"The real lives of humans are complex and the future is not predictable," Innovations-Report.de has noted. "To have better — or the best — benefits, it is necessary to predict the future trends. In the usual case, data-mining techniques provide us with satisfactory enough results for doing good business.

"However, there are exceptional events where simple data mining techniques and statistical analysis don't suffice."

In each of us, there is some internal belief system about acceptance or abhorrence of gambling and risk-taking. Risk-takers may have little fear regarding extrapolating past performance or trends into predictions. Those who abhor risk feel that "track records are meaningless" because the range of possibilities is so great, that the likelihood of any one of them is infinitesimally small, according to Michael Raynor's The Strategy Paradox.

Forecasting: worthless or worthwhile?

Forecasting Is Required
Over the last three years, only one percent of firms have hit their forecast exactly, and just 22 percent have come within five percent either way, according to a recent KPMG International report entitled Forecasting with Confidence. On average, forecasts have been out by 13 percent.

As chief financial officers (CFOs) continue seeking ways to enhance business competitiveness and value, "they are increasingly turning to performance management processes and information to transform the enterprise and identify opportunities for growth," says the recent report.

When it comes to estimating profits, "chief financial officers need to treat forecasting more as a science and not an art driven by gut instinct and intuition," explains Gary Reader, a KPMG partner, at Personal Computer World last month. Bear in mind that this report is dealing with near-term forecasting. The further in time one reaches, the more possibilities there are — and thus the smaller the chance of forecasting correctly.

Yet according to ForecastingPrinciples.com, forecasting has improved because forecasters have learned what to avoid from past mistakes.

Even though "63 percent of firms rely on the finance function to take responsibility for forecasting," the process needs to include all areas of an organization," states Reader.

Despite the queasiness that may emerge from making forecasts, some real-world useful advice comes through his article: "Turning to the problem of under forecasting, while it is arguably human nature that is to blame for the fact that so many companies seem to underplay their forecasts to comfortably exceed them, this costs money."

Reader cites this examples: "If a manufacturing firm doesn't have the raw materials in place because it has under forecasted orders, it may not be able to meet customer demand."

According to KPMG's report:

The impact of poor forecasting has a deeper effect through its impact on strategic and operational choices. Although other factors are undoubtedly at play, firms with forecasts that came within five percent of actual saw share prices increase by 46 percent over the last three years, compared with 34 percent for others.

"Clearly," the KPMG concludes, "good forecasting pays."

On the Other Hand…
In The Strategy Paradox, author Michael Raynor cites this premise by management guru Peter Drucker: "Forecasting is not a respectable human activity, and not worthwhile beyond the shortest periods."

"While grappling with strategic uncertainty, the key is to avoid, on principle, reductionist point-predictions of the future," Raynor echoes.

Rather than making predictions, he recommends creating "credible, believable, fully dimensioned descriptions of a future state of affairs." Creating these scenarios requires going through five steps:

1) Ask the right question.
2) Identify the dimensions of uncertainty.
3) Determine the limits of uncertainty.
4) Determine the final scenario set. (Apply one's own judgment in determining which are credible).
5) Determine the relative probabilities.

Smart managers then prepare for the unpredictable by formulating optimal strategies and making an investment in assets or capabilities that will prove valuable in rising to the possible challenges. The problem with such planning around a set of scenarios is that it is incredibly difficult to envision disruptive technologies that may or may not occur.

Which is supposedly the point of forecasting...

Resources

The Strategy Paradox
by Michael Raynor
Deloitte & Touche USA LLP, 2007

Forecasting: Did You See It Coming?
by Gary Reader
Accountancy Age, Dec. 6, 2007

Evidence-Based Forecasting
International Institute of Forecasters

Time-Critical Decision Making for Business Administration
by Hossein Arsham
University of Baltimore

New Direction for Chance Discovery?
by Astrid Engelen
Innovations-Report, July 12, 2007