We’re not going to nail it.
Nothing could be truer in this day and age when it come to business planning. Undertaking exercises in long-range planning and forecasting assumes that the business’ contextual environment has a level of stability and certainty… well at least enough to make us feel comfortable that we can range the behaviors. I know that when I started my business life in the Financial Planning & Analysis group of a Fortune 50, assumptions about magnitude and direction weren’t the concern.
However, in today’s reality, very few of even the most long-toothed concerns can afford not to stress test even the most basic assumptions. The cone of uncertainty has expanded to a point that we all need to systemize real-time feedback and turn this data in actionable information.
I was digging through my pile of favorites articles and ran across ‘In an Uncertain World, Plan to Be Wrong’ by David A.J. Axson. The article takes a look at this situation and provides a roadmap on how to be prepared, because we know were going to be wrong. Since many are finally seeing the light at the end of the 2012 budgeting cycle I though it would be a good time to for a reality check. Below are the key points I took away from the article.
Expect to be Wrong
Although our budgets aren’t a house of cards they are held together by assumptions – resource allocations, input costs/availability, and performance expectations. And, until these our key assumptions are validated we can only hope that nothing unforeseen causes the industry’s terra firma to shift unexpectedly. What about the other assumptions? Will they fall in line?
All we can know for sure is that when the budget hits the real-world (aka January 2012) we know it will be wrong from the start. How could it not be when we made day one projections in the middle of Q3. But I can hear you thinking, “Ah, we took care of that by instituting a beginning of the year readjustment”… point 1, we built the process knowing that we would be wrong.
Tighten Your Re-calibration Cycle
We used to look at projections quarterly; now I see larger entities conducting monthly reviews. This is great, but as financial and strategy executives what we need to be doing is using our analytical skills to aggressively seek out data that can provide insights into future behaviors of markets, customers and competitors. Just so we’re clear, monitoring (backward looking data comparisons) and using information to consider alternative courses of action are two different processes.
Learn to Love Feedback
Our job is to rigorously measure both where the business is right-now, confronting the hard truths, and then devise how to steer the organization to closer to the prescribed trajectory.
What is our best tool? Feedback.
Being a trained electrical engineer I have a fond appreciation for feedback loops. The business equivalent of this is real-time analytics, the formalization of the leading indicator scanning process presented above. I believe that for most businesses this should be a very frequent undertaking — in fact the ideal scenario is that it is an event trigger action. In reality most of us don’t, yet, have the bandwidth to need to support constant monitoring, thus I propose a 15 to 30 day cycle. The point is this: You need to be validating the core assumptions on a continuous basis.
Stand on Conviction… Until New Information Changes Your Mind
All of the best information in the world isn’t worth a dime if business managers are unwilling to make decisions. Something that in times of uncertainty and volatility is very hard to do. In an environment when decisive action is most required some people quite often react in the opposite fashion because they are concerned about making a slip and jeopardizing their reputation and or job. Thus, the infinite decision loop better know as ‘analysis by paralysis’ sets in.
Think not. I refer you to one of the most heeded quotes of the second half of the last century “You can’t go wrong with Big Blue”. Basically, what it implies is that if you take the most defensible (read safe) path you’re covered if it doesn’t work.
There needs to be an environment that tolerates slips and mind changes that are a result of our validated learning. And, on a personal level we all need to become more comfortable being uncomfortable and use the best information available to make a decision.
Because of the speed of change, there has never been a better time to lead a business. However, old processes need to be retrofitted or discarded so that concerns can exploit time-limited opportunities presented by volatility. While nothing is guaranteed, following the four principles above will keep you from being blindsided.