Apr
24

Your Forecasting Skills are a Leadership Advantage

By Gary Clayton

How much better at forecasting are you than this gecko?

How much better are your predictions than those of this gecko?

Does your leadership depend upon you forecasting the future, predicting what will happen? How much better at forecasting have you proved to be than, say, the average gecko? You might be surprised at the answer.

One of your most important leadership skills is making sense of the world, both inside and outside your organization. You have to create a vision of a better future, else why would anyone follow your lead? If you make durable products, then why would anyone buy yours rather than your competitors’ products, if yours doesn’t lead to a better future than the competitors’ products? And why would anyone work for you, if you can’t provide a better future than other employers? Your vision and the messages you deliver to your followers and custsomers are very important to your success.

But how good are you at forecasting?

Forecasting is tough

Can you name responsibilities that are more difficult than successful forecasting? It may seem easy, if you only look a few business cycles into the future. If you are in retail and it is a Thursday, you can compare your results for today against your historical Thursdays and Fridays to guess pretty well what tomorrow will bring. But what it you are trying to forecast next year’s sales – and the year after that? How easy is that?

Do you think you are better at forecasting than the wizards on Wall Street? Look at how poorly they have performed in 2008 and 2009. Which of them forecast the market crash – and got all their money out at or near the peak? How much taxpayer money had to be handed out to keep their businesses from collapsing in the aftermath? These are bright individuals. Do you think your forecasting skills are closer to theirs or the average gecko?

Our forecasting skills are primitive

There are at least 80 million years that separate our brain development from that of the gecko, yet we and the gecko rely on the same basic brain mechanisms for forecasting. In fact, the brain part we’ve evolved over that last 80 million years and are so proud of (the cortex) sometimes hurts our forecasting ability.

How long has it been that we humans have cared about the future further out than our own lifetime? Probably not very long (let’s forget about wanting to have children that will outlive us). Certainly, in western society, we don’t have a record of caring about what happens much beyond our lifetime.

From an evolutionary perspective, it’s been a lot more important to focus on imminent threats. The future will take care of itself. As a result, we’ve done well as a species by doing our short term forecasting using the same the brain mechanisms we share with the gecko. These mechanisms reside in what we can call the lizard brain or Old Brain (I mentioned part of the Old Brain, the amygdala, in Avoid Rejection).

Our Old Brain doesn’t understand the future

There’s tons of evidence that our Old Brain does not understand the future. The failures of Wall Street are just one example - and the anecdotes about chimpanzees forecasting the market with a dart board might as well be real. The Vanguard Group has been very successful with it’s assertion that on average you will be better off buying an index fund than using a stock advisor. Could a gecko’s brain do any worse?

The Old Brain was built around our needs as hunters and gatherers. We had to avoid becoming lunch for a saber tooth tiger and we had to be smart enough to follow animal tracks until we got close enough to catch or kill the animal for food. How much forecasting is required to accomplish that? Oh yes, at some point we started storing fruits and vegetables for the winter and spring.

Today, we continue to forecast by looking for past patterns we can understand. As hunters, we follow a trail, thinking we will see hoof-prints again. As leaders, we look at a chart and expect the line will have a linear correlation with the past. In the short term, the line will continue on it’s last trajectory or, over a longer term, it will regress to the linear mean through a least-squares fit. Here’s an example: on January 5, 2008, a pretty well respected financial blogger posted that we in the US need not worry about many bank failures happening in 2008. After all, there were only five in 2007 and none in 2006 or 2005. Of course, 2008 ended with 28 bank failures and a prediction of over 100 in 2009.

Forecasting is essential for your successful leadership

Forecasting is essential for you to succeed as a leader. When I was running the Americas’ consulting operations for a software company, I required my managers to forecast consulting sales and overhead activities every month. We forecast up to eighteen months out as we approached budget season – and always at least nine months. That forecast helped us manage our profitability and properly serve our customers (it took us around six months to turn a new consultant or programmer into someone who created more success than trouble for us).

The forecast was very beneficial to our organization and our customers. Getting the information required my managers forming deeper relationships with their customers. Not only did that give us better forecast numbers, but it gave us insights into how we could serve them better, thus winning additional business. It raised the morale of our entire consulting organization, as they understood the purpose and value of their work for the customer.

How to forecast for leadership success

We’ve already identified that our innate forecasting mechanisms are not much better than a gecko’s, so what should we do? Why not use forecasting as a means of confirming what we know, what we hope we know and what we see is starting to happen?

  • Forecast often and regularly. This helps us spot errors and alerts us to new factors emerging from all the noise of the business day.
  • Forecast as a group. Rely upon each other to identify pertinent factors and events that you would not notice by yourself.
  • Get outside advice regularly. Talk with your customers to learn what trends and events they have noticed. Talk with industry experts and experts outside of your industry. This will reduce the skilled incompetence and groupthink effects).
  • Examine your assumptions. Try to eliminate all assumptions that are people based. Plan to revisit time-dependent assumptions frequently so they don’t turn bad while you are otherwise occupied.
  • Recognize that some people like to gamble. Pull their forecasts back to reasonable future numbers.
  • Recognize that people are prone to “anchoring and adjustment”. In other words, if I mention a large number to you before you generate your forecast, you are likely to anchor on my number and adjust your forecast numbers upward without even realizing it. The reverse happens if I mention a low number (this is proven in studies).
  • If your forecasts prove to be too high, lower them immediately. Don’t keep unreal expectations in your plans. Think defensively.

Forecast for success – and guard against failure

Your forecasts should be a method by which you can create success in your planned business and recognize and seize good opportunities fairly early on. More importantly, your forecasts should be a method by which you recognize potential problems early on and protect your business against possible major failures.


Reference

Anchoring. In Wikipedia. Retrieved April 23, 2009 at http://en.wikipedia.org/wiki/Anchoring.


Gary Clayton has consulted with both small and large (over 4,000 professional employees) companies to organize their workload and revenue forecasting. Gary provides leadership coaching services to leaders and those who wish to become leaders in business and life.

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Categories : Qualities & Skills