Last Updated: May 20, 2021
It’s time to stop guessing about the future of your business and start leveraging fact-based unbiased data in planning and decision making. The economy may be getting more volatile than ever before, yet there is hope. Business leaders can take advantage of 3 Key Forces that together provide an always-on competitive advantage.
The 3 Key Forces
Our physical world is becoming more digitally enabled creating a treasure trove of insights companies can incorporate into their forward-looking plans. With the right data, companies can now track consumer behavior and global economies with more timeliness and accuracy than ever before. Our cars are reporting on our behavior, our mobile payments are accessible, our smart appliances are providing signals regarding consumer habits. In addition, government, states, and cities around the globe are publishing macro- and microeconomic signals that can be used to predict future swings in demand and financial results. One interesting data set that we recently learned about was the ability to know when garage doors were opening and closing in cities. It may seem a little odd to know this information, but it can be a signal as to the financial health in specific areas. For example, if door openings and closings happen infrequently or decline between typical business hours then homeowners are probably working. Companies that provide discount food and retail may be able to exploit this data to inform store placement.
Power and Scalability of Cloud Computing.
With tens of millions of potential data sets available, data scientists and analysts need substantial computing horsepower for quick and cost-effective processing. Cloud computing is providing an unprecedented amount of computer power at a lower cost. With the ability to scale and parallel process data we can build efficient applications that provide answers in just minutes to decision makers. Companies can leverage cloud computing to efficiently analyze their past performance and demand for products and services across all these new signals to identify the right signals and clues on what influences their results.
Machine Learning and Augmented Intelligence.
The concept of machine learning, a field within artificial intelligence, has been around for 60 years. Yes, 60! More recently, machine learning has been used to assist human intelligence to produce augmented intelligence. What we have found is that human intelligence augmented by machine learning generates smart insights and information for making sound business and economic decisions.
The Answer to Better Predicting Your Company’s Future
These 3 Key Forces provide the opportunity to capitalize on our ever-changing world. Leveraging them in planning and forecasting is vital to success for companies across industries. This methodology of using external macro- and microeconomic data to better predict future financial results and demand changes has been proven to be the most accurate forecasting method as far back as the early 70s. Harvard Business Review studied dozens of naïve and statistical methods to identify the most accurate way to forecast and identified Econometrics as the top method for near, mid, and long term horizons along with critical business turning points. Econometrics continues to be the most accurate method and was identified again in 2019 as the most accurate method by the Institute for Business Forecasting and Planning.
So why haven’t all companies adopted Econometrics in all planning and decision making? Simply put, in the past it was too time-consuming and computing power was too limited. In 1971, HBR tested econometrics on mainframe computers and realized the cost was too high to put into routine practice in company planning processes. In addition, collecting econometric data required time-consuming manual effort. This has all changed over the years with the power and scalability of cloud computing.
Interestingly, Econometrics can reduce forecast errors and identify upcoming headwinds and tailwinds of business with greater accuracy yet has been a forgotten methodology. Even though data scientists and demand forecasters spend a lot of time looking at new techniques and better algorithms, the answer to improving a company’s ability in predicting the future is to incorporate leading external signals that are available in millions of global data sets. This, along with boosting Econometrics through machine learning and augmented intelligence, leads to a remarkable forecasting tool.
Econometrics is explained through modeling that uses a set of equations to incorporate the interrelationship between internal and external variables. Furthermore, in econometric modeling, time series and judgmental models may be used in addition to regression.
A somewhat recent development is the ability to not only leverage economic signals such as interest rates, GDP, FX rates, but also new digital assets on consumer behavior. We can incorporate consumer signals, macroeconomic, microeconomic, weather, and internal knowledge into holistic models that are the most reliable predictors of the future. This holistic approach provides companies Intelligent Forecasting.
The Rise of Intelligent Forecasting
Intelligent Forecasting is now becoming mainstream. With the cost and effort to harness external data and economic signals about our business no longer a barrier, leading companies are adopting Intelligent Forecasting at astonishing rates. In addition to new cloud-based software solutions, top consulting firms are building teams and practices to deliver these insights to organizations across industries. We have helped leading global companies adopt these insights resulting in improved forward-looking projections across industries. Leveraging external data and predictive analytics is one of the top priorities for executives and identified as having a major impact on improving business performance.
According to McKinsey’s C-Suite survey on the adoption of analytics, the stakes are high. “Those who advance furthest fastest will have a significant competitive advantage; those who fall behind risk becoming irrelevant.”
Low to No Barrier of Entry if Done Correctly
Forecast and planning is still a very manual process for companies. What we mean by that is the forecast process still requires meetings by decision makers across executive teams, finance, sales, marketing, and operations. These teams get together at predefined horizons (typically monthly and quarterly) armed with their view of the future in spreadsheets and PowerPoint presentations to come to a consensus. There is one blind spot left unchecked, or at best generalized into assumptions: What are our external signals telling us about the future? With econometric modeling you can now add this new and mission-critical data point into the meeting of the minds. Simply comparing internal forecasts to what the econometric models are telling you will lead to better discussion and a new consensus forecast that covers more of the necessary ingredients to predict future results.
The Three-Legged Stool
Web-based solutions that provide you these insights are not a replacement for any current systems or tools; they are an easy addition to the current process and not a replacement for it. Just as companies should not plan without external insight, they also should not ignore their internal data and knowledge. We call these external insights the third leg necessary for success. Internal sales, marketing and operation knowledge, your historic performance, and external factors all come together to provide the most accurate picture of the future.
What Results Can Be Expected
First, I think it is important to think of the big picture. Major decisions by company leaders are based on their vision of the future. Get it wrong and the impact is both financial and professional. Shareholder value in public companies is decreased every day by missed forecasts and the number one reason CFOs are replaced in companies is due to their inability to anticipate upcoming changes accurately.
Studies have shown that companies that harness big data and apply advanced analytics like econometric modeling increase top-line revenue while reducing costs significantly. If you look at major multi-billion dollar companies in manufacturing, consumer good, and retail, a small improvement in their ability to forecast can mean tens to hundreds of millions in bottom-line cost savings from operations and inventory optimization.
What is Holding You Back
Change does not have to be hard but is often perceived to be difficult. Bringing in an external perspective to your planning process is an easy step, yet companies struggle with the concept of change. Deloitte has identified the top reasons companies fail to take advantage of this critical information including:
- Fear. Fear of the unknown and fear of change. Finance and demand planning have been done the same way for decades and some employees will resist change. This fear will cripple your efforts to improve as an organization and must be overcome.
- Recycled thinking. Some employees are ingrained in tactical efforts and may start small with very difficult things to predict to try to devalue external insight. Those that see the more strategic importance and value, often within the executive team, are those that need to sponsor change.
- Internal conflict. This may be the Number 1 issue we see in companies that want to adopt Intelligent Forecasting. There is a desire for some analytics or data science teams to protect their turf or desire to increase their internal headcount, as opposed to leveraging external solutions or services. This desire can delay or prevent the use of external insights that are readily available now by experts that work across many companies for the latest best practices.
3 Key Takeaways
- The world is changing, and it impacts your company greatly
- Data and technology have eliminated the cost and effort of applying econometric modeling in your forecast and planning process giving leader’s Intelligent Forecasting
- Companies that incorporate Intelligent Forecasting will see higher profits while becoming leaders in their industry. It is a race that has already started!
Economic Scenario Planning in a COVID-19 World
Planning and forecasting based on historical performance is no longer valid in today’s economic climate. As you look ahead beyond the immediate crisis and consider your business plans, having visibility to external economic factors and being able to consider how your company will fare in the “new normal” economy are paramount. This is what we call Intelligent Forecasting.
Prevedere helps companies answer, “what’s next?”, using global data and AI technology.
Whether it is a black swan event like the COVID-19 pandemic, less severe shocks like falling oil prices, or the regular contraction-expansion business cycles, Prevedere provides executives with insights on global forces impacting their business.
Rich Wagner is the founder and CEO of Prevedere, a leader in predictive analytics software for intelligent forecasting. As a forward-thinking, predictive analytics thought leader, Rich has contributed to publications such as ChiefExecutive, Supply and Demand Chain Executive, Wired, Manufacturing Business Technology, CMSWire, Website Magazine and FORBES.