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  • The ultimate rolling forecast workshop

    Having fun at the workshop

    Forecasting is a critical topic for many companies these days. No big surprise: the volatility and the speed in the world requires organizations to stay agile. About four years ago, my team and I started working with several customers and thought-leaders (David Axson, Steve Morlidge) to collect best practices for forecasting in these turbulent times. The results of the countless hours of talking, brainstorming, analyzing and reading are captured in the IBM Cognos ‘Best Practices in Rolling Forecasts’ workshop. This workshop ended up being way more successful than any one of us would have ever imagined. I have personally delivered over 100 of these events in the past three years.

    THE WORKSHOP FORMAT

    Forecasting is a complex topic and we were able to collect a full library worth of experiences. But simplicity rules and we selected the most interesting aspects

    David Axson is showing the way!

    to fill the agenda for a half-day workshop. That creates more focus and the attendees leave with just enough ideas to drive change in their organizations and without feeling overwhelmed. The overall focus is on the business process and not software. While we share a lot of best practices, the workshops are very interactive. We usually have extended and very fruitful discussions amongst the participants. Many attendees stay after the official event ends to continue their idea exchange. This is one of my favorite parts. There are always many things to learn.

    BEST PRACTICES AND MORE

    Static vs rolling forecasts?

    So, what do we cover? A lot! The focus is clearly on proven practices that were identified by our customers. But it is also important to look beyond those things. We therefore injected some thought-provoking ideas from our thought-leaders. And each workshop we run typically provides new ideas, stories and experiences that we leverage to enhance the materials.  It would be too much detail to cover in this post but here are some of the things we discuss:

    • Is a rolling forecast right for your organization?
    • What’s the right time horizon? 90-day? Four quarter? Six quarter? Three year?
    • How often should you update the forecast?
    • How do you use a rolling forecast as an early alert of threats and opportunities?
    • What is the role of scenarios?
    • What role can driver-based modeling and tools play in the forecast process?
    • How do you sell the need for a rolling forecast?
    • What does the business case look like?
    • How can you measure the efficiency and effectiveness of your process?

    IT’S YOUR TURN NOW!

    If you are considering to make changes to your forecasting processes or if you are working in the IT department supporting Finance, you should join one of these workshops. It is a great opportunity to meet other finance & IT professionals and to get solid ideas. Believe it or not, but we have had several customers attend multiple events. They simply liked the interaction with the other professionals so much and they felt that they got a lot of value out of each workshop. Check out my events page to find out about upcoming dates or simply drop me a note. Hope to see you soon!

  • Scatter charts – Good for relationships

    SCATTER CHARTS – THE BASIC IDEA

    One of the interesting and really fun things to watch is young kids learning about cause and effect. They pull on a string and music starts playing. They giggle. They push a car and the car begins to roll. And so we learn to be curious at an early age and we learn to look for cause and effect relationships. And this an especially useful skill to have in business. The discovery of relationships can help us make better decisions: what happens to our revenue, if we increase marketing spending, what happens to our customer inquiries if we lowered the price of our top product? Answers to these questions can provide valuable insights.

    WHAT IS THE RELATIONSHIP?

    How can we go about testing and identifying these relationships? One option would be to combine two data sets in a chart. Let’s say we wanted to analyze the relationship between our price and customer inquiries. How do customers react to a price increase or decrease? We could create a combination chart for our products which outlines the price (red line) and the inquiries (green bars):

    Product Alpha – Is there a correlation between price & inquiries?
    The product Charger – higher correlation?

    When you look at these charts it seems that there is a loose relationship between price and inquiries for Alpha but a stronger relationship for the Charger product. But it is hard to really tell. Especially for Alpha. Overall, this chart is not all that useful. We need more information.

    SCATTER CHARTS

    This is where scatter charts come in handy – they allow us to quickly analyze the relationship between two numeric variables. We basically take a regular Cartesian 2D coordinate system with our two numeric variables plotted on each axis. The general norm is to plot the independent variable (in this example the price) on the horizontal axis and the dependent variable on the vertical axis (customer inquiries). Here is a simple example that I created with IBM Many Eyes:

    Scatter charts
    Marketing Spending and Revenue

    The dots represent the values for individual marketing campaigns. We mark the amount of  spending on the x-axis and the resulting revenue from the campaign on the y-axis. We can easily tell that there is a relationship between marketing spending and revenue – we could almost draw a line between the dots. There is just one outlier on the bottom of the right-hand side.  By the way, it is really easy to create these charts with IBM’s Many Eyes tool. Check it out when you get a chance!

    PRICE AND INQUIRIES

    Back to the initial problem. Let’s see how price sensitive Alpha and Charger are. Let’s take a look at the resulting scatter plots. We have created these charts in Cognos 10 using the same data set. We have also included a trend line to make it easier to see a potential correlation:

    Scatter charts in Cognos 10
    Same data in a scatter chart. This makes more sense

    Both of these graphs now tell a clear story: Alpha’s dots are literally scattered throughout the chart. There are plenty of outliers. This shows that there is just a weak correlation between price & inquiries. The picture is different for charger: The dots are more clustered and we can draw a good line, i.e. the correlation is pretty high.

    SO WHAT?

    Scatter charts are pretty simple to create and they do tell a good story if used for the right purpose. They are also ideal for large data volumes. However, they do ignore time. The combination charts I showed above would do a better job at that. But if we want to focus solely on the relationship, the scatter plots are better suited. Even though scatter plots are relatively easy to read, I would not recommend using them in an executive dashboard. You definitely need to know how to use them. They are probably better suited for analytical people. Also, keep in mind that while these charts help identify relationships pretty well there might still be other influence factors. But that is really common sense. So, next time you want to explore your data in a different way try scatter charts!

     

  • Three lessons from the Flip story

    Did you read the news the other day? Cisco is shutting down it’s Flip business unit.  I was a bit stunned. They had just bought them for around 590 million USD two years ago. The first Flip hit the markets less than four years ago (2007). And it was (and still is!) a huge success. In his book ‘The Innovation Secrets of Steve Jobs‘, Carmine Gallo states:

    “The Flip changed everything. From 2008 to 2009, the video camcorder market grew by 35 percent. Flip products represented 90 percent of the growth.”

    What is going on and what can we learn from this story?

    THE FLIP

    Simple enough! The Flip

    In case you don’t know the Flip: it is the simplest camcorder available in the market. Its inventors took a highly complex product (that was probably collecting dust in the camera bags of millions of people) and made it super simple and easy to use. The Flip only has a few simple buttons and even a kid can learn how to use it in under a minute. The quality of the recordings is excellent for most situations. This simplicity lowered the barrier to shoot high quality video and people starting buying and actually using the Flip everywhere.  The Flip has been ranked as one of the bestselling items on Amazon for a long time. I am personally sad to see Cisco shut down this business. But I believe that there are three lessons we can all learn.

    EMBRACE SPEED

    This story is an excellent reminder of how quickly things can change these days. Product lifecycles are getting shorter and shorter. It supposedly took the radio over 38 years to reach 50 million users. The iPod did that in just about three years. A different camcorder I bought just four years ago now has a market value of roughly 5 Euros on eBay. Businesses need to embrace this speed. They need to be prepared to deal with this. Complacency is no longer viable. What worked yesterday doesn’t have to work tomorrow.

    STAYING ALERT AND AGILE

    Smart phones & tablets push out the Flip?

    The other lesson of the Flip is that all businesses need to stay on their toes. Competition for products and services can come from completely unexpected areas other than our traditional competitors. The Flip for example was not threatened by the traditional camera manufacturers like Canon or Panasonic. No, the biggest competitor is/ was the smart phone. Why bother with a Flip if you can use your iPhone to record decent video? And the smart phones threaten some other product categories as well. Just like Cisco, the traditional GPS producers have been trying to figure out how to compete in this new smart phone world. Traditional media like TV stations and newspapers are now facing severe competition from Twitter, blogs etc.. In other words, we all need to stay agile and aware. We also need to encourage our organizations to keep innovating. If we stop doing that we will most likely loose out. If you look at some of the successful businesses these days, you will find that most of these are known for its agility and innovation: Apple, Gore, Google to just name a few.

    DECISION MAKING

    April 19th, 2011 – The Flip is still popular on Amazon.com

    But the biggest lesson for me here is that all companies need to get better at decision making. It is easy to believe that the smart phones have pushed the Flip out. But as of today (April 19th, 2011) the Flip is still one of the top-selling products today. No, there must be more to it. The reason for Cisco’s decision is probably caused by either a wrong decision they made two years ago or by a sound forward-looking decision they made last week. Many people were surprised when Cisco announced the acquisition of Flip. It just didn’t seem to fit into their portfolio and the smart phone market with integrated video was just taking off. This raises the question whether Cisco really went through the proper decision cycle including a thorough market analysis and also proper scenarios techniques. But another way to look at this is that Cisco might be really good at making decisions: the Flip is still selling well but the outlook of small camcorders being replaced by better smart phones is on the wall. Either way, given today’s rate of change it is ever more critical for all businesses to have situational awareness (how are we doing and why?) and to have the ability to think and plan ahead. Business Analytics help us make those critical business decisions.

    RIP FLIP

    Too bad about the Flip. I love it and still use it frequently despite my iPhone. Lessons learned here: Embrace the speed; stay agile & creative. But most importantly: let’s get better at making sound business decisions. Cisco spent 590M USD on this specific decision. Too bad!

     

  • Vienna calling!

    Harald Hornacek
    A famous host: Harald Hornacek

    Greetings from Vienna: home of the schnitzel, yummy dumplings and lot’s of amazing history. But Vienna is also the hub of many successful companies. Today is the third European IBM Finance Forum 2011. We have had a great day so far. Lot’s of attendees from the Finance & IT departments of different Austrian businesses and government agencies. The agenda here is once again packed with Finance content. And as in all the other locations, we also have some great speakers. The event in Vienna is hosted by Harald Hornacek, chief editor of the popular business magazine Succeed. The magazine is distributed by Austrian Airlines and flyers love it for its fresh and meaningful content. Harald is quite famous in the Austrian and European business community for exactly that reason. The attendees have a great time listening to his insightful comments and questions. But let me back up for a quick second. There was another Finance Forum in Zurich last week.

    HIGHLIGHTS IN ZURICH

    The Dolder Hotel, Zurich

    The Finance Forum Switzerland was held at the famous and gorgeous Dolder Grand hotel. It is situated high above the city with breathtaking views left and right. Steve Morlidge, the author of ‘Future Ready‘ delivered a refreshing keynote about best practices in forecasting. He will be speaking at many different Finance Forums across Europe this year. We also had a customer speaker from a 500 year-old company (can you believe that?): Mr.Binzegger from Orell-Fuesseli talked about their innovative use of SPSS software to develop highly accurate credit ratings for companies. We also heard Mr Wirth from Nycomed talk about how to build an effective reporting and information strategy in a global environment. The Dolder Hotel staff also served up some amazing food and coffees during the break. Great event.

    VIENNA CALLING

    Back to the event here in Vienna. It’s been a bit of a mad rush for me in the background. I left home on Sunday morning to run two Rolling Forecast workshops with close to 40 CFOs from different companies in the Middle East on Monday and Tuesday. Wednesday morning we found out that one of our customer speakers in Vienna ended up calling in sick and I jumped in with a different presentation last minute. We are about to start a panel discussion between different customers and experts.

    NEXT STOP BUCHAREST

    Hopefully you will get the opportunity to join one of the IBM Finance Forum events in the next few months. As you can see, we always have great speakers, great content and also lot’s of valuable discussions. Knowledge exchange and networking is a critical part of this. My next event is scheduled for May 4th in Bucharest. To see more photos from all the different events click HERE. See you soon!

    20110414-015537.jpg
    Vienna: Vista 3 – The location fro Finance Forum
    20110414-015607.jpg
    Finance Forum: Many great discussions
    20110414-015715.jpg
    Collaborative BI: A real-life scenario

  • What cartoons can teach us about information delivery

    A picture says more than a thousand words, right? Managers drown in pages of numeric reports. But as John Medina, author of the famous book ‘Brain Rules’ clearly pointed out: “Vision trumps all other senses“. In other words: we are much better at absorbing information through visuals than we are at reading numbers and letters.

    To see how effective visuals can be at delivering complex information we just have to look at something that we are all surrounded by: Cartoons. They are in newspapers, they are on websites, they show up on twitter. Cartoons are drawings. A single picture that tells a humorous or critical story. Once you look at them carefully you will notice how deep and smart they can be: They tell a thoughtful joke or story in a single picture.

    Talk about the power of visualization! Remember the scandal about the Danish cartoonist a few years ago? A single picture set a huge scandal in motion. To convey the same message, a writer would have to fill a lot of pages. And those pages wouldn’t be all that powerful.

    To learn more about cartoons I ended up watching this short Ted presentation by Patrick Chappatte. It is quite entertaining and it highlights the power of visualization. We should all strive to learn something from this. Shouldn’t we all use more visuals in our daily lives? Should we toss those endless 2-dimensional reports and replace them with good, solid visuals that tell a clear story? You know my answer.

     

  • A discussion about forecast errors

    Forecasting continues to be a hot topic. My recent interviews with Steve Morlidge continues to be very popular. Also, ‘Franz the Frog’ sparked some interesting discussions behind the scenes. Given the strong interest in these topics, I reached out to a friend who has spent a lot of time and effort driving solid forecasting processes.

    Please meet Ulrich Pilsl. He provides a different perspective. Ulrich currently works as an Interim Manager in Munich. He spent over 14 years at Softlab / BMW Group (later Cirquent / NTT Data Group). As a member of the executive board, he held different senior executive positions including CFO of a consulting subsidiary and as the Head of Controlling & Business Administration.

    Christoph Papenfuss: Forecasting is a key focus area for many finance professionals. But many organizations are struggling to obtain an objective view of the future. What are some of the key problems?

    Ulrich Pilsl: The biggest problem I see is complexity. Many companies have bloated processes that are too detailed. It simply takes too much time and people have a hard time differentiating between what is important and what is not. There is no clear focus. Also, management tends to have a hard time managing the process. My advice is to simplify and to get rid of excessive detail. More detail does not create more accurate forecasts. On the contrary: the more detail, the less accurate forecasts tend to be for the above mentioned reasons.

    Christoph Papenfuss: What is the main problem with inaccurate forecasts?

    Ulrich Pilsl: Inaccurate forecasts lead to a serious confidence problem. Shareholders don’t like surprises. It gets worse when surprises are caused by poor forecasting efforts.

    Christoph Papenfuss: Are positive and negative errors equally problematic? Let’s take a look at a typical sales or business forecast. Some people tend to create very conservative forecasts and often end up outperforming. Isn’t this better than creating a very ambitious forecast and then coming in lower?

    Ulrich Pilsl: This is an interesting but common situation. First of all, positive and negative errors are equally problematic. Both type of errors can create serious management challenges apart from the already discussed confidence problems. In regards to this specific situation, one might be tempted to say that it is a good thing for a sales person to continuously beat his or her forecast. However, this can create some serious challenges. Let’s take a look at a consulting company. Low sales forecasts indicated low resource requirements. Hiring efforts might be slowed down and the business might quickly end up in a situation where they do not have enough talent available. Business is lost. Customers might loose confidence in us as a trust-worthy business partner. I therefore strongly believe that both negative and positive errors require serious attention.

    Christoph Papenfuss: What should the Controller do to help minimize forecast errors?

    Ulrich Pilsl: The Controlling department should show some ‘tough love’. They have to challenge the departments to deliver realistic forecasts. We found that it is critical to provide suggestions and to jointly develop scenarios with the business managers. Finance basically acts as a tough but fair coach in the process. This continues in the the monthly and weekly management meetings: We openly discussed the forecast results and challenged the numbers. It is obviously the job of the Business Controller to moderate this process. Last but not least, we found that it sometimes makes sense to create top-down adjustments that reflect upside and downside risk.

    Christoph Papenfuss: Based on your experience, does it make sense to measure forecast accuracy? If yes, how often and at what level did you measure accuracy?

    Ulrich Pilsl: It depends on the organization. This reminds me of a quote by my former manager who said: “Most companies are over-controlled but under-managed.” A team that understands the value of a forecast will usually deliver solid forecasts. Measuring forecast accuracy won’t necessarily improve it. I do believe, though, that it makes sense to measure it if the organization has challenges with the forecast process. Especially in the case of a management team that does not see the value in the forecast. It might make sense to add an accuracy target to the annual objectives. We had a variable goal “internal quality”. This allowed us to substantially change the mindset of some managers. The goal was set once per year.

    Christoph Papenfuss: How do you utilize forecast accuracy measures? Should you communicate the numbers to the organization or is this something that should stay within the walls of the finance department?

    Ulrich Pilsl: In my opinion, it does make sense to communicate forecast accuracy to the management team. But it makes no sense to communicate it to the whole organization. The aim is to improve forecast quality and not to blame the management in the organization.

    Christoph Papenfuss: What can Finance do to help create a culture where people are happy to create meaningful and objective forecasts?

    Ulrich Pilsl: Finance simply has to be the role of a coach and consultant for the business. It is our role to educate and to support the business.

  • Why bubble charts are cool

    Things can be complex. Especially when we look at multi-dimensional data-sets. The objective of charts is to visualize data in the most effective and easy way. You shouldn’t need a PH.D. degree to decipher a complex chart. But it happens. There are a lot of complicated and useless charts out in dashboards. And it happens more often than we think. For example: Once we reach more than 2 dimensions, many people reach out for 3D charts. Let’s say we want to analyze market size, market share & margin. Many people are tempted to simply create a 3D bar-chart like the one below:

    Chart 1 – Is this useful?

    There are a lot of obvious problems with these type of charts: The dimension have different scales and it is therefore impossible to decipher. And let’s be honest – this looks super ugly. I could not, would not make a decision based on this chart. The other option is to break this out into multiple charts. But that requires a lot of space – and space is tight in a good dashboard. Analyzing numbers would also be more difficult in that setup as we have to shift our view from one chart to the next.

    THE CASE FOR BUBBLE CHARTS

    There is a better way to display this type of data. My boys loves this chart type: Bubble charts (all kids love bubbles!). Bubble charts allow us to visualize three different measures at the same time. And not only that: they are easy to read and they allow us to make critical associations between these measures. Let’s have a look at an example: This is a classic bubble chart that displays three different measures: Late shipments, damaged shipments and shipping cost for different carriers. The first two measures are obvious – they are represented by the x and y axis. The shipping costs, however, are visualized via the size of the bubble.

    Bubble Charts
    Chart 2 – A classic bubble chart

    Notice how easy it is to read this chart (which vendor has the best performance?). Depending on the problem that I am trying to solve, I could simple look at the top right area to find the black sheep that are super later and also careless. Or, I could first focus on the size of business that we do with each carrier by picking out the large bubbles. Pretty simple. Also notice how this chart allows me to combine three measures with different types scales: percentages and absolute values. The traditional 3D bar chart was useless.

    THERE IS MORE

    In Cognos 10, we can also turn any bubble chart into a quadrant chart. This is useful if you want to categorize your data a little further by using a common layout like it is used in a SWOT or market attractiveness analysis. Take a look at the bubble chart that we created using the data from the first Excel 3D example:

    A classic bubble chart
    Chart 3 – A quadrant bubble chart

    This puts the data into further context and makes it really easy for managers to spot specific key points. For example, the attractive markets (high margin & high market share) are up in the right upper corner.

    Cognos 10 also allows you to hover over each bubble and you will get the numeric details behind each bubble. This makes it really easy to explore the data.

    Chart 4 – Use your mouse to explore

    THE LIMITATIONS

    As nice as the bubble charts are, they are certainly not perfect. Take a look at Chart 3 above and focus on the intersection of 11.5% Net Margin & 2% Market Share. There is a bigger bubble covering a smaller one. That can easily happen. A superficial glance over the chart can therefore be problematic because we would not notice this. Careful color choice could potentially help uncover these cases. This probably also highlights that bubble charts might not be an ideal solution for large data sets as there would be too many overlaps. But nothing is perfect, right?

    cognos slider
    A slider – easy to use

    Also, keep in mind that bubble charts in their pure and simple form only provide a snap-shot in time. Time-series analysis has to be done in a different manner. But the good news is that Cognos 10 offers us sliders. We can use these sliders to walk through history and easily discover changes in the data.

    LAST BUT NOT LEAST

    One person who has really popularized the bubble charts is scientist Hans Rosling. He literally makes data fly. If you haven’t done so, make sure to watch one of his famous TED presentations.

    Take a look at bubble charts! Consider them for your next project. They are easy to understand and they allow us to make critical associations. Chances are managers who have attended business school will certainly like them.  A friend of mine always says that managers are like kids. And kids like bubbles, right?

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  • An imaginary conversation with a weather frog

    European folklore believed that frogs kept in a glass would be able to forecast the weather. People filled some water in the glass to keep the amphibian happy, and then added a small ladder. A climbing frog would indicate good weather, whereas a frog hanging out in the water would show bad weather. This belief especially stuck with people in the German speaking countries where weather forecasters are typically called ‘Weather Frogs’ (Wetterfrosch). Well, weather forecasters do one thing well: forecasting. They are the true masters and I thought that we could get some insights from one of them. It is frog migration season in Bavaria and I happened to have found one who is willing to talk to me. Please meet Franz the Frog. Franz resides in Bavaria, Germany where people recognize him as a trusted master forecaster.

     

    AN IMAGINARY CONVERSATION WITH THE FROG

    Christoph: How is life as a master forecaster? Your pictures are every on the side of the roads these days. You must be pretty busy? Spring is known for its volatile weather.

    Franz the Frog: All cool here in the pond. Thanks for asking. We were quite busy up until yesterday. That’s when we finished our quarterly forecast. I am looking forward to jumping around for the next few weeks.

    Christoph: But wait a second! It’s a volatile climate out there. How can you just sit there, jump around and not forecast whenever things change?

    Franz the Frog: Dude, I hear ya’. But the big boss here in the pond decided that 2-3 forecasts per year are totally fine. Plus we have so much other stuff to do. Also, do you realize how much work we have to do to complete a forecast?

    A weather frog

    Christoph: Sorry, this was news to me.  Then tell me, why exactly is this so much work?

    Franz the Frog: Helllllooooooo!!!!! Each forecast starts with us looking at weather patterns for the past five years. Just simply gathering the data that is stored all over our pond takes us forever. Our big boss in the pond also wants us to create detailed variance reports for those years. That takes about a month. To create the actual forecast, we turn over every single leaf in our pond. And we record every little rain drop. That takes a lot of time. Get it?

    Christoph: Oh…I see…a lot of detail. But a lot of detail should result in higher accuracy right? My wife Jen complained about your reliability the other day. She claimed that she would not even ‘pack a suitcase for vacation’ using your information. Errr…please don’t shoot the messenger.

    Franz the Frog: Watch it, buddy! I will stick my tongue out here in a second. What do you expect? We get paid by our big boss in the pond. If the boss is happy, the flies are happy and we are happy. The boss decided that it’s best for us to provide a forecast that tells you guys exactly what you want to hear. Last year we saw rain coming. Your wife complained that she did not want any rain that particular week. She said:’Ahh, this stupid forecast. Rain is driving me crazy. It should be sunny!!!’. That got my big boss in the pond really upset. And guess what happened: no pay. That made our decision easy: we would eliminate a lot of pain and frustration if we simply forecast what everybody wants to hear.

    Christoph: Oh…ok. That is so not cool. Let’s change topics. What type of tools do you guys use to do your forecasts? I mean, we’re in the year 2011 so  I suspect that you guys have some cool tools…like that PC game Frogger?

    Franz the Frog: Frogger rules!!! If you like Frogger, you will be happy to hear that we are still using the same platform. No changes. Here, take a look: We have special leaves from a searose that was created in Redmond, WA’. Those leaves allow us to play with the data that we collect. The nice thing is that everybody in our pond has a ton of those searoses flying around. And the other guys love those leaves. The all create their own versions. But do me a favor and DO NOT talk to the green guy over there: he has to collect all the leaves at quarter-end. He hates his job. A bunch of my colleagues sometimes play a joke on him and swap out leaves or hide them. Others change the carefully thought-out leaf structures by ripping a holes in them or by chewing on them. You should see his face when the leaves don’t stack!!! Haha…RRRiibbitt.. Hilarious.

    Christoph: Holy tadpole! That sounds like a tough job. Can you trust the data then?

    Franz the Frog: Probably not. But hey…that’s the way the pond has been for a long time. It worked in the past it should work in the future, right? We have been around for thousands of years.  And the big boss is happy and we’re getting paid—what’s not to like?

  • Future Ready? A discussion with Steve Morlidge

    Steve Morlidge, Future Ready

    The IBM Finance Forum 2011 events have officially started in Europe. These events are designed for Finance professionals seeking to deliver stronger business insight to their organizations. Apart from being a great networking opportunity, we focus on sharing a lot of best-practice knowledge. Customers share their stories. And IBM also bring in great guest speakers like Steve Morlidge who share their tremendous knowledge in the finance area.

    Steve MorlidgeSteve Morlidge will be joining many events across Europe this year. He is a true thought-leader in the area of financial performance management. In 2010, he released a ground-breaking book called ‘Future Ready – How to Master Business Forecasting’. Together with co-author Steve Player, Steve shares a lot of valuable knowledge that he gained in over 25 years as a senior finance executive working for international companies like Unilever. He is also an active member of the Beyond Budgeting Roundtable (BBRT).

    Steve Morlidge and I were able to talk over the phone right before the first Finance Forum event in Zurich.

    Christoph Papenfuss: Many companies are still developing annual budgets. Is this approach outdated or is there a place for the annual budget?

    Steve Morlidge: I believe that conventional budgeting is dead, or at least very much on the way out. It takes too long, hinders responsiveness and fosters all kinds of damaging political behavior in enterprises. Companies still need to do things like setting targets, and this may still be called ‘budgeting’, but it is a long way from the traditional process many of us grew up with.

    Christoph Papenfuss: What are some of the key issues associated with the traditional forecasting process?

    Steve Morlidge: In my view most companies do not understand the difference between budgeting and forecasting. As a result, forecasting is done in too much detail, but not frequently enough. More importantly, the mindset is very often all wrong. Budgeting teaches us that gaps (between target and prognosis) are bad, whereas the primary purpose of forecasting is to detect deviations from plan so that corrective action can be taken; so unearthing such discrepancies should be positively encouraged, not punished.

    Christoph Papenfuss: Many people talk about rolling forecasts. Are rolling forecasts a viable approach?

    Steve Morlidge: They are, but too often people underestimate the task. In my book, rolling forecasts are forecasts with a consistent horizon: 12 months, 15 months or whatever. As a result, at any one time a significant chunk of the horizon may extend beyond the fiscal year end. Many of the processes upon which forecasting relies – like activity planning and so on – are anchored on the annual budgeting process so sourcing the information you need beyond the financial year end can sometimes be a challenge, unless these supporting processes are remodeled at the same time. Also, conventional annual target setting, particularly if it is tied to incentives, can distort a rolling forecast process to the point that it falls into disrepute. As a result, my advice to people is to fix the ‘in year’ forecast process first, before you tackle rolling horizons and the ‘out year’.

    Christoph Papenfuss: We all know the saying ‘You get what you measure.’ Does this apply to the forecasting process?

    Steve Morlidge: Absolutely. In fact, if you don’t measure the quality of your forecast process and, most importantly, act upon it, you have no kind of guarantee that the forecast can be relied upon. Proper measurement – closing the feedback loop – is the only thing that separates forecasting from guesswork, and in my book, 95% of corporate forecasts fall into the latter category.

    Christoph Papenfuss: Many organizations utilize spreadsheets to manager their forecasts. What role does technology play to improve the forecasting and planning processes?

    Steve Morlidge: At one level technology isn’t important at all – the main deficiency with business forecasting is the processes used and the thinking that lies behind it – not the toolset. Having said that, few companies can sustain a successful forecasting process without technology that enables them to streamline processes, provide appropriate modeling capabilities, support rapid reiteration, provide insightful measures, communicate results effectively and so on. Tools don’t make a master craftsman, but without them nothing would ever get built.

    Christoph Papenfuss: You will be delivering a keynote presentation at many IBM Finance Forum events. Can you share a few things you will be talking about?

    Steve Morlidge: My main message is that the practice of forecasting is broken, not because we don’t have the tools, but because we don’t know how to use the tools we have. I will be sharing what I have learned about mastering forecasting articulated in the form of six simple principles.

    You can find out more about Steve on his website: http://www.satoripartners.co.uk. To see a full list of the Finance Forums 2011 events and to sign up, click here.

  • Three ideas for better user requirements

    Let’s face it. Way too many projects fail. And they often fail because of low user adoption. Users hate the new processes, they dislike the new report style, they are not sure how to best use the new planning software. Project managers claim that the users are not open to change. Sounds familiar? But when we look at it carefully, a lot of the issues boil down to how we gather user requirements.

    THE PROBLEM WITH REQUIREMENTS GATHERING

    In my very first job, a senior colleague invited me to join a critical requirements gathering session for an SAP implementation. He had prepared an intricate questionnaire (By the way, he called this process a ‘JAD session’ as in Joint Application Development). We met with the users and he rattled off a ton of detailed questions. I was impressed. The users weren’t. They struggled with a lot of the questions and my colleague left frustrated. His message to me was: “Users never know what they want. This is the most frustrating aspect of our business.” To make a long story short, the users ended up not liking what they received. When my team mate pointed at the signed off requirements document an angry user replied: “Sure, I signed off on this document but this is not what I had expected.” This type of situation happens everywhere. But what is causing this problem?

    HORROR IN THE KITCHEN

    A few years ago, we moved from San Francisco to Europe. We ended up renting a house that did not have a kitchen. No big deal, I thought, and went to the first kitchen store I could find. The friendly sales person started rattling off a ton questions: What type of stove do you want? Have you thought about the size of your fridge? How many liters of storage space do you need? It went on and on. I had no answers for this person. Strange. I love to cook, I spend a lot of time in my kitchen. Yet, I was not able to provide satisfactory answers. And the sales person got frustrated with me. He suggested we take a break and reconvene after I had done some soul-searching. Sounds familiar? Any similarities to the standard requirements gathering process? Well, I aborted the process at that point and found another store that clearly knew how to help me.

    A FEW IDEAS

    Here are three ideas for making that requirements gathering session easier and to help drive user satisfaction:

    1. Business problems come first: The traditional requirements gathering process focuses on features and functions (which fields do you need in the report, how do you calculate this metric). There is a place for that, but let’s start focusing on what the users are actually trying to accomplish. Ask questions like: “What do you use this report for? What problems are you trying to solve with this? Has this been useful in the past?” We are in the business of solving business problems after all. So let’s focus on that. By asking those type of questions first we are able to make new connections and we are able to guide the discussion proactively. I went to another kitchen store and found a great sales person. He asked me a ton of questions around our family life-style, looked at pictures from the prior kitchen, etc.. He got the big picture. Also, I felt at ease. This person clearly showed an interest in helping me.
    2. Stop asking users for what they want and start showing them how the world could be: We don’t know what we don’t know. It’s that simple. Look at a user who has been using a certain set of paper-based two-dimensional reports: that person would not know how to articulate the requirements for a multi-dimensional online version (What is a dimension?). Instead, build a little prototype and show them how the world could be. Make it easy for people. The person at the new kitchen store did just that. After asking the high-level questions, he used a few models to explain to me what type of decisions I would have to make. He basically educated me. And that did wonders. All the feature and function questions from the other store suddenly made a lot more sense.
    3. Create and share: Don’t just stop there. Take the initial requirements, apply your knowledge and think ahead. Take the input from the general business problem discussion and create a prototype that includes useful things the user might not have articulated. You are the expert and you need to inject your expertise. Apple does that extremely well. Steve Jobs once said: “Let’s go invent tomorrow instead of wondering about what happened yesterday.” And this could be a highly rewarding exercise, because we get to apply our deep knowledge. Also, make sure to show the advanced prototype for early feedback. It is easier to visualize what could be when I actually see it. The guy at the second kitchen store did that. We configured a basic setup and he then applied his deep knowledge to surprise me with a really cool proposal.

    THE NEXT PROJECT

    Next time you head out to meet with users, try to remember some of these things. It can make a huge difference. I can tell you that my family is pretty happy with our kitchen. The combination of understanding how the world could be coupled with the deep knowledge and creativity from my coach (the sales guy), we ended up with a rather cool setup that continues to delight us. Why shouldn’t we be able to do this in business as well?

    “When you fulfill dreams, success is inevitable.”,Carmine Gallo, The Innovation Secrets of Steve Jobs

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