The third item on my list of common reasons I have encountered for forecasting errors is a lack of objectivity.
We all want our business to be good. We all want to hit our numbers. We all have good intentions. Fact is, many of us are just plain overly optimistic. How many times have you heard someone say, “We had a great meeting with this huge prospect!” yet nothing ever comes from the meeting or the relationship? Or one of my favorites, “This could be the Deal of the Century!” This optimism and confidence in our abilities to close deals and add value is not bad. In fact, it is a job requirement. Without it, we wouldn’t be good at what we do. But, we have to factor it in when we are forecasting. The best forecast is not the optimistic one, or the overly conservative one; it is the one that represents the most likely scenario given what we know today.
One of the best ways to get objective, is to fight the urge to ignore what your customers are telling you. Use your various customer listening posts to gather data relevant to your forecast and use it. Don’t explain it away, don’t give it lip service. It is the most objective and relevant information you have if it is timely and from the right people.
I know how guilty I am of ignoring signs that an independent person would quickly pick up on. I even know when I am doing it! I will be discussing an account with our CFO and he will ask a question about a particular data point and my answer will include something like, “Yeah, but…” (it ALWAYS starts with “Yeah, but…”!), “Yeah, but we just talked with them and they are actually looking to ramp up their business with us…” The minute I say it, I just know he is going to turn out to be right.
Companies that are good at listening to their customers also have more predictable businesses. In a study we did of the Hardware and Software industry published in September 2008, we discovered that the Loyalty Leaders (those companies good at listening to their customers and developing solid relationships) missed their earnings targets 22% of the last 4 quarters (including the incredibly difficult quarters ending 2008 and beginning 2009). The Loyalty Laggards (you guessed it—not so good at listening and building those business-sustaining relationships) missed their earnings estimates 62% of the time! Listening to customers and using the insights gained can dramatically improve predictability.
As hard as it is, maintaining objectivity is critical to good forecasts. Also critical is using the right information to help develop and validate your forecasts and to remain objective. And, don’t forget to avoid the trap of crying wolf related to uncontrollable or unforeseeables.
Any other tips for better forecasting?