Survey Finds Only 13% of Companies Are Effective At Forecasting
It’s Monday morning and it’s time to go to the monthly forecasting meeting to see if we met last month’s numbers and adjust the quarterly forecast. Have you ever been in this kind of meeting?
Representatives from sales, marketing, analytics, finance, and operations are all present. The data is up on the screen. Last month’s forecast was missed by 30%. Conversations begin to justify why the number was missed and how to adjust the next month’s number.
Business forecasting is the lifeblood of a company. Hundreds of decisions are based on the numbers in these forecasts every day. While 90 percent of companies agree that forecasting is important to the success of their businesses, only 13 percent believe their businesses are truly effective at forecasting, according to the survey responses we received from executives, managers and analysts across a variety of industries and departments.
In September, we surveyed 71 executives, managers and analysts across management, marketing, sales, analytics, IT and finance departments to understand current forecasting practices, the barriers to effective forecasting and the opportunities to make the biggest impact. Here’s what we learned.
The majority of businesses are using rudimentary math to run their business.
In this era of big data, it is surprising to find that more than half of all forecasting is being done using methods created before the advent of the computer. While some businesses use proprietary models (18%) and outside consultant services (26%) that are largely focused on regression analysis, the majority of companies are basing their future business success on basic math – either using a set percentage compared to last year (31%) or heuristics (25%). Without factoring in competitive forces, customer segments or other variables outside the four walls of a company, it is not surprising so many companies feel their forecasting methods are ineffective.
Which of the following alternatives does your company use for forecasting?
Lack of access to data and tools are top barriers to effective forecasting.
In the last 5 years there has been an explosion of data and tools to manage data, yet these are cited as the two biggest barriers. What this finding indicates is that organizations are struggling with how to share and give access to data coupled with having the right talent that is trained in using the tools. These are two organizational challenges that we have been working to resolve with our clients by offering a centralized location to integrate data and providing a simple user interface so that you don’t need a technical background to utilize data to make decisions.
Which of these barriers to forecasting are present at your company?
Senior level commitment is more important that forecasting accuracy.
We asked respondents to rank what would have the greatest impact on improving their forecasting capability. Better data and access to tools came in as top drivers of improving capabilities, but interestingly senior level commitment was ranked as more important than proof of forecasting success. While the method of forecasting used is important, forecasting accuracy is an anomaly since just like the weather there is no such thing as 100% accuracy. This finding indicates that gaining consensus within an organization among the right parties is actually more important.
In order of importance, rank the following for their impact
on your ability to improve your forecasting.
Many believe there is a better way to forecast.
Despite frustrations with current methods, many believe there is a better way to forecast. We are living in the age of big data where computers have the ability to integrate incredibly large sets of data and learn from the past in order to predict the future. The survey found that 40 percent believe it is possible to forecast human behavior and the technology exists to do it. We believe these numbers will continue to shift in the coming years as more people discover the power of market simulation and human behavior forecasting.
Access the complete State of Forecasting report here.