Three D’s for Improving Your Forecasting Process · is room for improvement. CFOs today have the opportunity to increase their fore- ... value of effective forecasting and set about

BUSINESS PERFORMANCE SERVICES

Three D’s for Improving Your Forecasting Process

ADVISORY

ContentsDecisions 2

Data 3

Discipline 5

Conclusion 7

1 Forecasting with Confidence: Insights from Leading Finance Functions, KPMG International, 2007, page 2 2 Ibid., page 6

Forecasting with Confidence, a 2007 study commissioned by KPMG International and conducted by the Economist Intelligence Unit, reported that almost half of surveyed organizations believe the reliability of their financial data is merely adequate or worse; a majority think the same of their nonfinancial data.1 Further evidence abounds. Without reliable data, forecasting is not only a waste of time, it is also potentially damaging to your business.

The failure of forecasting is particularly painful given the ever-heightening need for

it: product and service life cycles are shorter, competition can come from anywhere

in the global marketplace, and every company must be flexible and forward-looking

to survive. What’s more, the tools and technology to enable better forecasting have

matured. Business performance measurement (BPM) applications, now in their second

or third versions, are gaining greater integration with major enterprise resource planning

(ERP) applications. And these tools are at the disposal of the chief financial officer

(CFO), who now takes an increasingly strategic role in the business.

What are the stakes in forecasting? Successful business performance is closely tied

to better practices in forecasting. For example, share price growth is 12 percentage

points higher for the most accurate forecasters; and improved reliability in forecasting

leads to improved ability to recognize opportunities (68 percent) and to manage risk

(66 percent), according 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. 070630

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

Given the imperative for accurate forecasting, the availability of better tools and

techniques, and the recent empowerment of CFOs to implement change, why aren’t

companies more successful in their forecasting efforts? Tools and techniques alone

cannot produce successful forecasting. Companies have struggled to forecast with

reliability because they haven’t focused sufficiently on forecasting fundamentals—

what we call the three D’s: decisions, data, and discipline.

Decisions: You need a reason for forecasting, and the reason is leadership’s targeted

desire to obtain forward-looking information that can facilitate specific business decisions.

Data: You must find a way to acquire and maintain accurate, relevant, and timely

data that support business decisions.

Discipline: The forecasting discipline includes a commitment to managing the business

in a forward-looking manner, embedding the forecasting process in the organization,

and consistently using forecasting as an element of strategic decision making.

Almost every company attempts to forecast in some form or other, but among KPMG’s

survey respondents, only 22 percent qualified as leading forecasters.3 Clearly, there

is room for improvement. CFOs today have the opportunity to increase their fore-

casting effectiveness by using the three D’s.

DecisionsWhat makes forecasters effective? And why do effective forecasters do better in

the marketplace?

Effective forecasters know what they’re looking for and why. They’re looking for

answers to their most pressing questions—whether about north Atlantic weather,

the price of silicon, or Chinese investment regulations—to help them make good

strategic decisions. They do better in the marketplace because they’ve committed

to using forecasting consistently and they put that commitment into practice as they

lead the company.

Taking a page from business reporting history, the first financial data warehouses were

built in the late 1990s to help managers answer “any” question, which added up to

confusion and complexity. It wasn’t until data marts (subsets of data warehouses)

were developed to answer specific issues—for example, the spending habits of seg-

mented buyers—that the potential of the financial data warehouse came to fruition.

Forecasting Tools and TechniquesThese tools and techniques, listed from strategic to tactical, are available to CFOs:

•Automationthroughinformation technology (IT) systems and tools

•Morescenarioplanningand sensitivity analysis

•Rollingforecasts

•Reductionindetailandgreaterfocus on key business drivers

• Improvedqualityofinputdata

•Simplificationandstandardizationof processes

•Managementincentiveslinkedto forecast

•Formalmeasurementofforecast accuracy

• Improvedspeedtocollectand consolidate forecast data

• Involvementofoperationalmanagers

•AutomationthroughITsystems and tools

•Trainingofstaffinforecasting (both finance and nonfinance areas)

•Cleartimetablesforforecasting

•Focusonforecastsduringperiodic performance reviews

•Frequencyofforecasting

3 Leading forecasters produce forecasts that are within 5 percent of actual results.


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 finance with mobilizing people, processes, technology, and

controls in a forecasting effort without a sound understanding of the business lead-

ership needs—the questions and decisions that will drive the success or failure of

the business. The need for effective forecasting will not come from outside the

business—from regulators, for instance. Leadership must recognize the potential

value of effective forecasting and set about engineering a forecasting process that

will address the particular questions the business needs to answer. Leading compa-

nies know how to target top-of-mind issues—such as navigating market uncertainty,

establishing governance and controls, increasing shareholder value, and building trust

externally—and they focus forecasting efforts to aggregate and filter helpful informa-

tion in 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?

DataBusiness leaders are hungry for insightful information, which in turn depends on

high-quality data. It’s not surprising that more than one third of companies (34 per-

cent) believe that improving data quality is a leading way to improve their faith in

their forecasts.4

It is obvious that predicting the future is more difficult than reporting on what has

already happened. Many of the questions a forecasting process targets require that

both financial and operational data be complete. While this is not a simple effort by

any means, successful forecasting processes have the following key characteristics

relative to data. They:

• Exploit currentefforts

• Create transparencybacktothedatasources

• Incorporate externalkeyperformanceindicators(KPIs)anddatasources.

Leaders Exploit Current Efforts

Managing the business based on data and information is not new and finance is

not being asked to attempt something that the organization is not already doing.

To support this core activity, many companies are undertaking data standardization

and access initiatives for the purposes of risk management, reporting accuracy and

transparency, improved decision making, and better customer relationships.

Business Goals Should Drive ForecastingThe goals of forecasting for different com-panies will be as varied as their strategic business goals. For example, forecasting questions and answers could reflect any one of these strategic goals:

•Achievenextfiscalyear’stargeted return on investment

•Plancapitalexpendituresforthenext 18 months

•Understandnewmarketsandhowto contribute to profitability in the next fiscal year

•Achieveend-of-yearbudgetgoalstwo to four months out

•Understandthestrengthofthesales pipeline

•Providealternativescenariostoaccount for weather-related risk

•Anticipateandcontrolcoststhrough global sourcing

•Ferretouthiddeninefficienciesthat accompany sales growth

4 Ibid., page 12



As a first step, understand and leverage your own company’s current efforts around

data management to ensure that you are not only creating but also maintaining the

key pieces of data that you need for forecasting. In practice, much of the data you need

(1) probably exists but isn’t refreshed appropriately, (2) may reside in multiple systems,

or (3) is not in the form you need. As data warehouses are being standardized for all

kinds of purposes, a key requirement is for them to serve the forecasting process.

Leaders Create Transparency Back to the Data Sources

Assuming you have identified the historical data needed to support forecasting, first

determine if it exists in your company and how you can best gain access to it—

whether it resides on a database, a spreadsheet, or in some analyst’s head. Second,

test the data for transparency: Can you see source detail? Can you slice the data to

accommodate your needs?

If the data doesn’t exist, determine a method for accurately calculating or compiling

it, and, just as importantly, agree with stakeholders on that method. A “single version of

the truth”5 is required for forecasting, but that version is valuable only if the method

used to determine it is accepted by the business.

Leaders Incorporate External KPIs and Data Sources

Whether or not you have all the available forecasting information to answer a busi-

ness question, you can enhance the richness and in many cases the reliability of the

forecasting by incorporating external data sources. For example, if you don’t have

adequate sales forecasting, you can improvise by using industry trends or other

third-party data to benchmark target sales numbers. Similarly, external cost trends

and industry averages can help to quantify or even qualify a forecast of expenses.

Creating standardized relationships between internal and external financial and opera-

tional sources can provide both insight and consistency in your forecasting.

5 In computerized business management, single version of the truth (SvOT) is a technical concept referring to how data is selected for analysis. Selection from two or more equally valid representations of input data may be arbitrary, but henceforth “sets in stone” one and only one version of the truth.

See also Julia King, “Business Intelligence: One version of the Truth: Getting there takes more than sophisticated business intelligence software. It takes data quality and political battles, too.” Computerworld, December 22, 2003.



KPMG’s research has shown that automation through IT systems and tools, reduction

in detail and greater focus on key business drivers, and improved quality of input

data are three of the top five factors that provide the greatest benefit in improving

forecasting confidence.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?

DisciplineAccording to Forecasting with Confidence, leading forecasters take accountability more

seriously than less-successful forecasters do, are more likely to enhance forecast quality

through scenario planning and sensitivity analysis, leverage information more effectively,

work harder at forecasting, and benefit their shareholders more.

Once leadership commits to forward-looking decision making and management of

the business based on ongoing capture and analysis of relevant data, it cannot

proceed without a well-designed and sustainable forecasting machine.

That’s where discipline comes in—the discipline to:

• Create aconsistentfocusonthebusinessissues

• Develop asingleversionofthetruth

• Rely consistentlyonforecastintelligencetomakemanagerialdecisions

• Embed forecastingintotheculture.

Forecasting should be part of a larger process related to strategic execution in orga-

nizations. Its interaction with other major planning and managerial processes—such

as strategic planning, budgeting, capital appropriation, monthly and quarterly analysis,

and the like—is critical to optimizing its value to the organization.

Driver-Based Forecasting

Rather than building financial plans solely on static, detailed internal data that is merely self-reflecting, leading organizations focus on the key dynamic internal and external business drivers that concern management —such as customer demand, competitor activity, and economic conditions. Although more difficult to obtain, map, and predict, these measures provide greater value and insight into the business environment than strictly internal details can. In fact, two of the four areas where organizations see most forecasting errors are ones where such external data might help: consumer demand (38 percent) and economic drivers (29 percent). The most accurate forecasters do look further afield: 68 percent of them use market reports, for example, against just 55 percent of their peers.6

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



Forecasting today resembles quality control in the early 1990s. Quality control depart-

ments were typically large and well staffed, but no matter how hard inspectors tried,

they couldn’t improve quality until they made everyone in the business quality focused.

Similarly, leadership today needs to move forecasting out of finance and into the

business so that it’s embedded in day-to-day activities and part of everyone’s job.

That’s a fundamental cultural change, one that requires us to look at ownership of

forecasting.

Although implementation of forecasting is properly the domain of finance, owner-

ship of the process belongs with the recipient of the results, which is the business.

In a 2006 budgeting and forecasting survey conducted by KPMG, 78 percent of

respondents said the business owned the budget. While finance was the driver of

the process in the majority of cases, finance was the owner of the process in only

19 percent.

Forecasting with Confidence (page 33) echoes this view: “Leading forecasters

embrace forecasting as a core business process, one that engages operational deci-

sion makers across the business. They tap into their managers’ knowledge in real time

so their forecasts mirror actual frontline events, and managers remain engaged in the

debate about potential courses of action. In this way, operational managers own and

are accountable for their forecasts, and they value the process as a crucial manage-

ment responsibility.

“Involving the right people in the process also breaks down organizational silos and

enables managers to understand how their decisions affect other parts of the organi-

zation. As a result, enhanced dialogue, openness, and a level of integration between

various parts of the business emerge that enable business managers to use the

discipline of forecasting to improve performance.”

The survey data provide some support for this notion: among the more accurate

forecasters, 40 percent are more likely to have operational and line managers do the

work, versus 34 percent among the less accurate. Within leading organizations, senior

managers sponsor and value the financial planning exercise, are visible and active in

reviews, provide clear direction and coaching, and follow up on the actions arising

from the process.



In addition, “making the budget” has been a key driver of behavior and compensation

at many organizations. Those companies that have chosen to manage the future as

aggressively as the past are striving for the proper balance between “making the

numbers” and positioning for long-term success—and they’re aligning compensation

with their new management discipline.

Understanding what you need to measure and having accurate data available can

move your forecasting process forward. However, for the process to excel, all

levels of the organization need to collaborate with a common purpose and focus.

not addressing the discipline aspect of forecasting severely limits the overall

achievement of goals.

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

business climate? Developing a single version of the truth? Using forecast

intelligence as the basis for managerial decisions? Working across silos and

embedding forecasting into the culture?

ConclusionEvery business tries to anticipate the future; successful businesses take an active,

aggressive role in shaping it. A well-designed and information-rich forecasting process

is a prerequisite for this effort. The design, detail, and structure of your forecasting

process will be specific to your company’s strategy and goals. Customized and

accurate forecasting—focused on the critical issues driving your business’s success—

reveals your single version of the truth.

With a heightened demand for better business foresight, the availability of

more-evolved tools, and greater potential on the part of the CFO to implement

cross-functional change, organizations have the opportunity to develop and leverage

their single version of the truth—if they keep the proper focus on decisions, data,

and discipline.

Many companies still live in a world where understanding what has already happened

is a challenge, let alone what might happen next. Companies that engage in a process

to shape where they are going and where they can outpace their competition have a

distinct advantage. Aggressively pursuing a value-rich forecasting process is increas-

ingly a requirement for success, not a luxury.

Tools exist. The CFO has permission. now you have the opportunity to take the

upper hand by keeping the focus on decisions, data, and discipline.


Contact UsFor further information about this report or KPMG’s Business Performance Services,

please contact your local KPMG partner.


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination 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’s for Improving Your Forecasting Process · is room for improvement. CFOs today have the opportunity to increase their fore- ... value of effective forecasting and set about