AFP GUIDE TO

Forecasting:

Best Practices for Common Challenges

FP&A Guide Series
Issue 1

About the Author

Nilly Essaides is Director of Practitioner Content Development at the Association for
Financial Professionals. Nilly has over 20 years of experience in research, writing and meeting
facilitation in the global treasury arena. She is a thought leader and the author of multiple
in-depth AFP Guides on treasury topics as well as monthly articles in AFP Exchange, the
AFPs flagship publication. Nilly was managing director at the NeuGroup and co-led the
companys successful peer group business. Nilly also co-authored a book about knowledge
management and how to transfer best practices with the American Productivity and Quality
Center (APQC).

About the Association for Financial Professionals

The Association for Financial Professionals (AFP) headquartered in Bethesda, Maryland,
supports more than 16,000 individual members from a wide range of industries throughout
all stages of their careers in various aspects of treasury and financial management. AFP is the
preferred resource for financial professionals for continuing education, financial tools and
publications, career development, certifications, research, representation to legislators and
regulators, and the development of industry standards.
Association for Financial Professionals
4520 East-West Highway, Suite 750
Betesda, MD 20814
General Inquiries
Web Site
Phone

[email protected]
www.AFPonline.org
301.907.2862

Copyright 2013 by the Association for Financial Professionals Inc. All Rights Reserved

AFP GUIDE TO

Forecasting:

Best Practices for Common Challenges

FP&A Guide Series
Contents
Introduction

An Inflection Point

Sidebar: The Data Speaks

Common Problems and Best Practice Lessons

Sidebar: How to Improve Accuracy

13

Practitioner Case Studies

14

Case Study 1:
Speck Products Re-Budgets and Re-Forecasts

14

Case Study 2:
PACT Forecasts to Meet an Overhead Target

17

Case Study 3:
Planet Hollywood Refreshes the Forecast

19

Case Study 4:
Statoil Links Forecasting and Agility

21

AFP GUIDE: Forecasting

Introduction
Judging by the sense of uncertainty and the velocity of business change in
recent years, one might have assumed that forecasting practice should have
been top of mind among CFOs and financial planning and analysis (FP&A)
professionals. Yes, there has been significantly more conversation around forecasting and concepts such as Beyond Budgeting, but less so a clear indication
such concepts are gaining true traction. Just how far have companies gone in
bringing their forecasting methods up to date?
Surprisingly, not very far at least not yet. Multiple interviews with experts
and practitioners from companies of different sizes and in different industries,
combined with quantitative analysis based on the Association for Financial Professionals (AFP) 2013 Risk Survey, sponsored by Oliver Wyman, reveal a wide
chasm remaining between where experts and market leaders say companies
should be and where many of them actually are (see case studies beginning on
page 14). Theres also a large disconnect between perception and action: while
financial executives agree the world is harder to predict, only a small percentage
(13 percent) report that theyve made significant changes to their forecasting
and planning processes (see sidebar on page 3). Whats behind this apparent
contradiction?
This guide attempts to answer that question and lays out a roadmap for
companies wishing to make significant changes in their approach to FP&A.
Indeed, there are new data indicating that more companies are planning to
make changes. Results published in recent surveys from KPMG and The
Hackett Group show CFOs have targeted FP&A as the number-one area for
improvement, and forecasting is at the top of their list.
The guide examines some of the common hurdles to effective forecasting
and presents the related best practice lessons. It relies on data and extensive
practitioner interviews to support observations about the current state of
forecasting and planning practices as well as where theyre headed. Finally, this
guide provides four practical case studies which showcase different companies
approaches to forecasting, illustrating various stages of process maturity.

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AFP GUIDE: Forecasting

An Inflection Point
Theres no question the world is becoming more
unpredictable. The 2013 AFP Risk Survey reveals
that over 59 percent of financial executives are facing greater volatility in earnings today than they
were five years ago. In addition, more than half of
financial professionals report that it is more difficult
to forecast risk today relative to five years ago, according to Oliver Wyman, the surveys sponsor. This
result is consistent across all types of organizations,
according to the report. And its not getting any
easier. While over half of respondents in the survey
indicate risk is more difficult to forecast currently, an
almost identical share expects this trend to continue.
One of the biggest challenges, according to survey
respondents, is integrating forecasting data into strategic decision-making. Thats exactly where FP&A
comes in (see sidebar on page 3).1

While a Majority Faces Increased

Uncertainty, Few are Making
Significant Changes
Natural resistance to change, political hurdles, common forecasting mistakes and the lack of a burning
platform (or major crisis) were all at the forefront
in discussions with experts and practitioners as to
why a persistent gap exists between what is and what
could be. While theres growing acceptance of new
concepts like rolling forecasts, many businesses are
still having a difficult time changing the status quo.
One of the reasons things have not changed faster
is that research has proven that theres a 50-75 year
lag between ideas being proven in management, in
education and then those ideas being widespread,
said Christopher Avery, CEO of Partnerwerks and
a leading authority and frequent speaker on agile
leadership and culture.
Perhaps not surprisingly, the AFP Risk Survey
reveals that companies concerned about volatility are
much more likely to have made changes. That holds
true regardless of organization size and type. In fact,
financial professionals who report that forecasting has
become much more difficult in recent years are twice
as likely to have made changes to their forecasting
processes as those who do not (see charts to the right).

Change in Exposure to Uncertainty in Earnings

Relative to Five Years Ago
(Percentage Distribution)
Exposed
to the
same
level
29%

Exposed
to more
59%

Exposed
to less
12%

Change in Organizations Forecasting of Critical

Variables Relative to 5 Years Ago
(Percentage Distribution)

37%
18%

23%
9%

13%

1 Little-to-no
2 3 Somewhat
4 5 Significantly
change different
different

Unpredictability Leads to Action: Whos Making Changes?

100%=Financial professionals indicating forecasting is
not significantly more difficult relative to 5 years ago

11%

100%=Financial professionals indicating forecasting

is significantly more difficult relative to 5 years ago

23%

1. For more information on the AFP Risk Survey, visit www.AFPonline.org/risksurvey

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AFP GUIDE: Forecasting

The Data Speaks

When the 2013 AFP Risk Survey data is analyzed further, it reveals some interesting trends specific
to changes in forecasting, according to research conducted by David Beckoff, Manager of Survey
Research at AFP.
Smaller, private companies lead the way. While incidents of significant change in forecasting
processes are few, privately held companies are twice as likely as public ones to forecast
variables very differently than they did five years ago. When the analysis includes those companies
that made changes to some degree (rating a 4 or 5 on a 5-point scale), the differential
holds according to size as well: 45 percent of small companies have made some change in their
forecasting processes versus 26 percent of large organizations that have done so.

Organizations More Likely to Have Made Significant Changes in Forecasting

(Percentage of Organizations Providing Ratings on a 5-Point Scale for Level of Change)

Significantly different (5 rating)

Between somewhat and significantly different (4 rating)

27%

23%
22%
18%

9%

Private
Public

19%

18%
Annual revenue
below $1B

7%
Annual revenue
greater or equal to $1B

According to Nestor Nova of Planet Hollywood (see case study 3, page 19), [Smaller companies]
face a more rapidly changing and volatile environment. This is also driven by how smaller companies
experience growth, he said. A lot will depend on the short-term risks a company faces.
The challenge for smaller, private organizations is understanding that even absent the external
pressure from The Street on quarterly earnings and forward-looking estimates, these
companies need to maintain tight financial discipline and offer guidance to their own unique
stakeholders like banks and investors, according to Josh Gibbons, Finance Director at Speck
Products (see case study on page 14). But unlike larger firms, [Smaller companies] dont have
all the resources. Its up to a handful of people to actively seek out forecast input and get the
rest of the company to buy into why its important, Gibbons said. Private companies dont
always get that its important to manage internal and external expectations. Just because theres
no ticker symbol, you cant let go of that responsibility. Thats part of the finance team educating
the rest of the business. Its reminding people that its still important to communicate expectations
to our stakeholders.
Whats working in smaller companies favor is that they can move more quickly. Nova pointed out
that smaller and midsize organizations have an advantage over large, often less agile players. Its
easier for [smaller organizations] to adopt changes, he explained. For large companies, changes
do not come about as rapidly. When we have to change, we can just do it, Nova said.

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AFP GUIDE: Forecasting

According to a May 2013 survey

of 358 finance executives by
accounting firm KPMG, CFOs
number-one priority in the next
two years is improving business
planning and forecasting.

Recent surveys from KPMG and The Hackett Group

show that many more companies are likely to follow suit.
Youre right that the feeling out there is that volatility has
continued to make forecasting more difficult, said Tom
Willman, Associate Principal and Global Practice Leader
for the Finance Executive Advisory Program at The Hackett Group. As a result, the consulting group sees a greater
focus on forecasting improvement. Every year we poll
our CFOs about what changes they anticipate. In 2013,
over 70 percent said theyre going to make changes to their
forecasting and modeling capabilities, Willman said.
According to a May 2013 survey of 358 finance executives by accounting firm KPMG, CFOs number-one
priority in the next two years is improving business planning and forecasting. The survey, featured in an article in
the May 2013 issue of CFO Journal, reveals that over 70
percent of finance executives ranked FP&A as their top
area for improvement. Sixty percent also said that management reporting and analytics tools are among their biggest
near-term priorities. Xena Ugrinsky, a partner in KPMGs
Enterprise Performance and Analytics Group,told CFO
Journal that the old way of doing things is no longer sufficient because of growing pressure from The Street on
forecasting accuracy and the rapidly shifting economic
and competitive environments.
Businesses used to be insulated. But today competitors
can be in China as easily as down the street. The world is
more fluid, and thus there is more risk and movement,
said Steve Player, Managing Partner of the Player Group,
Program Director for the North American arm of the
Beyond Budgeting Roundtable (BBRT) and co-author of
Future Ready (published in 2010) which looks at common

forecasting illnesses and best practices. Certainly some

industries are more volatile than others. Those industries
reward the adaptive company. The ones that wont change
die right away. If you dont adapt, youre going to pay a
price very quickly, he said.
That doesnt mean everyone is doing it well, Player
acknowledged. Because of the education cycle, companies need to go through an evolutionary process. Most
people are dissatisfied with their forecasting process but
dont know what to change. Many polls reveal frustration
with forecast accuracy. But forecast accuracy is not the objective, according to Player. The objective is to optimize
the outcome.
What were talking about is a huge white space, said
Steve Morlidge, co-author of Future Ready and for 25
years a FP&A and performance management practitioner
in companies such as Unilever. The question is: how do
you build control processes for large complex organizations that have to increasingly develop agility, he said.
Traditional processes are extremely crude and they are
100 years old. In effect, a bad forecast is worse than no
forecast, Morlidge cautioned. With no forecast, you
know that you dont know. You proceed with caution. But
a bad forecast creates a false sense of security or can lead
you to make wrong decision.
To be fair, things have changed quite a lot over the last
five years, and particularly in the last two to three years,
Morlidge said. People recognize the status quo of annual
budget with quarterly updates doesnt make much sense.
People have recognized that the process needs to be more
frequent and have a rolling horizon rather than a fixed
horizon. Theres greater openness to these ideas than there
has been, Morlidge said.
The best practices in planning and forecasting were
written in the 1990s, said Miles Ewing, Principal,
Deloitte Consulting Finance Practice and Finance Performance Management Service Area national lead. He
mentioned concepts like bottoms-up, scenario planning
and less detail. However, while everybody in FP&A has
heard about these, it becomes challenging to do it [sic].
That may explain why a disconnect remains between
what finance experts say companies should be doing
and what many of them are actually doing. That doesnt
mean the experts are wrong or that change is not possible. Ive helped a number of companies achieve a lot

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AFP GUIDE: Forecasting

of those, Ewing said. However, Often companies miss

some fundamental steps when theyre thinking about redesigning a planning and forecasting process that limits
their ability to make progress.

What is going to separate the

companies that thrive from the
also-rans will be the ability to more
accurately predict the future, said
Brian Kalish, AFPs Finance Practice Lead.

The importance of forecasting has never been

greater, said Brian Kalish, AFPs Finance Practice Lead.
The velocity of change and the magnitude of change
continue to increase. What is going to separate the companies that thrive from the also-rans will be the ability to
more accurately predict the future, Kalish said. While
no one knows what the future holds, the most successful
entities will be those that develop the people, processes
and procedures that are able to more accurately generate
useful data, convert that data into information, process
that information into knowledge, and then act upon that
knowledge to execute informed business decisions.

Strong Forces of Change

Some big forces are pushing newer thinking about how
to forecast effectively, according to FP&A professionals.
Technological advances
As technology changes, the needs and demands for
information are changing as well, said one FP&A executive. Theres an overall sense of need for more data and
greater frequency of updates. Theres also more of a need
for a formal process, as opposed to lumping forecasting
[in] with the annual planning process, she said.
Demand from internal and external
stakeholders
According to Nestor Nova, FP&A Director at Planet
Hollywood, The recent increase in the difficulty of forecasting is correlated with an increasing amount of requests

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by executive leadership for information. Ditto for bankers and investors. So while its getting increasingly volatile
and difficult to forecast, my experience is that the need
for business insight and immediate evaluation of implemented strategies is also growing.

Breakdown in historic trends

In addition, as we internally experience the effect of
changes in the business cycle, our ability to find insight
on consumer behavior in common economic indicators
has significantly decreased, Nova explained. Some of
the premises and benchmarks we thought of as certain
have changed and proven not to be as reliable, he said.
This is mainly due to the fact that the independent
variables and sources we relied on are also experiencing
volatility and uncertainty.

The challenge is the fact that

leadership has become more
proactive in trying to mitigate
negative trends. This has led to
an increase in mitigation efforts
by implementing and trying new
strategies, explained Nestor Nova.
Higher level of noise
Finally, adding to the challenge is the fact that leadership has become more proactive in trying to mitigate
negative trends, Nova explained. This has led to an
increase in mitigation efforts by implementing and trying
new strategies. Consequently, theres a lot of noise
in the data when trying to isolate the effect of a single
strategy. This adds to the difficulty of adjusting for trend
under the current environment; that means its harder to
tell what initiative worked and what didnt. Specifically,
Nova said, he was looking at 2012 actuals and found
that there was an increasing level of difficulty normalizing data. Due to this and the changes in the economic
environment, 2011-2012 looked completely abnormal.
The same is likely the case for many other companies,
Nova said.

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AFP GUIDE: Forecasting

Common Problems and Best Practice Lessons

Experts and practitioners highlighted several common pitfalls in successful forecasting, which in reverse are key to
implementing an effective forecasting program. While theres no single solution for any company (as the case studies
illustrate), there are some common missteps that can be avoided.
Turning Problems into Solutions

Process Problem

Solution

Mixing forecast and target

Separate forecasting and target-setting into two distinct processes

Top-down pressure

Incorporate independent scenario analysis to create realistic inputs

Vague purpose

Articulate the purpose and integrate disparate processes

Stale process

Focus on key variables and forecast frequently

Linear thinking

Create a feedback loop based on empirical data

Inertia

Leverage transformative events and management changes

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AFP GUIDE: Forecasting

Process Problem: Mixing forecast and target

Best Practice Lesson:

Separate forecasting and target-setting into two distinct processes

to eliminate bias and drive effective decision-making.
Mixing targets with forecast
The biggest challenge, and very few businesses get that
right, is that forecasting has become, as budgeting always
been, an intensely political process, Steve Morlidge
said. Its difficult to treat forecasting as an objective and
honest assessment of potential future outcome when all
that information is traditionally so deeply embedded in
a political culture around target-setting, intolerance of
gaps and annual incentives. Its especially important to
recognize the two [forecast and target] will be different
most of the time. He added, The target is where you
would like to be. The forecast is where you think youre
going to be. The fact that the two are not the same
is not a sign of failure; its a sign that you need to do
something different than what you had planned to do.
You have to turn the idea that gaps are bad entirely on
its head, he said.
According to one practitioner at a tech company,
currently the companys forecast and target are one and
the same. That means some people low-ball the numbers while others exaggerate. Theres a lot of gaming,
according to this financial professional. Theres often too
much negotiation as each business leader comes up with
his or her own set of numbers.
We have to get around the fog into the business talent thats driving the bottom line, he said. The head
of FP&A at one Midwest firm agreed. Because the two
are the same, they [businesses] massage the numbers
before theyre presented to reflect a more achievable
target, noted this FP&A professional. The purpose of
the forecast would be to have more realistic and real-time
updates and information that will take into account any
need for change in order to be able to react.
If the forecast is not close to the target, that becomes
a management decision, Tom Willman of The Hackett
Group said. The first question should be: how is the

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target set? If its arbitrary, e.g., growth estimated at 30

percent next year in contrast to a historic growth rate of
10 percent, and thats pushed down to the business units
(BUs), theyll have wide gaps and may submit unrealistic forecasts to match managements expectations and
demands. Such unrealistic estimates are not going to lead
to real results. There are many leadership issues at stake.
In fact, when the two numbers are the same, according
to Jason Logman, Principal, EPM Transformation Practice
for The Hackett Group, theres a very typical snowplow
effect. Thats what happens when an inaccurate and inflexible forecast gets moved over to the next period each
time as actual results fail to meet expectations. The goal
is to still meet the budget despite mounting evidence that
actual results are not meeting expectations. Thus, the next
months forecast gets heavier and heavier.

According to Jason Logman, the

reluctance to separate forecast
from target reflects executives
fear that if they dont set up
overly aggressive targets their
managers will fail to deliver.
According to Logman, the reluctance to separate forecast from target reflects executives fear that if they dont
set up overly aggressive targets their managers will fail to
deliver. Ideally, the target is a dialogue, said Logman,
produced over a period of several weeks in conjunction
with the business and the strategic process, i.e., heres
where we think things are heading. Then tie compensation to realistic rather than unfounded expectations.

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AFP GUIDE: Forecasting

Process Problem: Top-down pressure

Best Practice Lesson:

Let the numbers tell the story and find objective ways to come up with
forecasting inputs.
Top-down approach
A related source of bias is that often the numbers are
set in stone far in advance of the forecasting process by
top management. So, even if the information is apparently collected from the field, the end result is that the
numbers match the expectations. Things can be even
trickier at public companies that make public commitments to boards and external constituents. Promises are
made to the board and to investors or lenders, said the
CFO of an insurance firm. If we said were going to be
two bucks up on EPS, that translates into the forecasting
model, which becomes about how to get to that public
target, he said.

Sometimes with and sometimes

without intending to, the executives
have created this top-down overall
goal, said the CFO of an insurance
firm, instead of relying on real
numbers coming from the field.
Then, forecasting becomes about
re-justifying that target, the
assumptions get tweaked so that
ultimate outcome turns out to be
close to that promise, he said.
Sometimes with and sometimes without intending
to, the executives have created this top-down overall
goal, said this CFO, instead of relying on real numbers
coming from the field. Then, forecasting becomes about

re-justifying that target, the assumptions get tweaked

so that ultimate outcome turns out to be close to that
promise, he said. The numbers become more and more
diluted as they go through multiple filters. The larger
the company, the worse it is, he said. The CEO and
CFO are the last to know.
At his previous company, this CFO instituted a
Competitive Intelligence (CI) process that relied on
structured war games to arrive at tested assumptions
about market conditions, competitors moves and overall
industry direction, including macro factors. Those assumptions fed into the FP&A process to guide strategic
and budget planning. This marriage of CI and FP&A
is rare but is one among several effective ways to ensure
unbiased information flows to the top.
Theres no doubt that forecasting should interact
closely with the competitive intelligence analysis, said
Ben Gilad, President and Co-founder of the Academy of
Competitive Intelligence. However, thats not often the
case. FP&A and the controllers office are financially
oriented. They generally dont understand competition,
he said. They are looking at available financial data
and fitting it into quantitative models that by definition make it difficult to take into account competitors
actions. Many neglect to look at external market factors
or examine mostly macro- and microeconomic trends,
and not just the possible activity in their market. Financial planning and competitive intelligence functions
should work together. Where you find that connection,
you find that the function has been elevated to a strategic
level. It takes the term Strategic Financial Planning and
gives some context to the slogan.

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AFP GUIDE: Forecasting

Process Problem: Vague purpose

Best Practice Lesson:

Clearly articulate the purpose of the forecast and integrate multiple

forecasting processes.

One of the biggest issues that

permeates all this is understanding
what decision youre trying to make
better, i.e., whats the purpose of
the process, Deloittes Miles Ewing
explained.

Vague Purpose
One of the biggest issues that permeates all this is understanding what decision youre trying to make better,
i.e., whats the purpose of the process, Deloittes Miles
Ewing explained. Different purposes require different
approaches to forecasting, planning and budgeting.
Sometimes, the purpose is to prepare for fast growth
and put together a hiring plan. Then you need a good
forecast of the needs and then plans on how to do it,
who to hire and where to hire and how much to spend.
Another specific purpose may be to prioritize investment
across businesses based on relative performance. At
the end of the day, the process has to align to decisions
youre making, he said.
According to Ewing, there are three primary approaches to planning driver-based, choice-based and
traditional. Driver-based relies on external drivers and
is most often used for forecasting sales, operational costs
and cost of goods sold (COGS). Choice-based is best

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applied to discretionary spending, such as new business

development or marketing. Finally, traditional is applied
where there is no clear external cost driver or choice for
example, finance.
Take a cell phone company for example. It may look at
a combination of internal and external drivers growth in
the cell phone market, its market saturation, competitor
activities, new products and upgrade patterns. To drive
a top-line view of the forecast you have to understand
the impact of these drivers on the forecast so you can put
together a high-level model that will take you from these
drivers to forecasted revenue, Ewing said. You can build
a model, and use that to inform targets.
The challenge for FP&A is to roll all this into a single
forecasting process broken into sub-processes based on
decisions. FP&A ultimately needs to create a highquality forecast and budget while creating visibility into
the underlying activity.
According to The Hackett Groups Jason Logman, that
level of coordination doesnt yet exist in many organizations. None of it matches up. These are separate and
distinct, time-consuming processes, said Logman.
Some organizations have done a great job, he commented. For example, at one company theres a sales and
operations planning meeting every month that brings together marketing, production and finance to talk about
volume and its financial ramifications. They come up
with a consensus that flows into the financial forecast,
explained Logman, as opposed to finance coming later
with its own number. That degree of integration makes
good business sense, he said. Everyone is looking at the
same information.

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AFP GUIDE: Forecasting

Process Problem: Stale process

Best Practice Lesson:

Focus on key variables/drivers and who needs to be involved, and forecast

frequently to stay ahead of market changes.
Slow or Stale Process
According to Steve Morlidge, the speed with which
companies need to forecast today is one of their biggest
opportunities and risks. You have to get processes very
quickly. People used to traditional forecasting can take a
long time to produce [the forecast]. Now you have to do
more, quickly, and thats a significant process change,
Morlidge said.
It may sound counterintuitive at first, but when The
Hackett Group broke down its own data it discovered a
strong negative correlation between the cycle time of its forecasts and forecast accuracy, i.e., shorter forecasts are more accurate, according to both Tom Willman and Jason Logman.
Organizations that complete the process faster also have the
best results, Logman said (see sidebar on page 13).
According to Willman, this means is that companies
that are successful at forecasting have found ways to do
their work more efficiently, often by focusing on a smaller
range of key indicators rather than getting bogged down
in trying to forecast every line in the General Ledger.
They [leading forecasters] have a good understanding
of what drives their business and what impacts financial
performance, explained Willman. In addition, theyve
also made deliberate choices on who gets involved in the
process. Every part of the business doesnt have to be
involved in every forecast, Logman added.
The Hackett Groups Logman and Willman advise
FP&A professionals to build a matrix or a quadrant chart
that ranks items based on materiality and volatility to
identify which drivers are important to forecast. Identify
seven to ten drivers and what makes those drivers move,
said Logman. These are the items that move the needle.
Analytical emphasis should be placed on the drivers that
have been statistically proven to impact the overall accuracy of the forecast. As an example, variables such as rent
or materials may not be volatile or drivers of performance
for some businesses, so analysts can use run rates for those
with some tweaks. That saves valuable time that can be
10

spent more efficiently on forecasting volatile indicators

that are fundamental to the business
Just how quickly companies can forecast and re-forecast
can make a huge competitive difference. In its survey,
The Hackett Group found that top forecast performers
complete their process in half the time of their rivals. So,
in addition to being more accurate, these companies also
reap the benefit of having better information to allocate
resources when needed all of that at a lower cost.
Were used to budget processes that have taken four
to six months, Morlidge explained. Transformative-state
processes should give you a reliable sense of future outcome within days. That requires a complete change in the
way finance people think about process and discipline,
he said. It means that we have to think about what were
doing and direct resources [only to] where it makes a difference while leveraging technology, Morlidge noted.
There are three key benefits to quick and flexible forecasting, according to Morlidge. First, quicker forecasting can be
done more frequently. Second, a shorter time frame means
that staff have less opportunity to manipulate the numbers.
Finally, if it is done quickly and often, forecasters gain more
opportunities to learn due to additional feedback, as well as
the ability to readily identify and correct mistakes.
Some FP&A professionals are feeling the pressure. Currently, one practitioner said, the process is very static, not
dynamic, and it doesnt move quickly to adjust to customer
feedback. His company forecasts on a quarterly basis only.
We should forecast more regularly a weekly trend and
use a dashboard, said this practitioner. We need to have
a longer time horizon and a rolling forecast. Right now,
the problem is that you wait for the quarter to finish and
then re-forecast the next quarter. Thats a very short-term
horizon. This is not the right way to run the business.
Every time the forecast is missed, executives are motivated
to take short-term corrective action. Every year we have to
right-size toward year-end to make the target.

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AFP GUIDE: Forecasting

Process Problem: Linear thinking

Best Practice Lesson:

Be agile, create a feedback loop at the business level to change behavior

and escape linear thinking.
Linear vs. Empirical Thinking
Some of the lingering hesitancy about switching to
frequent, agile forecasting and budgeting is the traditional
way organizations have been managed. Thats a tradition
thats very hard to change. Theres a turnover in the way
executives are thinking about solving problems from rational traditional forecasting, to more holistic and empirically
based models, said Christopher Avery of Partnerwerks.
What management education has taught executives is
based on traditional linear or deterministic thought or rational thought, he said. The problem is that those styles
developed when the world was more stable. All of those
strategies, including forecasting processes, are based on
linear thinking, he said, but its not too late to retool.
Avery points to an overall shift in more recent thinking
toward agility management. Agility is a response to the
waterfall budget and project management methodology,
he said. Agile management is based on empirical thinking
rather than deterministic thinking. Complex adaptive system
theory tells us theres only one effective response to uncertainty and change: iteration-based discovery and feedback.
Thats the key difference between empirical and linear
thinking. Empirical thinking involves a constant feedback
loop and adaptive targets. Thats why effective forecasting is
critical. It creates that critical feedback loop to allow management to adapt its course. In practical terms, it means tying
resource allocation to empirical results.
This approach has been most recently manifested in
the high-tech market where theres been a 180- degree
change in thinking about how we approach building
products and particularly software, Avery noted. Under
agile software development, a worldwide development,
developers are taught to question whether they are adding value daily, then re-prioritizing and building a small,
testable model and put it in somebodys hands for the
purpose of getting feedback. They do this over and over

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again, Avery explained. Engineers and project managers

work in collaboration to adjust dynamically to feedback.
Youre exposing yourself to the risk in small doses, so your
eyes are wide open and youre not kidding yourself.

Many traditional industries are still

working under that old model.
Whats stopping them is that they
have been taught that any failure to
execute is failure in planning, said
Christopher Avery of Partnerwerks.
However, many traditional industries are still working
under that old model. Whats stopping them is that they
have been taught that any failure to execute is failure in
planning. They continue to look for ways to make the
plan more robust. The people who have risen to positions
of power dont see what they cant see. Its not about processes but about the basic thinking they apply to solving
any problem, Avery said.
The challenge is becoming more adaptive to conditions
that you cant forecast, according to Avery. The way to
do that is to identify where you are adding the most value.
Figure out how to involve the right people in the organization and loosen up and let go of rigid hierarchy. Begin
by inviting people to create a real feedback loop that keeps
their fingers on that risk or opportunity in order to make
adjustments. He acknowledged that this more fluid
approach makes traditional command and control people
very uncomfortable. They want to have a logical control
structure, but traditional command and control structures
cant match the complexity in the environment.

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AFP GUIDE: Forecasting

Process Problem: Inertia

Best Practice Lesson:

Leverage new management or transformative events to introduce a

new way of doing things.

Companies tend to resist change

and prefer to continue to do things
the way theyve been done unless
theres a burning need for change.
Doing things the way theyve always
been done
Finally, theres inertia. Companies tend to resist change
and prefer to continue to do things the way theyve been
done unless theres a burning need for change. That
can be a transformative business event (sale of business,
acquisition), a severe slump or, often, a change at the
helm. New management brings new practices and a fresh
set of eyes to old processes.
At one insurance company, a new CEO and a recent acquisition have combined to create that burning platform.
We have an entirely different vision as to how things
should be, said the companys FP&A executive. Right after
the first quarter, a confluence of events led the company to
update the numbers, in particular a significant acquisition
that would impact earnings, the balance sheet and capital.
We had to adjust to that, she said. Health-care reform
adds additional uncertainty on a short-term basis. We
changed the key assumptions and factored in the favorable
results vs. plan. We were millions over. The forecast needs to
have a purpose and actionable results.
She acknowledges change will be hard. The culture
here will make it difficult to make the change, she
said, but the [businesses] are seeing that there is a need
because of all the changes around us, she said. Our
industry is also affected by low interest rates.
Shes currently pushing for the new approach. Im
trying to sell it and the businesses are accepting it. For

12

now, the idea is to separate the plan and the forecast into
two sets of numbers. The target will be communicated
to the board, but the forecast can drive decision-making.
Lets have a realistic baseline and alternate adverse scenarios, she said. If the forecasting process works, well
need to be realistic in communicating the numbers both
upward and sideward, to the chairman and the business
leaders, according to this FP&A veteran. For now I
think we need to have both. Eventually, shed like to
have everyone look at one set of numbers and work off
the same page, presenting multiple business scenarios.
We have to forecast more often and we have to have
more frequent updates.
In enabling change, the new CFO is a big factor. The
CFO and the FP&A executive both joined the company
a year ago, and we said we need to roll out our finance
vision and how it relates to corporate vision and get
people to learn [that] the old ways dont work anymore.
One tangible aspect of this commitment was the decision to give the FP&A professional leeway to train her
current team or hire new members. Our core value is
to hold everyone to high standards, and ensure people
continue their personal development. Im thankful the
CFO has the same vision and knows the importance of
getting quality individuals, she said.
The team I had when I first came on board had been
here for 30 years, she said. Theyre more old school:
we do our annual historical view plan. Ultimately,
she said, I dont care how old you are as long as youre
adaptable to change. I am trying to get people to sharpen
their skills. Thats proving hard. I have models that I
want to build, but I dont have anyone who can build
those models. Shes encouraging her current staff to
go to conferences like AFPs and network to learn more
about how things are getting done.

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AFP GUIDE: Forecasting

Conclusion: How to move forward

There are some common mistakes companies make that
hamper their ability to improve their forecasting processes.
The first mistake is confusing the target and the
forecast, Steven Morlidge said. Whats behind it is
that the budget is perceived as whats likely to be in the
future, so the forecast is treated as the target, he said.
The second problem is that companies are not measuring the quality of the process or are measuring it
incorrectly (see sidebar on Accuracy on page 13).
The third, which ties into the other two, would be
failing to define what success looks like, Morlidge
noted. One of the first things I did at Unilever was
to decide that a good forecast would have particular
qualities, he said. The finance organization tends to
be extremely good at managing the standard chart of
account and defining how to make provisions about
debt. They say forecasting is really important, but
when I ask them to tell me their definition of a good
forecasting process, they draw a blank. If you dont
know what youre aiming for you cant succeed.
In terms of fixing the problems, Id put these in the
following order: Define your forecast policy first. In that
policy, make a clear distinction between target and forecast. Then, distinguish what makes a good forecast and
measure it, Morlidge said.
A lot of people have to have dissatisfaction but their
vision is blurry, said Steve Player. They can try very
hard to do better but the result is not better. According
to him, the first thing you need is vision, i.e., whats going
to be required in terms of people and education. Player
advised the following steps:
Assess practices. You need to assess the landscape.
What level of detail is in the forecast? What is the
frequency, the purpose, whos the audience? What is
managements attitude about the forecast?

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Build a case for change. You have to explain whats

wrong and what challenges and misdirections youre
enduring as a result of the current practice. The
business case needs to highlight the risk and the
opportunity of having an effective planning system,
and what it would mean in terms of higher returns
and more sales, Player said.
Design an end goal. Finally, examine best practices
and put together a roadmap of where you want to go
and with it a prioritization.
Resistance can be as simple as inertia and disinclination
toward change, as people feel they already know how to
play the budget game. Some may be concerned a new
approach would put them at a disadvantage. And clearly,
change can be difficult, particularly such significant
change. The change is deep. Its about changing the governance of the company. The key to sustainable change
is embedding new practices into the process instead of
one-offs, Player said.
Ultimately, improving the forecasting process is about
changing the underlying governance of an organization and
driving better results. While supply-chain efficiency or automation were the key drivers of success in recent times, this
is the age of management innovation, according to Christopher Avery of Partnerwerks. The source of competitive
advantage is how youre organized and make sense of the
environment. What you want to become is anti-fragile, and
be able to be resilient to shocks in the market place, while
learning to take advantage of opportunities.
The payoff for FP&A executives is in watching their
functions drive successful organization-window management processes. If you do it right, you can influence
the business and help guide strategic decision-making
throughout the company, said Josh Gibbons, Finance
Director at Speck Products.

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AFP GUIDE: Forecasting

How to Improve Accuracy

Its not surprising that when companies measure forecast accuracy, accuracy
trails off the farther out the horizon. One-month forecasts are more reliable
than one-year forecasts. But what is surprising to The Hackett Groups Tom
Willman and Jason Logman is that so many companies dont even measure
the process performance in terms of forecast accuracy. The majority are
not measuring at an actionable level, said Logman. They are not making
that result visible to the individual BUs and the forecasters and they are not
able to make continuous improvements. Once a company starts measuring
forecasts to actuals and holding their executives accountable for the results,
theres something to talk about.
Even when companies measure accuracy they dont always measure it in a
way that tells them something about the process. They look at one-month
forecast vs. actuals and do a variance analysis. Consequently, many reports
have variance to actuals for one-month or one-year forecasts. Thats an
aspect of forecast accuracy, said Logman. If theres a big gap it can raise
important questions. But its not a measure of forecast process excellence.
Instead, or in addition, companies could look at the evolution of a rolling
forecast over time: was the new forecast better than the old one?
Ideally forecast accuracy for revenue, earnings and cash flow is measured
and tracked not only for the current period but also for the current quarter
and on a 12-month rolling basis (e.g., in January what was the forecast for
December and how accurate was it?). These measures of accuracy should
be built into executives individual goals and objectives to drive focus and
improve the process.

14

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AFP GUIDE: Forecasting

Practitioner Case Studies

Companies follow different paths to this end goal of good forecasting. Not all processes follow every single
best practice, nor is it realistic to expect that they do. The culture of an organization plays an outsized
role, which can be good and bad. According to the head of FP&A at a large technology company, whether
theres a different process in place that looks at the forecast more frequently or on a rolling basis matters
less than making sure you understand what the business is going to look like, and what youre going to
spend. Whichever approach you take, there needs to be visibility and youve got to hold people accountable and provide good guidance to Wall Street. When you get to the nuts and bolts, the approach may be
different, but youre still driving all the same points, he said.

>

Case Study 1: Speck Products Re-Budgets and Re-Forecasts

Speck, a maker of protective cases for mobile devices including iPhone, iPad,
MacBook and Android devices, is a midsize, privately held company based in
Silicon Valley. The super-fast, relatively unpredictable business environment in
which the company operates drives its product development cycle and hence
the companys forecasting and budgeting processes.

The most challenging issue we have is that were tied

to the handheld device market, said Finance Director
Josh Gibbons, who built the financial forecasting process
from scratch when he joined the company two years
ago. Those devices change quickly, so the design and
development process must be nimble and fast, and we
have to maintain reasonable project budgets, he said. In
essence, budget items are a bet on the actual date of a
device launch.
We normally dont get information about devices prior
to launch. We typically find out when everybody finds
out, Gibbons said. When I started here two years ago,
I found that the biggest challenge involves the speed at
which our market, customers and suppliers move. Our
success is directly tied to our ability to react quickly with
efficient execution of our strategy. If you cant take calculated risks and move fast enough to take advantage of opportunities, you wont survive. While Speck operates on
a larger scale than many of its competitors, it also means
that were making bigger bets to keep up with customer
demand, said Gibbons.

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Re-forecasting and re-budgeting

To drive the forecast, Specks finance group collects data
and qualitative probability predictions on the timing and
type of devices coming to market. Speck creates a forecast
that is updated monthly and goes out to fiscal year-end.
So in January, FP&A will forecast out to the end of December. Then in February it will re-forecast the bottomsup P&L and balance sheet based on emerging information
to year-end.
In reality, according to Gibbons, the company has visibility into the next three to six months. Within the first
six months say January to June Youre looking hard
at expenses, making headcount decisions. And, obviously,
you have better visibility to revenue, he said. Thus, the
forecast for the second half of the year doesnt change until
the company goes through the formal biannual re-budgeting process, regardless of what the results for the first half
of the year are.
Speck overhauls its budget on a bottoms-up basis at
mid-year. The annual budget is prepared during the
fourth quarter of the previous year. Then in the second

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AFP GUIDE: Forecasting

quarter of the current year, We actually turn around

mid-year and do a re-evaluation of the business pretty
much from ground up to reset objectives, said Gibbons.
The company ties some employees variable compensation to these half-year performance goals while other goals
are tied to annual metrics. At that point, we will have to
make an assessment of what products, revenue and resources to fund in the next half of the year. He admitted,
The scariest part is that second-half re-budgeting. Thats
when we have to make the most educated guesses and our
best-of-the-best forecast, but we still may not have solid
device launch information.
The forecast drives the budget to a certain extent as
well as resource allocation decisions. We can assess right
now [sic] in mid-April, Is that original budget still valid
and reasonable? Gibbons explained. We can make
some high-level adjustments and advise our management
team. We can say, This is really where were at. These are
the risks or opportunities. By continually revising the
forecast, were able to reassess our goals and communicate
most effectively to stakeholders, he said.

If we bet wrong on tools and

capacity, we can lose a lot of
business; at the same time we may
meet capacity and orders but its
important not to overbuild tooling
and inventory, John Gibbons of
Speck Products said.
During each six-month period, We constantly reassess
what were investing in headcount, sales and marketing
programs, tooling and prototypes, Gibbons explained.
Since the company produces a broad range of products for
different devices (and in many different styles and colors),
If we bet wrong on tools and capacity, we can lose a lot
of business; at the same time we may meet capacity and
orders but its important not to overbuild tooling and
inventory, he said.

16

Reassessing investment in tooling and prototypes is

particularly crucial for this company. The tools are the
metal molds that are injected with liquid plastics to form
the cases during the manufacturing process. Each tool can
produce only so many cases, and tools must be cleaned for
new colors. So if the company expects to produce a certain
amount of cases on day one, it needs to ensure it has
ample capacity. Being wrong can mean dramatic swings
against forecast, so the company has to be ready with the
right number of production-ready tools on the launch
date to meet demand.
The forecast is produced with input from everyone on
the senior executive team as well as from the sales and
customer-support teams. The two latter groups are the
ones charged with putting feelers out into the market
and assessing the preferences of their customer base. Its
up to the sales team to develop key relationships with
their customers to be able to get a sense of demand and
then assign some probability to any potential product
launch. Retailers for the companys products are often huge organizations that have the models, data and
processes to do precise forecasting for their thousands
of SKUs. They have very sophisticated forecasting
methods and inventory management methods on their
end, said Gibbons. We work in tandem with them to
manage the short-term forecast.
That competitive intelligence is collected and sent to
FP&A in spreadsheets. The probability assignment is not
a scientific process using statistical models. Were partnering with our salespeople toward preparing forecasts with
probability weighting in Cloud-based customer relationship management (CRM) tools, said Gibbons. Specks
finance team uses a Cloud tool from Adaptive Planning
thats integrated with NetSuites ERP product. Were
building many flavors of reporting on customer, region,
product line and device type to help drive useful information to our business end users.
The audience for the forecast is internal (CEO, CFO,
Sales) but also external (banks, equity investors). The
complete re-forecast, with updated assumptions on items
such as sales and margin by customer and region, headcount and tooling investments, is prepared and reviewed
with company management and ownership on a monthly
and quarterly basis.

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AFP GUIDE: Forecasting

If youre a passive finance person,

youre going to fail. You have to
be able to go out, talk to people
and ask them, What are your
assumptions? What are your
inputs? I shouldnt sit at my desk
and make up numbers. I want and
need intelligent, thoughtful input
from the business partners
throughout the company, so we
can guide the business in the right
direction, said Specks John Gibbons.

Recent Changes
Two finance projects this year are focused on improving the forecasting processes around both sales and
inventory forecasting:
1. Improving forecast accountability
Specks finance group routinely engages with the
companys sales teams to gather its customer and product
line forecasts for mid-size to large channel partners and
agree on assigning some probability of deal closure. Thats
been a significant mind-shift in the organization. When
the company was smaller and things moved so fast, sales
finance was not as strong of a discipline, Gibbons commented. Now that weve grown, part of my job is to
ensure that we routinely gather sales estimates by customer
and major product line from each salesperson. In the end,
I can make up numbers in finance, but my assumptions
wont be as meaningful as actively acquiring sales forecast
commitments, he said.

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Gibbons places an extra emphasis on reaching outside

finance to get the kind of input he needs to arrive at
a useful forecast: Its basically trying to get everyone
in the company involved in the forecasting process. If
youre a passive finance person, youre going to fail. You
have to be able to go out, talk to people and ask them,
What are your assumptions? What are your inputs? I
shouldnt sit at my desk and make up numbers. I want
and need intelligent, thoughtful input from the business partners throughout the company, so we can guide
the business in the right direction.

2. Visibility into inventory

The other area of improvement is inventory forecasting. This year I built an inventory forecasting
methodology. The forecast pulls inputs of inventory
on hand and customer orders (backlog and bookings)
and constructs a 2-to-3 month assumption of inventory
at a high level. That helps Gibbons forecast the balance
sheet. I capture rolling inventory estimates on a product-line basis and this informs our aggregate level decisions, For example, what inventory will be required
for days one to 10 of a product launch? What about
requirements for days 10 to 30 and beyond? Before this
new approach, there was mainly a high-level assumption of inventory going down by X amount per month.
This year, I built the methodology which attempts to
prove out future inventory balances with assumptions
gathered from other groups like sales and customer
support, he explained. In practice, this means if were
planning to ship this mix of product, then that should
take X amount of COGS, which means inventory is
reduced by X.
On the agenda for further improvement is tracking
forecast accuracy. Right now, the company looks at
the variance between forecast, budget and actuals, but
not current forecast versus prior forecast. Thats an
area that I want to improveputting together variance analysis that will show how we are improving our
forecasting accuracy, said Gibbons. Its not like we
have unlimited access to cash. Every dollar is precious,
so we need to ensure that our forecast process is tight
and providing useful guidance to the business on a
consistent basis.

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AFP GUIDE: Forecasting

>

Case Study 2: PACT Forecast to Meet an Overhead Target

This $200 million non-governmental organization (NGO) focuses on delivering a
committed overhead rate by forecasting its incoming funding and expected cost.
By providing the business with actionable data for achieving its targeted overhead rates and keeping close track of operating cost and potential new funding,
FP&A drives decisions about business investment or cutbacks.

PACT World is a $200 million NGO based in the U.S.

with operations in sub-Saharan Africa, Southeast Asia
and Eurasia. About 80 percent of its funding comes from
U.S. AID, and the balance from other multinational and
private foundations. We are engaged not so much in
disaster relief, but in development. We focus on delivering
systemic solutions that enable our clients to earn a dignified living, be healthy, and take part in the benefits that
nature provides, said Leonard Williams, CFO and EVP
of Finance.

For PACT, the challenge is less

about what our revenue is going to
be, but how best to leverage limited
resources to achieve the projects
objectives at a particular overhead
cost, said Leonard Williams,
PACT World.

Limiting Overhead
Most of PACTs work is structured on a cost-reimbursable basis. Less than 10 percent of its funding is for traditional fee-for-service contract work. For us,the challenge
is less about what our revenue is going to be, but how
best to leverage limited resources to achieve the projects
objectives at a particular overhead cost, Williams said.
We put a budget in front of our board to ensure that the
right resources are being put against deliverables. For us,
budgeting and forecasting are as much a control process as
it is a profitability measurement process, he explained.

18

The key variable to manage is overhead cost. That rate

is important to PACTs relationship with donors who
typically look to partner with NGOs that use the majority of the funding for execution. Weve done a reasonably good job of forecasting overhead cost so that we can
establish an appropriate rate to support the business, said
Williams. Thats an important part of our ability to attract continued funding for our mission.

Collecting the information

The forecasting team at PACTs headquarters in the
U.S. does most of the coordination, but the numbers
come from the field. Williams and the COO co-own the
budgeting and planning process. The forecast and the
budget are done on a country-by-country basis and each
country may have four or five projects. Theres a finance
director in each country that reports to me on a dotted
line and works with the local operations leader to come up
with the information, i.e., what are the deliverables? What
is the cost going to be? Williams said. When the numbers
come in, the U.S. team makes a set of assessments: are
they reasonable? Do they support the level of overhead
needed to operate the business with integrity? That information feeds into the budgeting and forecasting process.
Additional information comes in from the funding side.
Some grants are already in place, whereas others are only
planned. We have an opportunity development team that
responds to donor requests for proposals and looks at all
of those responses and assigns a probability to those proposals, he said. As a result, we have a pretty good guess
for what may happen over the next two to three years.
Forecast horizon
The forecast and planning horizon match the long-lived
nature of most of PACTs projects, which typically run

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AFP GUIDE: Forecasting

The pipeline (incoming funding

forecast) is redone on a quarterly
basis to reflect actuals or changing
probabilities. By late in the second
quarter/early third quarter of the
fiscal year, theres usually a
different picture than what was
expected earlier. As such, we do
[an entire] re-forecast, said
Leonard Williams of PACT World.

from three to five years. Once we get a piece of business, the challenge is to execute against the dollars we
have, Williams explains.
Based on that three-year forecast, PACT breaks down
its expected revenues and expenses rather mechanically
on a month-by-month basis. PACT looks at expenses by
examining the plan associated with each project. It can
project how many people or number of vehicles it will
require to execute. Of course, some projects are more
complex than others, Williams said. We operate in
places subject to conflict, drought and political instability. Those macro factors can affect the execution even on
a short-term basis. For projects in such locations, PACT
takes into account the potential changes in the external
environment as part of its planning horizon.
The resulting annual forecast functions as an operating
plan. We forecast that over the next two to three years,

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we will likely get X number of projects, and we have Y

projects were already working on, explains Williams.
PACT forecasts the likely win rate, and then how
quickly we can execute those when we capture them,
he said. To project in-flows of funding, the company
looks at the strategic plans of organizations like USAID, U.N. agencies and private charities. USAIDs fiveyear plan may state that the agency intends to spend X
millions of dollars on health issues. That gives PACT a
sense of what funds would be available for the various
types of businesses.

Review and re-forecasting

PACT utilizes a monthly integrated business review
to see how the company is performing against budget
in terms of both deliverables and dollars. Once it closes
the books, it takes two to three days to provide analysis
and reporting on performance vs. the monthly expectations. We do a monthly review with finance, business
development and operations, said Williams.
On a quarterly basis, PACT reviews whether it is
meeting its funding expectations as well. We maintain
a pipeline report, Williams explained. During the
course of the year, you win things, lose things vs. what
thought you were going to capture. So the pipeline
(incoming funding forecast) is redone on a quarterly
basis to reflect actuals or changing probabilities. By late
in the second quarter/early third quarter of the fiscal
year, theres usually a different picture than what was
expected earlier. As such, we do [an entire] re-forecast, Williams said. While PACT doesnt change the
annual budget, by re-forecasting to year-end it can get a
handle on what year-end actuals are likely to be.
There are a couple of reasons why thats important.
First, a portion of everyones compensation is determined by performance against the annual target. Second, and most importantly, the re-forecast results allow
management to make changes to PACTs course for the
remainder of the year. For example, if PACT finds that
its significantly outperforming its expectations, it can
invest more in business processes or people. Conversely,
to the extent that funding falls short of expectations,
we see where we need to reduce spending, for example,
cut back training or hiring.

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AFP GUIDE: Forecasting

>

Case Study 3: Planet Hollywood Refreshes the Forecast

Planet Hollywood is a Florida-based, privately held brand with interests in
hospitality and restaurants. Over the last couple of years, in response to
the growing volatility in the market and growing demand for different and
more frequent information, FP&A has altered the frequency and horizon of
its forecasting process to drive better decision-making at the operations and
management levels.

Nestor Nova, Director of FP&A at Planet Hollywood, lists

several factors that have driven companies to alter their approach to forecasting. Among them are the volatile external
environment, increasing demand for fresh data by multiple
stakeholders and the fact that some tried and true reliable
indicators are no longer as stable as they used to be.

The biggest change Planet Hollywood

has made to its forecasting process
is a much greater emphasis on
ensuring the accuracy of short-term
forecasting. Even with six months
of data, forecasting the current year
can be challenging under the existing
economic environment.

In response, the biggest change the company has made

to its forecasting process is a much greater emphasis on
ensuring the accuracy of short-term forecasting. Even
with six months of data, forecasting the current year can
be challenging under the existing economic environment.
There is more scrutiny on the two-year horizon forecasting accuracy, Nova said. In years past and under a more
stable economic environment, I would be more focused
on the five-year outlook. Now, to deliver strong financial
results in a shorter time frame and thus improve the viability of future development, short-term forecasts have
gained tremendous exposure, says Nova.

20

At Planet Hollywood, forecasting is handled by FP&A

with input from different departments. In addition, the
frequency with which we need to account for new factors
and re-forecast has increased dramatically, Nova said.
Previously, forecasts were done on a monthly and quarterly basis. Now we have instances when we review them
biweekly, and on rare occasion weekly, to ensure assumptions are valid and staying on track.
That is in large part an outcome of the companys
industry and size. It has to keep its eyes on the short term
first, while larger, more established companies may have
the luxury of time. My previous experience was with
larger companies, Nova explained. While the focus is on
current year plus one, we still produce a five-year outlook, he added. But the scrutiny and frequency changes
are for the current year and 2014.
In part, the trigger for the shorter-term focus might be
driven by externalities. What drives a companys planning in part is its ability to access the market for funding;
investors and banks are paying extra attention to forecasts
because they want the latest information. In order to be
able to time its development efforts, a company needs to
be mindful of when it can access funding. Weve heard
that from many small and midsize companies, Nova
said. The timing of development becomes critical when
you forecast assumptions, he explained. The market
volatility means timing of new strategies is driven in part
by market timing.

Forecast, Budgeting and Planning

Planet Hollywood faces a common challenge: while its
forecasting has become more agile, it still runs a traditional budgeting process. Nova is aware of the constraints.
Ideally you would have three different forecasts, he said,

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AFP GUIDE: Forecasting

i.e., an initial budget, a re-forecast of the budget and a latest estimate. In that scenario, a more nimble re-forecasting
discipline would drive official changes to the targets as
actual data gets factored in and the environment changes.
You could adjust your goal, he said. You would still
keep some stretch in it but keep some reality.
Novas experience at a larger company before joining
Planet Hollywood in 2009 taught him that it is possible to build in a more flexible process. His previous
employer initially produced one latest estimate, or LE.
But as the environment became more challenging in
the post-2008 financial crisis, it switched to four LEs.
Each would help drive changes to targets and resources.
While the budget was still the ruling number it would
be more of a guide, and the latest estimates would adjust
the targets based on changes in reality and forecast. Even
then, the budget still drove compensation decisions,
which ultimately may be the biggest driver of management behavior, Nova acknowledged.
He advises other practitioners to pay close attention
to the interaction between budget targets and forecasts.
Sometimes in FP&A we overlook the dynamics, he
said, but they reflect how business leadership is reacting
to the forecast, and the two must be viewed in unison if
FP&A is to deliver meaningful analysis to management.
Its relatively easy to tell how external stakeholders respond
to lower or higher forecasts. There are many studies that
show how stock performance or borrowing spreads react
to such announcements. Its a lot harder to identify how
internal operators behaviors change to adjust to changes
in the forecast and targets. Thats a piece that sometimes
doesnt get enough attention.
Currently, any new forecasts generated are shared with
both the field and management to provide leadership and
operations with a reality check on how the business is
performing vis--vis its targets. FP&A prepares different
forecasts for each of each business to reflect the difference
in their operating challenges and realities.
However, the budget still drives the targets. The forecasts function is to help perform gap analysis: heres where
we are vs. where we said we would be. The information
helps managers make decisions about adjusting activities
or launching new initiatives. If budget is the compensation driver, the forecast gives you a sense of the gap, i.e., if
you continue to perform at this level, your year-end will

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be X and needs to be X+Y, Nova explained. Current

performance provides the run rate analysis for whether the
business will hit its targets.
Yet Nova, like other FP&A professionals, sees the problem with this interaction between targets and forecasts.
The budget is done three months ahead of the start of
the fiscal year, Nova said. Therefore, by September, your
budget is already a year old. During that time, there may
be a lot of internal and external changes that affect the
budget assumptions. That is where forecast and reforecast
come in. You want to give executives the true picture and
the operators true visibility into performance, he said.

Nestor Nova of Planet Hollywood

noted that the true measure of
FP&As performance is not only
forecasting accuracy but whether
it is able to transform information
into actionable items.

Measuring Performance
To assess forecast performance, we try to go back and
compare actuals to the forecasts. We go beyond thresholds
for measuring whats good and whats bad. Its not only
about how much you missed it by, but rather about the
reason you missed it, he explained. For us its a way to
gauge how close weve come. Ending up below or above
forecast raises equally important questions, according
to Nova. If we exceed the forecast, the question is how
much did we underestimate the market or did we leave
money on the table, he said.
He sees this as the true calling for FP&A professionals. More and more we get involved in those decisions
at the leadership level, he said. The true measure of
FP&As performance is not only forecasting accuracy but
whether it is able to transform information into actionable items. Anybody can crunch data, according to Nova.
The measure of performance is whether FP&A can drive
knowledge conversion. Thats how I measure my team,
he said. Transforming numbers into knowledge is very
difficult to do.

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>

Case Study 4: Statoil Links Forecasting and Agility

Statoil isan international energy company with operations in 36 countries.
Based in Norway, Statoil has approximately 21,000 employees worldwide,
and a turnover of around $130 billion. Its listed on the New York and Oslo
stock exchanges. In 2005, Statoil embarked on a Beyond Budgeting
process journey as the company decided to break out of the mold of the
calendar year forecasting and planning cycle. The result is a dynamic process
designed to match planning with business realities.

Forecasting is something that is done to compensate for

lack of agility, Bjarte Bogsnes, Vice President of Performance Management Development at Statoil. Bogsnes likes
to compare Statoils forecasting process to a supertanker
which needs plenty of advance notice before adjusting its
course, compared to a speed boat thats able to quickly
alter its direction. The supertanker definitely needs
forecasting, while the more agile speedboat hardly does.
Companies put a lot of effort into improving forecasting.
Maybe some of that needs to be put into becoming more
agile, he cautioned.

Dynamic Forecasting
While many companies are still stuck in the old ways
of doing things, a number of companies are introducing rolling forecasting these days, Bogsnes said. Thats
definitely much better than traditional forecasting.
Typically, rolling forecasting occurs once a quarter with a
five-quarter horizon. What Statoil has concluded is that
this approach does not meet the goal of creating management processes that match business realities. Some Statoil
businesses need a long time to adjust course, like that supertanker. But for its trading business, anything beyond
three weeks can be quite foggy, he said. In contrast, for
business units charged with exploring for oil or building
platforms, three years is on the short side. To force everyone into the same frequency and horizon doesnt make
sense, said Bogsnes.
The change at Statoil to a dynamic forecasting model
was part of an overall shift to break out of the calendaryear model. The way the dynamic process works is by
adjusting the horizon and frequency to the unique needs
of each business. Instead of a calendar-based approach,

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forecasts are triggered by events. What we have is a living

database of forecasts, Bogsnes explained. New forecast
information continuously flows into the system on the
input side. On the output side, the company produces
some periodic reports tied into, for instance, its annual
Capital Markets Day to its reporting schedule. In addition, if Statoil is contemplating a major investment, it will
generate a forecast to help make decisions.
More and more, we are trying to adapt processes to
reflect business realties and help units to help themselves,
Bogsnes said. While that creates some difficulties on the
corporate side, Statoil decided it would rather make its
processes more productive for its units than for its corporate entity. Forecasts are generated by line management
assisted by the local controller. At the corporate level, we
simply collect it, he said.
Part of the forecasting culture involves clear assignment of responsibility for forecasting. Businesses are only
required to forecast as frequently and for as long a horizon
as they require to run their own operations. If someone
at a higher level or a different business needs something
longer, its their job to generate a forecast instead of
forcing all the units below to do it. The best forecasts are
those that people make for themselves to manage their
own business, Bogsnes said. When its the business own
needs, you get quality because they have interest in it.
He said that companies that require local businesses to
generate a lot of numbers that they dont need to run their
own operations run the risk of sacrificing quality and
ownership to forecasts.
Bogsnes recommended against measuring forecast accuracy to assess the performance of the forecasting process.
I would argue that its almost impossible to measure

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AFP: Forecasting

AFP GUIDE: Forecasting

forecasting accuracy, he said. It can actually be counterproductive. If your forecast shows you are about to hit
a rock, you do whatever you can not to hit the forecast.
That doesnt make this a bad forecast. The key is to focus
on the intervention: the action taken to reach the target,
not the forecast. Theres one thing you can measure, according to Bogsnes: a systematic bias. If your actual is
continuously higher or lower, then you have an issue with
bias that you need to address, he said. It could be about
mixing forecasts with targets or with resource allocation
or it could be cultural. If you get penalized every time
you present a bad forecast that could drive bias. Theres
always a reason behind it, he said.

Overall agility
The dynamic forecasting doesnt exist in isolation at
Statoil. As part of its overall objective of becoming a more
agile organization, Statoil began its transformation by
abolishing the traditional budgeting process in 2005. The
shift was designed to take reality seriously within both
a dynamic and unpredictable business environment and
an organization of competent, knowledgeable employees.
The company wanted to find its way back to the agile
and flexible organization it was in its younger days. Of
course, one cannotmanage a big companyexactly like
the small company it used to be, according to Bogsnes.
But could there be alternatives? Could there be other
ways, ways which better balance the benefits of being big
which of course are both real and important with the
benefits of being small?
To identify how Statoil could change its traditional
budgeting process, we looked at different reasons why
companies create budgets, Bogsnes explained. The company concluded that most organizations use budgets for
three main purposes:
1. Target setting
2. Forecasting
3. Resource allocation
While it may sound efficient to do all in one process,
Bogsnes said, the approach poses some serious difficulties.
A target is what we want to happen. A forecast is what
we think will happen, whether we like what we see or not.
They cant and shouldnt be the same number. By mixing
forecasting and target-setting, companies run the risk of
making the forecast their target. Since compensation is

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The only thing you know is that youre

wrong, but you dont know which way
and by how much. The future is much
less planable than it was when I started
my financial career in the early eighties,
eighties, said Statoils Bjarte Bogsnes.
often linked to targets, there is the danger of bias being
introduced into the forecast as managers have an inherent
agenda. When the forecast drives investment and resource
allocation directly, again, forecasters are going to have a
systematic bias.
Its not that Statoil is not planning. We are still doing
what the budget did for us. But separating into three
different processes with different numbers and time
horizons made it possible to optimize each one in much
more tailored processes, Bogsnes explained. To match the
dynamic planning process, resource allocation is equally
dynamic. The bank is open 12 months a year, Bogsnes
said, not for one month a year.
The process of implementing the change was not as
hard as one might anticipate, although there still are
challenges. Its actually quite logical and once people understand it, it makes sense, said Bogsnes. Not wanting
to change, said Bogsnes, is often about the fear of losing
control. But much of this is only an illusion of control. A
traditional plan that goes out 5-to-10 years and includes
millions of details is deceptive.
The greater the level of detail, the greater the sense of
control, he said. Its comforting, Bogsnes admitted. But
the reality is that over that horizon its impossible to really
know whats going to happen. The only thing you know
is that youre wrong, but you dont know which way and
by how much, he said. The future is much less planable than it was when I started my financial career in the
early eighties. That is why working on your agility is just
as important as working on your forecasting skills.
While there are ongoing discussions on how to improve
the process at Statoil, there are few discussions about going back. Eight years down the road, Bogsnes said, every
year is more solid.

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