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Monday, September 5, 2016

Forecasting Foibles

Back in graduate school, my classmates and I were often told how companies used sophisticated quantitative methods to forecast sales. When I started out in the world, I asked a few colleagues about it and never received a clear answer. So, I waited for an appropriate moment and began to ask key players who had to be responsible for it.

The first time occurred just before my first major client meeting at a New York advertising agency. I remember dressing with unusual care and arrived at the office a half hour earlier than normal. After pacing around a bit, I made my way to the conference room. I opened the door and froze. Sitting at the conference table was a man in his fifties. I could not turn around and leave so I walked in and introduced myself. He turned out to be the president of the client company (it is a well known company that you all have heard of and may own one of their products but it was not a Fortune 500 company at the time). He was very pleasant and put me at ease.

After a few minutes of small talk, I said, “May I ask you a question?” He replied, “Sure thing, Don. Anything.” I asked what quantitative forecasting methods that he used to predict next year’s sales. Was it helped by a regression analysis or some blending of economic forecasting? He started laughing and said, “Oh, god, did you just get your MBA?” I suppose I hung my head and said yes. “I don’t use any of that highfalutin stuff. What I do is ask my sales managers.” The meeting came off okay and after I did my two minute presentation he was far more complimentary to me than his marketing team was. As the group departed, he slapped me on the back and wished me well with my regression analyses.

Since that day, more than four decades have passed. And, I rarely missed an opportunity, when I could get a key player alone, to ask how he or she did their forecasting. To a person, they did qualitative rather than quantitative based forecasts and often at surprisingly big companies.

Here are some of the qualitative approaches taken:

Estimates of Sales Force--there is no question this group is closest to the customer and the street. I never worked much in tech but sales force input has to be vital in that arena. Looking at it objectively and seeing things close at hand as well, they can be great but perhaps biased. After a while, the sales team gets smart and learns that their estimates are often the key component on building sales quotas so they sandbag numbers so they over-deliver and obtain a lusty bonus. I have seen more than one management rep do that at ad agencies as well. One fellow placed a low number in after I had placed a four million dollar network TV order. That buy alone blew out his estimates for the whole year and this was second quarter. When I confronted him about it, he told me that they might cancel!

Outside Experts--on paper, this should bring some truly meaningful help to the forecasting table. Time and time again, I saw industry experts who “rubber stamped” the intuitive feel that the man or woman who hired them had “forecast” going in.

CEO Judgement--this is a mixed bag. A hands on CEO who is a straight shooter can do this well. He or she may have deep experience in the category and be far more analytical than the sales team. If they are too far removed from day to day, their projections could be way out of whack.

Once I asked a serious player in multi-unit retail about his forecasting. He looked me in the eye, laughed, and said 8%. It was literal--he set that as a target across the board. He cut me off as I was midway through my 210 markets with different economies speech. “I know that you are right. But, I set a high goal even for those in dying markets. For instance, I put a sharp young kid in to XXXXXXXXXXX a few years ago. We had declining sales for years and the economy keeps sputtering there. He has had gains of 1 and 2% the last two years. The guy is amazing! He still apologizes for not making my quota. I am going to move him in to a senior position here at headquarters in a few years. You need to motivate people so throw down a big challenge. Scientific? Hell no.”

Group Discussions--This one aims for a consensus. The whole team must come to a common projection and agree. It can work unless a bully is present (usually a senior manager) who dictates the final estimate. Others firms “pool” estimates and average the results of the sales team members and managers. It may have worked decades ago but  today with e-mail, texting, Skype and cheap long distance people will talk and cook something up.

So, my bottom line after decades of careful observation, is that surprisingly large firms are sloppy with sales forecasts. Also, honesty may be lacking in many cases. Once again, American businesses may prosper in spite of themselves.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog

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