Bad Forecasts Aren't a Mistake

The New York Times had a great op-ed piece today about companies missing forecasts. The premise – CFO’s and CEO’s are over confident in their beliefs.

I completely agree with this and think the premise can be extended even further to sales people. You can usually see this “hubris” in sales when sales people are well connected with the customer. The customer gives them their forecast, their expected sales for the next year and the sales person takes it to heart.

They believe their relationship with the customer and their knowledge of their “business” is spot on. This confidence drives faulty forecasts.

The New York Times does a good job explaining this, there is nothing I can add. That being said, I think there is another reason for faulty forecasts — forecasts have never been expected to be accurate.

Forecasting HAS never been an exercise in accuracy. Forecasting has always been an exercise in articulating how much growth is going to be had not an authentic expression of what is really going to happen.

Nobody wants to hear your going to lose money. No one wants to hear business is declining. No one wants to hear that the numbers are falling. Therefore, no one is allowed to forecast the truth. REALITY is something forecasts omit 90% of the time. Sales and corporate forecasts are marketing tools designed to build confidence in the company, the division or the sales person. They are rarely a fair representation of reality.

Know one wants to hear the truth — unless it is good.

An unprecedented number of companies missed 2009 earnings. Why? In my opinion none of them forecasted a decline in business from 2008 to 2009, despite all the economic signs and information suggesting 2009 would be brutal. There was more than enough information in the fall of 2008 that suggested for most companies growth was an impossibility and a decline was most probable.

Rather than embracing the data and building a forecast and plan to minimize the decline, most companies moved forward with completely unrealistic growth forecasts.

This intolerance of negative forecasts permeates all the way to sales. Sales forecasting is rooted in the expectations of growth, not accurate forecasting.

If sales teams want to improve productivity, improve forecasting accuracy and minimize surprises, the culture of forecasting needs to change. It needs to move from telling people what they want to hear to telling people what is actually happening.

If your company or sales team has never forecasted negative sales numbers yet has had a decline in revenue, that’s the first sign your company doesn’t forecast but promotes. If you have sales people or executives who have put forth compelling data based arguments for a decline in revenue or sales and they were marginalized or removed, it’s another sign you don’t forecast, you promote.

Real forecasting uses data, the good and the bad, to determine the most accurate prediction of future revenue. It’s that simple.

If some forecasts are deemed OK and others aren’t, reality is quickly being flushed from the process. When that happens just ask the powers that be, what number they want to see and give it them.

It will save everyone a lot of time, time your going to need to figure out how you can make that completely unrealistic forecast.

There is no such thing as a good forecast or a bad forecast . . . just an accurate forecast.