three d for improv forecasting proc kpmg

7/31/2019 Three D for Improv Forecasting Proc KPMG

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BUSINESS PERFORMANCE SERVICES

Three Ds for Improig YourForecastig Process

ADVISORY


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Cotets

Decisios 2

Data 3

Disciplie 5

Coclusio 7


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1Forecasting with Confidence: Insights from Leading

Finance Functions,KPMG Iteratioal, 2007, page 22Ibid., page 6

Forecasting with Confidence, a 2007 study commissioed

by KPMG Iteratioal ad coducted by the Ecoomist

Itelligece Uit, reported that almost half of sureyed

orgaizatios beliee the reliability of their fiacial data is

merely adequate or worse; a majority thik the same of

their ofiacial data.1 Further eidece abouds. Without

reliable data, forecastig is ot oly a waste of time, it is also

potetially damagig to your busiess.

The failure of forecastig is particularly paiful gie the eer-heighteig eed for

it: product ad serice life cycles are shorter, competitio ca come from aywhere

i the global marketplace, ad eery compay must be flexible ad forward-lookig

to surie. Whats more, the tools ad techology to eable better forecastig haematured. Busiess performace measuremet (BPM) applicatios, ow i their secod

or third ersios, are gaiig greater itegratio with major eterprise resource plaig

(ERP) applicatios. Ad these tools are at the disposal of the chief fiacial officer

(CFO), who ow takes a icreasigly strategic role i the busiess.

What are the stakes i forecastig? Successful busiess performace is closely tied

to better practices i forecastig. For example, share price growth is 12 percetage

poits higher for the most accurate forecasters; ad improed reliability i forecastig

leads to improed ability to recogize opportuities (68 percet) ad to maage risk

(66 percet), accordig to the same study.2

2008 KPMG LLP, a U.S. limited liability partnership and a member

firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved.

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2 T H R E E D S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S

Gie the imperatie for accurate forecastig, the aailability of better tools ad

techiques, ad the recet empowermet of CFOs to implemet chage, why aretcompaies more successful i their forecastig efforts? Tools ad techiques aloe

caot produce successful forecastig. Compaies hae struggled to forecast with

reliability because they haet focused sufficietly o forecastig fudametals

what we call the three Ds: decisios, data, ad disciplie.

Decisions: You eed a reaso for forecastig, ad the reaso is leaderships targeted

desire to obtai forward-lookig iformatio that ca facilitate specific busiess decisios.

Data: You must fid a way to acquire ad maitai accurate, releat, ad timely

data that support busiess decisios.

Discipline: The forecastig disciplie icludes a commitmet to maagig the busiess

i a forward-lookig maer, embeddig the forecastig process i the orgaizatio,

ad cosistetly usig forecastig as a elemet of strategic decisio makig.

Almost eery compay attempts to forecast i some form or other, but amog KPMGs

surey respodets, oly 22 percet qualified as leadig forecasters.3 Clearly, there

is room for improemet. CFOs today hae the opportuity to icrease their fore-

castig effectieess by usig the three Ds.

DecisiosWhat makes forecasters effectie? Ad why do effectie forecasters do better i

the marketplace?

Effectie forecasters kow what theyre lookig for ad why. Theyre lookig for

aswers to their most pressig questioswhether about north Atlatic weather,

the price of silico, or Chiese iestmet regulatiosto help them make good

strategic decisios. They do better i the marketplace because theye committed

to usig forecastig cosistetly ad they put that commitmet ito practice as they

lead the compay.

Takig a page from busiess reportig history, the first fiacial data warehouses were

built i the late 1990s to help maagers aswer ay questio, which added up to

cofusio ad complexity. It wast util data marts (subsets of data warehouses)

were deeloped to aswer specific issuesfor example, the spedig habits of seg-

meted buyersthat the potetial of the fiacial data warehouse came to fruitio.

Forecasting Tools and Techniques

These tools ad techiques, listed from

strategic to tactical, are aailable to CFOs:

Automationthroughinformation

techology (IT) systems ad tools

Morescenarioplanningand

sesitiity aalysis

Rollingforecasts

Reductionindetailandgreaterfocus

o key busiess driers

Improvedqualityofinputdata

Simplificationandstandardizationof

processes

Managementincentiveslinkedto

forecast

Formalmeasurementofforecast

accuracy

Improvedspeedtocollectand

cosolidate forecast data

Involvementofoperationalmanagers

AutomationthroughITsystems

ad tools

Trainingofstaffinforecasting

(both fiace ad ofiace areas)

Cleartimetablesforforecasting

Focusonforecastsduringperiodic

performace reiews

Frequencyofforecasting

3Leadig forecasters produce forecasts that are

withi 5 percet of actual results.




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T H R E E D S F O R I M P R O v I n G Y O U R F O R E C A S T I n G P R O C E S S 3

It is fruitless to task fiace with mobilizig people, processes, techology, ad

cotrols i a forecastig effort without a soud uderstadig of the busiess lead-

ership eedsthe questios ad decisios that will drie the success or failure of

the busiess. The eed for effectie forecastig will ot come from outside the

busiessfrom regulators, for istace. Leadership must recogize the potetial

alue of effectie forecastig ad set about egieerig a forecastig process that

will address the particular questios the busiess eeds to aswer. Leadig compa-

ies kow how to target top-of-mid issuessuch as aigatig market ucertaity,

establishig goerace ad cotrols, icreasig shareholder alue, ad buildig trust

exterallyad they focus forecastig efforts to aggregate ad filter helpful iforma-

tio i these areas.

Is your forecasting process designed to address your strategic business issues?

As the forecasting questions become more complex and difficult every year, is

your process configured to carry you forward?

DataBusiess leaders are hugry for isightful iformatio, which i tur depeds o

high-quality data. Its ot surprisig that more tha oe third of compaies (34 per-

cet) beliee that improig data quality is a leadig way to improe their faith i

their forecasts.4

It is obious that predictig the future is more difficult tha reportig o what has

already happeed. May of the questios a forecastig process targets require that

both fiacial ad operatioal data be complete. While this is ot a simple effort byay meas, successful forecastig processes hae the followig key characteristics

relatie to data. They:

Exploitcurrentefforts

Createtransparencybacktothedatasources

Incorporateexternalkeyperformanceindicators(KPIs)anddatasources.

Leaders Exploit Current Efforts

Maagig the busiess based o data ad iformatio is ot ew ad fiace is

ot beig asked to attempt somethig that the orgaizatio is ot already doig.

To support this core actiity, may compaies are udertakig data stadardizatio

ad access iitiaties for the purposes of risk maagemet, reportig accuracy ad

trasparecy, improed decisio makig, ad better customer relatioships.

Business Goals Should

Drive Forecasting

The goals of forecastig for differet com-

paies will be as aried as their strategic

busiess goals. For example, forecastig

questios ad aswers could reflect ay

oe of these strategic goals:

Achievenextfiscalyearstargeted

retur o iestmet

Plancapitalexpendituresforthenext

18 moths

Understandnewmarketsandhowto

cotribute to profitability i the ext

fiscal year

Achieveend-of-yearbudgetgoalstwo

to four moths out

Understandthestrengthofthesales

pipelie

Providealternativescenariostoaccount

for weather-related risk

Anticipateandcontrolcoststhrough global sourcig

Ferretouthiddeninefficienciesthat

accompay sales growth

4Ibid., page 12




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As a first step, uderstad ad leerage your ow compays curret efforts aroud

data maagemet to esure that you are ot oly creatig but also maitaiig the

key pieces of data that you eed for forecastig. I practice, much of the data you eed

(1) probably exists but ist refreshed appropriately, (2) may reside i multiple systems,

or (3) is ot i the form you eed. As data warehouses are beig stadardized for all

kids of purposes, a key requiremet is for them to sere the forecastig process.

Leaders Create Transparency Back to the Data Sources

Assumig you hae idetified the historical data eeded to support forecastig, first

determie if it exists i your compay ad how you ca best gai access to it

whether it resides o a database, a spreadsheet, or i some aalysts head. Secod,

test the data for trasparecy: Ca you see source detail? Ca you slice the data to

accommodate your eeds?

If the data doest exist, determie a method for accurately calculatig or compilig

it, ad, just as importatly, agree with stakeholders o that method. A sigle ersio of

the truth5 is required for forecastig, but that ersio is aluable oly if the method

used to determie it is accepted by the busiess.

Leaders Incorporate External KPIs and Data Sources

Whether or ot you hae all the aailable forecastig iformatio to aswer a busi-

ess questio, you ca ehace the richess ad i may cases the reliability of the

forecastig by icorporatig exteral data sources. For example, if you dot hae

adequate sales forecastig, you ca improise by usig idustry treds or other

third-party data to bechmark target sales umbers. Similarly, exteral cost tredsad idustry aerages ca help to quatify or ee qualify a forecast of expeses.

Creatig stadardized relatioships betwee iteral ad exteral fiacial ad opera-

tioal sources ca proide both isight ad cosistecy i your forecastig.

5 I computerized busiess maagemet, sigle

ersio of the truth (SvOT) is a techical cocept

referrig to how data is selected for aalysis. Selectio

from two or more equally alid represetatios of iput

data may be arbitrary, but heceforth sets i stoe

oe ad oly oe ersio of the truth.

See alsoJulia Kig, Busiess Itelligece: Oe

versio of the Truth: Gettig there takes more

tha sophisticated busiess itelligece software.

It takes data quality ad political battles, too.

Computerworld, December 22, 2003.




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KPMGs research has show that automatio through IT systems ad tools, reductio

i detail ad greater focus o key busiess driers, ad improed quality of iput

data are three of the top fie factors that proide the greatest beefit i improig

forecastig cofidece.7

How well does your forecasting effort leverage data quality initiatives that are

already taking place in your organization? Have you achieved a single version

of the truth in your forecasting calculations and metrics? Are you exploiting

external KPIs and data sources?

DisciplieAccordig to Forecasting with Confidence, leadig forecasters take accoutability more

seriously tha less-successful forecasters do, are more likely to ehace forecast quality

through sceario plaig ad sesitiity aalysis, leerage iformatio more effectiely,

work harder at forecastig, ad beefit their shareholders more.

Oce leadership commits to forward-lookig decisio makig ad maagemet of

the busiess based o ogoig capture ad aalysis of releat data, it caot

proceed without a well-desiged ad sustaiable forecastig machie.

Thats where disciplie comes ithe disciplie to:

Createaconsistentfocusonthebusinessissues

Developasingleversionofthetruth

Relyconsistentlyonforecastintelligencetomakemanagerialdecisions

Embedforecastingintotheculture.

Forecastig should be part of a larger process related to strategic executio i orga-

izatios. Its iteractio with other major plaig ad maagerial processessuch

as strategic plaig, budgetig, capital appropriatio, mothly ad quarterly aalysis,

ad the likeis critical to optimizig its alue to the orgaizatio.

Driver-Based Forecasting

Rather tha buildig fiacial plas solely

o static, detailed iteral data that is merely

self-reflectig, leadig orgaizatios focus

o the key dyamic iteral ad exteralbusiess driers that cocer maagemet

such as customer demad, competitor

actiity, ad ecoomic coditios. Although

more difficult to obtai, map, ad predict,

these measures proide greater alue ad

isight ito the busiess eiromet tha

strictly iteral details ca. I fact, two of

the four areas where orgaizatios see

most forecastig errors are oes where

such exteral data might help: cosumer

demad (38 percet) ad ecoomic driers

(29 percet). The most accurate forecasters

do look further afield: 68 percet of them

use market reports, for example, agaist just

55 percet of their peers.6

6KPMG Iteratioal, op. cit., page 147Ibid., page 42




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Forecastig today resembles quality cotrol i the early 1990s. Quality cotrol depart-

mets were typically large ad well staffed, but o matter how hard ispectors tried,

they couldt improe quality util they made eeryoe i the busiess quality focused.

Similarly, leadership today eeds to moe forecastig out of fiace ad ito the

busiess so that its embedded i day-to-day actiities ad part of eeryoes job.

Thats a fudametal cultural chage, oe that requires us to look at owership of

forecastig.

Although implemetatio of forecastig is properly the domai of fiace, ower-

ship of the process belogs with the recipiet of the results, which is the busiess.

I a 2006 budgetig ad forecastig surey coducted by KPMG, 78 percet of

respodets said the busiess owed the budget. While fiace was the drier of

the process i the majority of cases, fiace was the ower of the process i oly

19 percet.

Forecasting with Confidence(page 33) echoes this iew: Leadig forecasters

embrace forecastig as a core busiess process, oe that egages operatioal deci-

sio makers across the busiess. They tap ito their maagers kowledge i real time

so their forecasts mirror actual frotlie eets, ad maagers remai egaged i the

debate about potetial courses of actio. I this way, operatioal maagers ow ad

are accoutable for their forecasts, ad they alue the process as a crucial maage-

met resposibility.

Iolig the right people i the process also breaks dow orgaizatioal silos ad

eables maagers to uderstad how their decisios affect other parts of the orgai-

zatio. As a result, ehaced dialogue, opeess, ad a leel of itegratio betwee

arious parts of the busiess emerge that eable busiess maagers to use the

disciplie of forecastig to improe performace.

The surey data proide some support for this otio: amog the more accurate

forecasters, 40 percet are more likely to hae operatioal ad lie maagers do the

work, ersus 34 percet amog the less accurate. Withi leadig orgaizatios, seior

maagers sposor ad alue the fiacial plaig exercise, are isible ad actie i

reiews, proide clear directio ad coachig, ad follow up o the actios arisig

from the process.




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I additio, makig the budget has bee a key drier of behaior ad compesatio

at may orgaizatios. Those compaies that hae chose to maage the future as

aggressiely as the past are striig for the proper balace betwee makig the

umbers ad positioig for log-term successad theyre aligig compesatio

with their ew maagemet disciplie.

Uderstadig what you eed to measure ad haig accurate data aailable ca

moe your forecastig process forward. Howeer, for the process to excel, all

leels of the orgaizatio eed to collaborate with a commo purpose ad focus.

not addressig the disciplie aspect of forecastig seerely limits the oerall

achieemet of goals.

How much discipline has your organization developed in looking ahead at the

business climate? Developing a single version of the truth? Using forecastintelligence as the basis for managerial decisions? Working across silos and

embedding forecasting into the culture?

CoclusioEery busiess tries to aticipate the future; successful busiesses take a actie,

aggressie role i shapig it. A well-desiged ad iformatio-rich forecastig process

is a prerequisite for this effort. The desig, detail, ad structure of your forecastig

process will be specific to your compays strategy ad goals. Customized ad

accurate forecastigfocused o the critical issues driig your busiesss success

reeals your sigle ersio of the truth.

With a heighteed demad for better busiess foresight, the aailability of

more-eoled tools, ad greater potetial o the part of the CFO to implemet

cross-fuctioal chage, orgaizatios hae the opportuity to deelop ad leerage

their sigle ersio of the truthif they keep the proper focus o decisios, data,

ad disciplie.

May compaies still lie i a world where uderstadig what has already happened

is a challege, let aloe what might happe ext. Compaies that egage i a process

to shape where they are goig ad where they ca outpace their competitio hae a

distict adatage. Aggressiely pursuig a alue-rich forecastig process is icreas-

igly a requiremet for success, ot a luxury.

Tools exist. The CFO has permissio. now you hae the opportuity to take the

upper had by keepig the focus o decisios, data, ad disciplie.




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Cotact UsFor further iformatio about this report or KPMGs Busiess Performace Serices,

please cotact your local KPMG parter.




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The information contained herein is of a general nature and is not intended to address the circumstances of anyparticular individual or entity. Although we endeavor to provide accurate and timely information, there can beno guarantee that such information is accurate as of the date it is received or that it will continue to be accurate inthe future. No one should act on such information without appropriate professional advice after a thoroughexamination of the particular situation.

2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG

International, a Swiss cooperative. 070630


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three d for improv forecasting proc kpmg

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