Executive Briefings

Forecasting No Easy Trick in This Economy

What can companies do to forecast with any degree of accuracy in this economy? A few forward-thinking firms can provide inspiration. Hugh Courtney, a professor at the University of Maryland's Robert H. Smith School of Business, thinks more companies should be using "scenario planning" alongside their financial models, which do not produce a large enough spread of possible outcomes to capture the flavor of today's uncertainties. Sten Daugaard, the finance chief of Lego, a Danish toy maker, says his firm generated a number of different scenarios as part of its 2009 budget, the first time it had used such an approach. It has developed contingency plans for each scenario so that it can react swiftly whatever the coming months throw at it.
Lego has also been using a monthly meeting of senior managers, known as the operations board, to pool knowledge of what is happening in its various markets.
Some companies have formalized this kind of approach by creating "rolling forecasts." At the end of, say, the first quarter of a financial year, managers forecast the remaining three quarters again and then add an extra quarter's projections, worrying about only the most important financial variables. Many companies in Europe already use such systems, says Emery Sinclair of Revelwood, an American software-services provider, and firms in America are suddenly taking a lot more interest in them. One benefit of rolling forecasts is that they discourage executives from becoming too fixated on the present at the expense of the future.
Source: The Economist

What can companies do to forecast with any degree of accuracy in this economy? A few forward-thinking firms can provide inspiration. Hugh Courtney, a professor at the University of Maryland's Robert H. Smith School of Business, thinks more companies should be using "scenario planning" alongside their financial models, which do not produce a large enough spread of possible outcomes to capture the flavor of today's uncertainties. Sten Daugaard, the finance chief of Lego, a Danish toy maker, says his firm generated a number of different scenarios as part of its 2009 budget, the first time it had used such an approach. It has developed contingency plans for each scenario so that it can react swiftly whatever the coming months throw at it.
Lego has also been using a monthly meeting of senior managers, known as the operations board, to pool knowledge of what is happening in its various markets.
Some companies have formalized this kind of approach by creating "rolling forecasts." At the end of, say, the first quarter of a financial year, managers forecast the remaining three quarters again and then add an extra quarter's projections, worrying about only the most important financial variables. Many companies in Europe already use such systems, says Emery Sinclair of Revelwood, an American software-services provider, and firms in America are suddenly taking a lot more interest in them. One benefit of rolling forecasts is that they discourage executives from becoming too fixated on the present at the expense of the future.
Source: The Economist