the huge swings in stock prices we have seen recently when forecasts have been missed – and when I mention huge swings I mean large drops in stock prices costing shareholders potentially billions of dollars in value; An interesting case study in how to manage shareholder value and the role of fiduciary responsibility.
I would argue it does not need to be this way. It seems to me that the answer is more information, and more of it with better quality. Given the right tools, process and strategic objectives (oh I don’t know – make sure our stock price is fully valued), companies should be able to provide forecasts that are accurate on the bedrock variables – revenues, margins, yields, growth rates etc. In addition, they should actually be able to provide detailed scenarios to showcase how much time, energy and thought goes into considering all the risks to the value drives of their companies – both within their industries and within the greater global market place at large.
Imagine the increase in credibility if, rather than stop reporting on yields or revenue growth, a company were able to provide detailed scenarios about what is impacting those yields or growth rates. The global forecast for interest rates is between A on the high side and B on the low side. If interest rates hit A, that will decrease our revenue within this range. If interest rates hit B, that will increase our revenue within this range. Same applies to growth rates in target markets. What happens if the Euro Zone implodes? Exchange rates diverge from historic norms? Sure this all complex and to a large degree inter-related but rather than give up, dive in and tackle them and use them to provide a richer context for the guidance provided.
This will improve your credibility with the entire investing community, ensure a fair value for your company, and help realize a further return on the strategic investment to improve demand forecasting.