Managing Through Change: The Power of Rolling Forecasts

Rolling Forecast:

The pace of business continues to accelerate. The Internet is shrinking natural barriers to competition resulting in both new challenges and new opportunities. As competition heats up, so does demand for the resources needed for production. Not only does the wind change quicker, but also the competitive sea, the weather, and the number and skill of rival ships seeking to serve your customers. Many CFOs and CIOs are nervous about these accelerating trends. They also question whether their traditional planning, budgeting, and forecasting tools will allow them to be successful?or even survive.

The good news is many organizations are finding success by adopting rolling forecasts as the means to become more adaptive. They are using these techniques as a meaningful supplement to existing approaches and in some cases a more flexible alternative. This white paper reviews the purposes of traditional planning, budgeting, and rolling forecasts as well as the common problems experienced through rolling forecast planning. It highlights improvements being achieved by moving to rolling forecasts as contrasted with typical forecasts to the period end (forecasting "to the wall"). The paper then summarizes key "dos" and "don'ts" of rolling forecasts as experienced by a leading pharmaceutical company.

Traditional Budgeting Objectives and Common Problems with rolling forecasts:
Budgets have been described as "a financial blueprint of management's expected plan of action."

As such, they serve at least six key functions.
- Setting targets
- Aligning incentives
- Developing action plans
- Allocating resources
- Coordinating across all functions
- Monitoring and controlling finances

Many see these attributes as keys to successful management. Yet numerous studies have identified many criticisms and complaints. One well-documented rolling forecast issue is that traditional budgeting often creates a fixed performance contract that limits an organization's ability to be responsive in today's ever changing environment (see Exhibit 1). The annual budget or plan for rolling forecasts budgeting often has all the elements of a fixed contract including contract period (typically one year), fixed targets with predetermined rewards, allocated resources, and a monthly control process to track progress to the predefined targets.

Many believe that this negotiation process is driven by rolling forecast as a manager's desire to reach incentive targets. Operating managers instantly want to negotiate targets that can be easily reached. Senior managers try to stretch the targets and the budgeting games begin.

For large corporations, the ills of traditional budgeting are the focus of an entire chapter in the recently issued book "Winning" by Jack Welch with Suzy Welch. The former Chief Executive of General Electric devotes Chapter 12 to Budgeting: Reinventing the Ritual (pages 189-204). The authors begin:

Not to beat around the bush, but the budgeting process of rolling forecasts at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. Rolling forecasts brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity. In fact when companies win, in most cases it is despite their budgets and rolling forecasts, not because of them.

While there are many criticisms of traditional budgeting, the following seven lead most organizations' lists. These include:

- Budgets cost too much to prepare.
- Budgets take too long to prepare (often making them out of date when published).
- The budget process does not add value in managing the business.
- Budgeting requires a crystal ball to predict the future.
- Budgets slow response time allowing innovative ideas to only be discussed during the narrow window of budget preparation time.
- The budgeting process leads to gaming where managers try to negotiate low targets to reach maximum bonuses
- Budgeting sub-optimizes results by limiting optimal results.

The Beyond Budgeting Round Table has defined a new management model that overcomes many of the problems with traditional budgeting. It can be compared to the traditional approach to achieving the key planning functions noted above (see Exhibit 2). With this model as context, the remainder of this white paper will focus on rolling forecasts.

Traditional Rolling  Forecasting:
Many organizations seek to mitigate some of the traditional budgeting problems noted above by implementing some form of forecasting. This allows managers to update budgeted numbers with actual results for the periods that have already occurred.