Dynamic Planning Through Event-Based Forecasting

Technological and business model innovation, plus economic and geopolitical uncertainty, are sending seismic tremors throughout the business landscape. Yet while market conditions are changing faster than ever, most FP&A teams continue to adhere to a monthly or quarterly forecasting cadence, according to The Hackett Group research. It’s time for FP&A to revisit this approach and develop a capability to quickly address unforeseen events.

That doesn’t mean forecasting a lot more frequently. Nor does it mean you have to toss-out the traditional way of doing things. It means supplementing periodic forecasting with a new, event-based process that kicks into action only when something unexpected happens, and only if it’s something that can materially affect the company’s performance. To filter out the noise, FP&A can run scenario analyses when it builds the forecast to identify the company's pain thresholds, e.g., what percent of economic growth deceleration will hurt earnings, or how far do sales have to drop (%) to kickstart the supplemental process, or what types of natural event consequences (e.g., significant supply chain disruption).

To operationalize just-in-time forecasting, FP&A has to pre-assemble a “SWAT” team with relevant skills that can be deployed when external or internal conditions significantly change. The team’s first job is to triage the new circumstances and quickly assess the likelihood and extent of the potential damage (or conversely, opportunity).

It should only launch into further action if the new situation poses a material threat. At that point, FP&A must be able to follow a prescribed, predesigned process for analyzing the potential impact and coming up with recommendations, while alerting the right people, at the right time, and at the right level of granularity. 

Three Caveats

1. First, you need to optimize the existing periodic forecasting process so it’s more efficient and effective. We worked with one client to establish an 80% touch-less periodic forecast, so the company can free-up resources to attend to more value-creating work. Our research shows that EPM top performers take less than a fourth of the time to complete the forecast compared to the typical FP&A team, and at the same time produce more accurate forecasts that are more helpful to the business.
2. Second, you have to embrace new technologies such as data lakes, RPA, AI and cognitive computing to speed up the existing approach. Bots can collect and prep data in a fraction of the time it takes humans. And AI and cognitive computing can enhance the accuracy of the forecast by quickly running sophisticated statistical models and learning from experience. These same tools also make it possible for the forecasting “SWAT” team to conduct analysis a lot faster, as new circumstances can change hourly, or daily, or weekly.
3. Finally, you shouldn’t (and can’t) maintain a constant state of high alert. Once the situation stabilizes, the event-triggered forecasting team needs to incorporate any new assumptions and scenarios back into the regular forecasting process.

Conclusion

By using digital tools to automate more of the forecasting process, FP&A can create the additional capacity required to respond quickly to new challenges. By providing executives with just-in-time information to support tactical and strategic decisions, it can also enable management to make quicker decisions. And by doing both, FP&A can greatly contribute to enterprise agility, or the ability to sense and respond to changes in market conditions. That is an extremely worthwhile goal because agility can have a big payoff. Our research reveals that the most agile organizations (vs. the typical business services functions), significantly outperform their industry average in terms of margins and shareholder returns.