You Can Predict the Future!
I’ve enjoyed my fair share of sci-fi fantasy entertainment in my life, following heroes and villains as they traverse across time to right a wrong before it occurs. The scientist in me struggles with the math and physics of time travel, but the wild-eyed boy in me marvels at the possibilities.
Okay, maybe traveling to the future is out of our reach, but what about predicting it? The primary tools we have at our disposal as business professionals are strategic/tactical plans, financial modeling, and goal setting.
The Challenges with Prediction Models
The finance guy in me has seen many business and economic forecasting models trotted out to predict business results based on historical trends and data. These models are almost without exception of limited value because once they are set in place, circumstances change, historical correlations unravel, and the model’s value begins to immediately erode. The most important reason why financial models fail is because they are typically created in a vacuum and are not tightly coupled with the levers of the business.
Similarly, the CEO in me has been involved in the creation of myriad strategic and tactical plans that are designed to help predict the future state of the business. These too become worthless as time progresses due to the natural decay (a.k.a., entropy) and the daily demands of business-as-usual.
How to Improve the Reliability of Prediction Models
If modeling and planning yield such poor results in isolation, how do we build more reliable methods of predicting the future? The key is to use our prediction tool sets in concert with one another.
Here are the ingredients to the stew that will result in improved predictability:
Persistence and Consistency: A primary driver to modeling and planning ineffectiveness is that we tend to forget about them as soon as they’re published. I’ve seen this behavior too many times in my career - after months of work behind the scenes, the long-range plan is released with great fanfare at an all-company meeting. Teams meet to discuss the implications of the plan on their workflow models in the weeks following the big reveal, but then interest in the plan withers in the face of routine and “the way we’ve always done it.”
Manage Inclusively: The key phrase in point #1 above is “behind the scenes.” Leaders tend to convince themselves that the strategic plan also needs to be a secret that’s hidden from the rest of the company until the big reveal. Getting more voices involved in the development of the long-range plan increases the likelihood that more teams and team members will buy in earlier, shortening and muting the slope of the change management curve.
Communication and Shiny Balls: Leaders prep diligently for the aforementioned all-company meeting and their energy and excitement levels are high. Their performance (and it is a performance) is spectacular. The problem I’ve seen repeated like Groundhog Day is that the next shiny ball comes around very soon after the meeting concludes in the form of an acquisition candidate or new competitive threat. Management’s eyes are quickly diverted away from the hard, but necessary work of incessantly reinforcing the “why” behind the plan. The rest of the company is left to wonder how important the plan really is and falls back to what’s comfortable - business as usual.
Alignment and Goal Setting: Line managers and individual contributors who attended the all-company meeting are also likely experiencing feelings that lie along a spectrum. On one end is excitement regarding the plan and the change it represents. These individuals are wondering what’s in it for them, their team, and how they can get involved to make a positive contribution. The other end of the spectrum is caution and skepticism. These team members have “seen this movie before,” meaning that they’ve seen strategic plans get rolled out in the past but nothing changes because there’s little to no follow through. To ensure more team members bend toward the former, the strategic plan must be brought to life in the annual tactical plan (a.k.a., the budget) and individual goals and incentives must align to the plan. The strategic plan will gain momentum when individual contributors wake up each morning knowing that at least a portion of their personal/team goals and their financial incentives are directly related to outcomes that are necessary for the strategic plan to succeed.
Model the Plan: This is where most strategic plans fail. Yes, the team may have created a beautiful, shiny PowerPoint deck, but where’s the financial model that accompanies it? In many companies, financial modeling skills are reserved for the Mergers & Acquisitions (M&A) department and only a sliver of this critical resource is deployed to pressure test the assumptions and after-the-fact performance of the budget and long-range plan. A great financial model is built to be both a guide to the a priori outcomes of a plan and a “living” ex post check on key performance indicators (KPIs) and financial performance. The model is then backtested as actual results are realized and adjusted in real time as externalities and other previously unknown head/tailwinds buffet the business.
Punching Point #5
It should be no surprise to frequent readers in this forum that the tools needed to improve the accuracy and fidelity of business forecasting are pinned in the tenets of continuous improvement and organizational health. The “ah ha” moment I hope you’ve had is the importance of having strong financial modeling skills embedded in your organization. Yes, smaller companies may need to outsource this capability initially, but as the company grows in size, so too should investment in financial modeling expertise.
Avoid the trap of having only one individual that possesses deep financial modeling skills. Instead, develop and equip multiple financial professionals in your organization with the skills necessary to make a spreadsheet sing, dance, and do the dishes. Once your functional leaders see the benefits of coupling strong financial modeling with the planning process, demand for these skills will increase substantially.
Another implication is that financial modeling expertise must also be accompanied by strong financial acumen across the company. In my book, Balancing Act, I introduce financial acumen as one of four primary future workplace skills. I’ve also addressed the topic in an earlier Muse where I recommend using the budgeting process as an experiential learning tool to improve the financial acumen of non-financial business professionals.
Conclusion
Yes, you can predict the future! As I sit in my home office chair writing this Muse, I know with a high degree of probability what I’ll be doing in five minutes from now and what I’ll be doing for the rest of the week. I’ve also got a really good idea of what the next year has in store for my various business ventures.
Yes, there will be unexpected events that make aspects of our plan more challenging and new opportunities/ideas that need to be evaluated for fit and fitness against the original plan. But if I manage with persistence, am consistent and inclusive with the development and delivery of the message, avoid unnecessary shiny balls, align goals across the organization, and model/monitor performance, I’ll have a much better chance of landing on our target condition and not some other, unexpected square on the chessboard of business.
