Relationship Forecasting


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Relationship Forecasting by Caroline Stockmann - CFO -Save the Children International

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Relationship Forecasting

  1. 1. Relationship Forecasting Caroline Stockmann Save the Children International 5 July 2011
  2. 2. Save the Children <ul><li>Our vision is a world in which ever child attains the right to survival, protection, development and participation. </li></ul><ul><li>Our mission is to inspire breakthroughs in the way the world treats children and to achieve immediate and lasting change in their lives. </li></ul><ul><li>Our values Accountability | Ambition | Collaboration | Creativity | Integrity </li></ul>
  3. 3. Save the Children Responsibilities framework to provide global services home market fundraising advocacy representation domestic progs Save the Children national members Save the Children International global campaigns advocacy media co-ordination knowledge- sharing impact maximisation marketing Direction, strategy and performance of national as part of whole, plus influencing global strategy Direction, strategy and performance of SC overall <ul><li>Members will be awarded responsibilities for some global services based on members’ ability to provide: </li></ul><ul><li>overwhelming expertise </li></ul><ul><li>resources needed to run </li></ul><ul><li>excellent customer service and comms </li></ul>accountability performance risk mgmt inter- national progs delivery global services inter- national progs design, support
  4. 4. Agenda <ul><li>why are forecasts important, and what are the weaknesses of budgets? </li></ul><ul><li>what is relationship forecasting? </li></ul><ul><li>why a range is better than a single point </li></ul><ul><li>what are the tools which can support you? </li></ul><ul><li>why these principles can be applied to any (size of) organisation </li></ul><ul><li>Q & A </li></ul>
  5. 5. <ul><li>Why are forecasts important, and what are the weaknesses of budgets? </li></ul>
  6. 6. Weaknesses of Budgets <ul><li>Whilst budgeting also tries to guide an organisation, forecasts can be more focused on what is likely to happen. Budgeting as a process has many flaws, some of which you will be very familiar with: </li></ul><ul><ul><li>‘ lowballing’ of targets </li></ul></ul><ul><ul><li>building ‘sleeves’ </li></ul></ul><ul><ul><li>negotiating bigger budgets </li></ul></ul><ul><ul><li>treating budgets as an ‘entitlement to spend’ </li></ul></ul><ul><ul><li>resisting initiatives as they increase the target </li></ul></ul><ul><ul><li>starting initiatives to increase targets </li></ul></ul><ul><ul><li>moving money between years </li></ul></ul><ul><ul><li>cutting investment to meet targets </li></ul></ul><ul><ul><li>hiding good news for fear of increasing targets... etc... </li></ul></ul>
  7. 7. Weaknesses of Budgets 2 <ul><li>‘ The budget never should have existed…if you make it you generally get a pat on the back…if you miss it you get a stick in the eye or worse. . . Making a budget is an exercise in minimalisation. You’re trying to get the lowest out of people…everyone negotiates to get the lowest number.’ </li></ul><ul><li>Jack Welch 1995 </li></ul><ul><li>Sometimes one spends so long trying to explain differences versus a budget that was out of date the moment it was written that the organisation forgets to run its business and focus on necessary actions. </li></ul><ul><li>There are alternatives to the ‘classic budget’, which are the study of the Beyond Budgeting Round Table (, and which also formed part of my work at Unilever in developing ‘Dynamic Performance Management’. </li></ul><ul><li>However, today I will focus on the forecasting only, and how that can move an organisation into improved performance in the long run. </li></ul>
  8. 8. Importance of Forecasting <ul><li>forecasting focuses the organisation on looking at reality, although it can still involve some of the game-playing shown on an earlier slide </li></ul><ul><li>one is nearer to the period of time in question, so there is more data/up-to-date external factors that can be taken into consideration </li></ul><ul><li>there is generally some history vs the budget, so inappropriate assumptions have come to light and can be directly highlighted and addressed </li></ul><ul><li>as this is not so much about targets, there are greater chances of having meaningful and honest discussions with colleagues </li></ul><ul><li>techniques such as range forecasting come into play and are much easier to adopt for organisations than, say, a dynamic and/or range-based set of budgets </li></ul><ul><li>one naturally becomes more focused on actions rather than explanations </li></ul>
  9. 9. <ul><li>What is relationship forecasting? </li></ul>
  10. 10. Relationship Forecasting <ul><li>having great systems is fine but, as they say, ‘rubbish in, rubbish out’ </li></ul><ul><li>many people feel systems will solve their issues, whereas maybe the answer is more around trust and relationships? </li></ul><ul><li>example form Unilever – where the largest business group moves from bottom to top quartile in terms of forecasting accuracy – which clearly had a significant impact on the market and how the group was perceived as a whole </li></ul><ul><li>so, it is about: </li></ul><ul><ul><li>understanding the organisation </li></ul></ul><ul><ul><li>understanding others’ motivation </li></ul></ul><ul><ul><li>taking the first steps to build trust </li></ul></ul><ul><ul><li>using techniques such as range forecasting to create better conversations </li></ul></ul><ul><ul><li>assessing success, and taking corrective actions. </li></ul></ul>
  11. 11. <ul><li>Why a range is better than a single point </li></ul>
  12. 12. Range Forecasting <ul><li>What is it? </li></ul><ul><li>instead of seeking out one financial indicator for an area or department, this asks the questions ‘how good could it be?’ and ‘how bad could it get?’ </li></ul><ul><li>the outcomes of these questions can be consolidated, probabilities applied, and then a range forecast results showing the most likely outcome with a range of risk and opportunity either side </li></ul><ul><li>the process focuses the mind on the risks and opportunities, and these are then explicit and clear to all. </li></ul><ul><li>Benefits: </li></ul><ul><li>makes a huge difference to the accuracy of forecasting </li></ul><ul><li>stimulates discussion which can lead on to even more value-adding activity </li></ul><ul><li>focuses on risk (and opportunity) </li></ul><ul><li>can also be introduced in a very simple, low-tech way, which needs no further investment. </li></ul>
  13. 13. Range Forecasting 2 <ul><li>Some guidelines for putting into practice: </li></ul><ul><li>range forecasts describe possible outcomes around a single point forecast, & should ideally have a specified likelihood of occurrence; eg, one might identify ranges with 90% confidence levels, meaning that in the judgment of management the outcome will fall within the range 9 times out of 10 </li></ul><ul><li>alternatively, one might do this more intuitively, trying to estimate ‘absolute worst’ and ‘absolute best’ case in each area of the P & L, - which, in many cases in my experience, equated to a similar confidence level, though sometimes we would take 50% of the range on either side, given the fact that not all good/bad things are likely to happen at once </li></ul><ul><li>forecasts must also be unbiased – i.e. the probability of falling short should equal the probability of overshooting (being 5% at above confidence level) </li></ul><ul><li>the ‘most likely’, forecast is where the likelihood of the outcome being above it equals that of being below, but this does not mean that this forecast is in the centre of the range, - i.e. the range is more often than not ‘skewed’. </li></ul>
  14. 14. Range Forecasting 3 <ul><li>A practical approach is to work the forecast through taking each level of the P & L and, where appropriate, going down to a more detailed level (which can then be consolidated upwards). </li></ul><ul><li>The forecast process should: </li></ul><ul><li>start with identifying the high and low points, and then the ‘most likely’ forecast can be estimated </li></ul><ul><li>never start with the central point then fill out the range: this ensures that there is an open discussion on all aspects, and frees up the mind so as not to get ‘fixed’ on a particular outcome </li></ul><ul><li>beware also of ‘experts’, who often give too narrow a range, due to (a natural) overconfidence </li></ul><ul><li>use existing modelling and other detail to support the range proposed (eg analysis of historical and consumer data) </li></ul><ul><li>include guidelines for consistency </li></ul><ul><li>check how you are doing against actuals! </li></ul>
  15. 15. Issues <ul><li>There are of course issues around forecasting too, which can impact its accuracy (leaving aside acts of God/terrorism, etc!), which include: </li></ul><ul><li>politics (personal or general, which can encourage forecasts which significantly deviate from reality) </li></ul><ul><li>cultural tendencies (in terms of under- or over-forecasting), and </li></ul><ul><li>lack of/inappropriateness of supporting systems. </li></ul>
  16. 16. <ul><li>What are the tools which can support you? </li></ul>
  17. 17. Tools for Forecasting <ul><li>There are a number of tools which aid in probability analysis, ranging from complex to simple, for example: </li></ul><ul><li>Monte Carlo simulation </li></ul><ul><li>decision trees </li></ul><ul><li>SWOT analyses. </li></ul><ul><li>But there is also the simple conversation that goes: ‘How bad could it be? What if no-one bought my product/any tickets/gave funding? What are the chances of…?’ and, conversely, ‘How good could it get? What would be our maximum capacity? What would make it sell that well?’ Because it’s all about informed conversations… </li></ul>
  18. 18. Statistical Modelling <ul><li>Statistical modelling can be used where there is a lot of data to crunch and the return on investment is justified. </li></ul><ul><li>One type would be Monte Carlo simulation , a spreadsheet simulation which randomly generates values for uncertain variables over and over to simulate a model. These variables in the model are then represented by a distribution. The simulation calculates multiple scenarios of a model by repeatedly sampling values from the probability distributions for the uncertain variables and then recalculates the spreadsheet. There are a number of Excel add-ins/tools available to create Monte Carlo simulations; these can easily be found via the Internet. </li></ul><ul><li>The biggest impact of this kind of probabilistic analysis on finance is that it removes our obsession on getting to the ‘right number’, and forces us to really focus on the edges. This is where most discussions ought to be focussed – not only arriving at a forecast, but ensuring we think about the various options that we can draw from when the need arises. </li></ul>
  19. 19. Statistical Modelling
  20. 20. Decision Tree <ul><li>Another tool is the use of a decision tree , which is an excellent tool where choices are also allocated a probability. It provides a highly effective structure within which you can lay out options and investigate the possible outcomes of choosing those options, and helps form a balanced picture of the risks and rewards associated with each possible course of action. From this a sensible range of outcomes can be predicted. </li></ul>
  21. 21. Tornado Charts <ul><li>Tornado charts provide an easily understood visual representation of the risk profile of the forecast: </li></ul><ul><li>This can easily be created from Chart Wizard (go to ‘bar charts’ and, using negative and positive data, complete a table, then rotate the resulting chart), and is a tool which communicates the message effectively to all groups of stakeholders. </li></ul>
  22. 22. <ul><li>Why these principles can be applied to any </li></ul><ul><li>(size of) organisation </li></ul>
  23. 23. Basic Principles <ul><li>The basic principles of probability and range forecasting are easy to apply to any organisation , because it is very simple! Whether through use of underlying complex models, or via a more intuitive, simplistic approach, this is an effective approach. </li></ul><ul><li>The real key is for the organisation to find itself in a situation where it is assessing a range of possibilities, rather than discussing a single-point forecast. </li></ul><ul><li>I have used this approach to good effect in a number of organisations, and will be introducing it at Save the Children International as we complete our transition. </li></ul>
  24. 24. <ul><li>Q & A </li></ul>