A couple of days ago, in the post “Is Forecasting Really Worth the Effort?” I suggested that the effort expended in building sales forecasts from the bottom-up (i.e. asking reps what they think they will sell) was pretty much a waste of time. This was an issue that I also discussed back in 2007 in the post “Why the Sales Forecast Stinks.”
I recently interviewed Dr. Robert Fildes, the director of the International Institute of Forecasters. He’s also the head of the department of management science at Lancaster University Management School in the U.K. Here’s a brief excerpt where he explains why you’re wasting your time building a bottoms-up forecast:
- GJ: To what extent and how does corporate politics influence forecasting accuracy?
- RF: When we asked about political influence in forecasting, about 80 percent of the managers said that it had a major influence on the forecasting process. We discovered that the higher you go up the corporate ladder, the greater the aggregation, and the more important it is to manage investor expectations. As a result, more politics gets inserted into the process.
- GJ: What about forecasting at the lower level of the organization?
- RF: When you get into the kind of forecasting that involves how many widgets you need to buy or how many telephone calls you need to make, politics does not really have a major impact because the window is too short term. So what happens is that you often have a set of operational forecasts that are quite different from the commercial forecasts.
- GJ: How do you fix this problem?
- RF: The main challenge here is to have a reconciliation process between the different forecasts that are being used inside the corporation. This turns out to be an organizational discussion that’s concerned with how a company is run and how the elements of the business are suppose to interact with one another.
Let me net it out for you. Your CEO is probably telling the investors what he thinks they want to hear. To do this, he is probably is ignoring your sales forecasts. Therefore, all the effort put into aggregating everyone’s forecasts, with management pushing-back on the numbers, and fudging based on their gut feelings — the whole whoop — is wasted effort.
Now, this isn’t to say that you shouldn’t have a good idea about what you, personally, are going to sell this quarter. That’s useful. But the big hassle of a quarterly forecasting exercise is just so much wasted effort because top management doesn’t believe you, anyway.
