Business ethics and forecasting; another reason for uncomfortable meetings.

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With the fairly recent introduction of ‘Corporate Social Responsibility’, the subject of business ethics is on everybody’s lips these days.  Sadly, more often than not, this is mostly in the form of lip service. Many companies are guilty of having their marketing department create some slick CSR statement, but how many really operate against this backdrop; in my experience, not many. I say it’s a recent introduction but CSR has been around since the 18th century. A notable example is Cadbury’s who, in 1879 moved to a green field site just outside Birmingham; (now Bournville) introduced beneficial industrial relations, employee welfare and education for employees amongst other initiatives. It seems we haven’t come very far since then when you think about it. But we’ll leave CSR for another day. As commercial executives we are all aware of the everyday ethical dilemmas.

It’s a beautiful day, do I;

  1. Go to work?
  2. Play golf?
  3. Go to the beach?

I really need this contract so should I...

  1. Concentrate on delivering good products, good service and good prices
  2. Be honest about my business and competitor activity
  3. Invite him/her to a long weekend at an expensive resort on company expenses

(If you’re struggling with the answers you need some training!)

Although hard to track and quantify, these activities can and will have a damaging effect on the business in the longer term; the reason being that the most important element in business at any level is ‘Trust’. Once trust has been undermined relationships will eventually fail. Failing business relationships leads to a rapid decline in revenue.

But these are only relatively minor reasons for the failure in forecasting. Good sales management could iron out both those wrinkles above and the problem will be solved. Some problems are a little more difficult. If we go to the other extreme, unexpected £250 million losses by Tesco’s through ‘inventive’ accounting and poor diligence by board members may be a little harder to rectify. However, when it is all said and done, in both cases, people made a decision that created a situation of poor forecasting.

Why Forecasting?

To understand forecasting we need to understand why it’s important. The purpose of the financial forecast is to evaluate current and future financial conditions to guide strategy in driving the business forward. It is an integral part of the budgeting process; a process by which the performance of the business and investment in to the business is calculated. It is not a fixed position. My old boss used to say to me (pretty much every month), “the great thing about a forecast is that it can be changed”. For years I never knew what he really meant by that. If a forecast can be changed then where is the value? I now understand that unless you alter the forecast in the event of change and report the variances in the budget then you will be steering a false course and eventually you will founder on the rocks of poor cash flow and declining shareholder values. Disaster!

How do you put a sales forecast together?

The first step in the forecasting process is to define the parameters of the forecast. What are the issues that will impact on the forecast? This is the first area where things can go wrong. A forecast is not just a probability of success against a task. It is a complex mix of issues that need to be taken into consideration. Analysts have spent years generating formulas and methodology to create a science out of forecasting. And there is no doubt that these can really help.

However, one of the most important elements in a forecast is the ability of the forecaster to apply a ‘gut feel’ to the process. When I say gut feel I don’t mean just guessing. I mean applying an understanding of various conditions that you are aware of and applying them to the forecast. Techniques such as reviewing economic trends both internally and externally, sector trends, product positioning and advancements, demographic trends, historical anomalies and relationships between these issues.

Forecasting methods vary depending upon a variety of factors. One of my favourites and one I’ve had success with is extrapolation techniques. Taking a data set and using it to predict the next data set. This combined with the above can have great results. I pride myself on my forecasting abilities. This is often called ‘Hybrid forecasting’.

In my career I’ve met executives that are excellent at this, I’ve met some who are poor and rely on the statistical nature of forecasting…but I’ve met some that will use these ‘grey area’ conditions to forecast in excess of reality.

Why do people at all levels feel tempted to either consciously or subconsciously falsify forecasts?

We’ve seen why forecast are important and we’ve seen how they should be put together. But, because there is human intervention, there can always be the risk of errors, either deliberate or otherwise.

Psychologically, there are a number of issues which come in to play. Sales personnel at all levels are under enormous stress to deliver the goods. The life blood of any business is the sales team and this responsibility can have terrible consequences.

Abraham Maslow stated that all humans strive to achieve an emotional status in life. There are five of these conditions and once the first has been met, the person moves on to try and achieve the others…all subconsciously. One of these layers is called the safety layer and within this layer the following conditions are prevalent…

Security of employment Security of revenues and resources Moral and physiological security Family security Security of health

Physical security - safety from violence, delinquency, aggressions Security of personal property against crime

Whether Maslow was right or wrong is immaterial, we all know of the desire to please and to safeguard our security. There is therefore, a natural in built in protection programme that can lead a person to declare that the position is better than it actually is. In the short term (provided he/she can substantiate the claims and as we’ve seen because the forecast is made up of ‘less than scientific’ grey areas this can easily be done) the person enjoys a feeling of success and security. Thus, achieving the goal of satisfying the safety desire.

And let’s face it, sales managers hear what they want to hear sometimes; they want to hear the month will be good, they don’t want to tell the sales director that things are not good and they have a scape goat if they need one; albeit only once.

On the other side of the coin a sales rep may deliberately underestimate the deal in order to look good when the deal comes in (or to minimise risk if it fails – see Maslow above); the result is a bad forecast.

Some bosses can be unapproachable and put the fear in the hearts of the team. The result is a forecast to please rather than a realistic one.

Unfortunately, when the time comes at the end of the quarter to discuss outcomes with the board, the sales director has ‘egg on his face’ and difficult explanation ahead.

So, the moral of the story is to be aware of the forces involved in forecasting as it is a complex psychological minefield as well as a commercial skill with a set of rules. If you are a director look carefully at the rationale and compare this with your own thoughts.

Next Time – The use of CRM systems in forecasting – the answer to our prayers?