I was very intrigued by a recent MIT Sloan School of Management Whitepaper, “Why Forecasts Fail. What do to Instead.” Authored by Anil Gaba, Robin Hogarth and Spyros Makridakis.
http://sloanreview.mit.edu/the-magazine/2010-winter/51214/why-forecasts-fail-what-to-do-instead/
As you probably know, MIT’s Sloan School is among the top quantitative business schools in the country. It’s the bastion for better business through data analysis. So I was surprised that they would publish a whitepaper with such a title, and I simply had to read it. I found the authors made a compelling case for why forecasts fail. They make a less compelling case for what to do about it, but more on that later.
The authors do a great job of looking back at history and highlighting forecast follies, some recent, some in the distant past. They discuss the fact that noted experts didn’t see the sub-prime mortgage collapse and the ensuing economic recession in 2008; just like experts back in the 17th century failed to predict the collapse of the Tulip market that just about brought down the entire economy of Europe. It’s a really a fascinating account of failure after failure of predictive analysis. They draw some interesting conclusions about the root cause of these failures, among them:
What to do about it? The authors devote little space for that, but do say “Exactly how you deal with uncertainty is for you and your team to decide. Perhaps you’ll use a hedging strategy or develop a plan B for evolving your business model.”
Really?
My own conclusion is a little different. I’ve never seen a company or organization “predict” its way to success. It’s only when management sets clear objectives and the people on the front lines commit --really commit -- to delivering those results do expected outcomes become a reality. In other words, it’s not about models, it’s about people. And as long as the focus remains instead on inputs and outputs, variables and drivers, scenarios and models, then the organization itself will continue to be “surprised” by reality.
Or, as a former CEO of Pepsi use to say, “Stop predicting the future -- drive it.”
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
In a previous blog we talked about the unique challenges of budgeting in the not for profit sector (http://blog.xlerant.com/Blog/bid/74824/Unique-Challenges-of-Budgeting-in-Not-for-Profit )
We were overwhelmed by the response, and decided to follow it up with a live webinar. Join us on April 19th 2012 to hear directly from two leading CFOs who will share their experience in overcoming the many challenges in budgeting for a not for profit institution. Jill Larsen is the CFO of The Baptist General Convention of Texas and Steven Meisberger is the CFO of American Youth Soccer Organization. Both have tremendous experience and real insight to share.
They’ll explain why they believe budgeting is mission critical for non-profit organizations; especially in today’s economy and how budgeting should be tied to strategy. They will talk about the needs of the various stakeholders in the budget process – users, finance team and executives - and why their participation and ownership is crucial for a solid plan.
Date: Thursday, April 19th at 2PM EST
Duration: 60 minutes
Fee: Waived
Registration Link: https://www4.gotomeeting.com/register/890852175
About The Baptist General Convention of Texas
The BGCT encourages, facilitates and connects its 80 local Texas Baptist associations and 5,700 local churches to facilitate worship, fellowship, stewardship, evangelism, missions and discipleship. Read their case study here.
About the American Youth Soccer Organization
AYSO’s mission is to develop and deliver quality youth soccer programs which promote a fun, family environment for its more than 50,000 teams and 600,000 players, based on the AYSO philosophies.
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
According to a recent survey (multiple surveys in fact) most organizations are still using Excel for budgeting. Part of the explanation for that, of course, is “it’s free”. But it’s also because we in Finance have a bias for spreadsheets. No self respecting accountant or finance professional would back down from the challenge of building a budgeting process using Excel (Bill Gates is smiling, I can feel it).
But the key question, if you are planning on involving people outside the finance organization, is “what does everyone else want?” The knee jerk reaction is to say they’d like a spreadsheet look and feel just as much as anyone in Finance would. But take a step back for a moment and think.
People are surrounded in their daily lives with technology that make truly complex tasks look easy – iPhones, booking a trip on Expedia, using satellite navigation in a car. Or here’s another one... think about about how easy the benefits enrollment process is today if your company uses an online service. In the old days, say before 2002, someone from Human Resources would come by with a clip board and ask you a bunch of questions, then enroll you in a family plan even though you’ve never been married. Today you go online, answer a few questions, and get just what you want (or at least what you asked for).
Since we’re talking about an inherently complex financial task (budgeting) let’s look at an analogy that’s closer to home – completing your tax return. In the old days, you had to fill out a paper form which required looking up a lot of formulas and giving your calculator a real workout. If you think you know where I’m going with this – hold on.
Some clever accountants came along and devised an electronic 1090 Tax return that replicated exactly what you saw on the tax form itself, but had built in calculations. The paradigm was simple. Give people what they are already familiar with -- the 1090 tax form -- just make it electronic. They were convenced they’d become millionaires. Instead they went broke. Accountants may have liked an electronic 1090 tax Form, but apparently nobody else did.
Michael Chipman had a different idea. A graduate from the U.S. Air Force Academy with a degree in Computer Science, Chipman spent five years in the basic research arm of the Air Force, attaining the rank of Captain. Following that, he spent a number of years as a research scientist working in the area of computational physics, principally at Science Application International in La Jolla, Calif.
Smart guy. And smart enough to know that while accountants might be familiar with the 1090 tax form, nobody else was (or even wanted to be). So rather than just replicate the form electronically, he threw it away and replaced it with plain English prompts and selections. He brought a Steve Jobs mindset to the problem when everyone else was channeling Bill Gates.
The application he developed is TurboTax, which he eventually sold to Intuit. Now Michael is the owner of the Arizona Diamondbacks (not a bad job if you can afford it).
So, getting back to budgeting. Do your users want a spreadsheet to do their budgets… or would they prefer something more along the lines of TurboTax?
Comments are welcomed.
PS Okay, want to know what Bill Gates and Steve Jobs really thought of each other?
Gates: Steve Jobs was "fundamentally odd," and "weirdly flawed as a human being"
Jobs on Gates: “He’d be a broader guy if he had dropped acid once or gone off to an ashram when he was younger"
Gates on Jobs (again): "He really never knew much about technology, but he had an amazing instinct for what works"
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
Every once in a while the sun and the moon and the stars all align just right to deliver an exceptional webinar. Such was the case recently when Linda Murphy Church presented how she used the rigorous Malcolm Baldrige Award criteria to access a critical decision the Rhode Island School of Design was facing. In her case, that decision was around the budgeting process and some enabling technology. But she was able to generalize her example in a way that made the whole approach accessible, even to those few that never even heard of Malcolm Baldrige.
We had a tight timeframe – just 30 minutes – so we had very little time to provide a primer. Instead, we took a “learn from example” approach and it worked (the feedback’s been great). Interested? Just click on the video above.
As always, your feedback and comments are welcomed.
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
You’ve been through the drill before. Some process in your organization needs fixing and a team is formed to address it. Before you know it, you’re looking at software as a solution. That’s not a bad thing, but the way we go about it often is.
The team comes up with a requirements grid (often referred to as “wish lists”). Where do these lists come from? Well, some of them are dreamed up by team members. But surprisingly, many of these “requirements” come indirectly from software providers. Someone on the team does a Google search and, unbeknownst to him or her, a lot of the content they read originates from vendors or firms that vendors pay retainers to.
The result? Well, as a Deloitte Consulting Partner I used to work for once said, “It’s like people are told that when they’re shopping for a new car, it’s all about the number of ash trays. So people wind up buying the vehicle with the most number of ash trays and bragging, ‘Hey, my new car has six ash trays, how many does yours have?’”
We all like to think it’s the other guy who will get fooled by shiny objects. But really solid, 3rd party criteria will make sure you make wise choices. That’s what the Malcolm Baldrige Award Criteria is all about. It’s the nation’s highest Presidential award for performance excellence, and it’s an effective framework to evaluate any initiative, including software purchases.
XLerant recently hosted a webinar event on this topic. The Budget Director from the Rhode Island School of Design shared how she used the Malcolm Baldrige Award Criteria to evaluate an initiative and investment to the budget process. While the example used is a specific one, the presentation will generalize the framework so you can apply it to your own situation.
If you would like to see the video of the event, or download the PowerPoint document, just click here.
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
Budgets matter in the not-for-profit world to a degree I rarely see in the for-profit world. In the for-profit world, the budget is just a snapshot in time. It can be forgotten about the first time the company produces a reforecast (which, incidentally, can be forgotten with the second reforecast). It’s not that for-profit organizations are wrong to put less credence in the budget than non-profit organizations, it’s just that they operate in different worlds.
Not-for-profit organizations live and die by their budgets. Most of them don’t have a cash cushion to absorb any unplanned increase in spending. And with the level of donor scrutiny these days (especially around the ratio of total expenses spent on charitable programs vs fundraising and overhead) they can’t afford to be wrong. Not-for-profits often derive their revenue from low margin programs and events; and from limited donor appeals. There’s simply not the same opportunity to go out and generate revenue that so many for-profit companies enjoy.
And last but not least, budgets really matter in not-for-profit because they are a way of making the least financially oriented people fiscally responsible. Many not-for-profit program managers don’t have business training. That’s hardly a criticism. Many of them are making contributions to the world that will impact generations. The fact that they can’t recognize a credit from a debit doesn’t matter.
So budgets are deployed as a basic but effective tool to help communicate “stay within these boundaries” to program managers. They get that, even without an MBA.
With all that being said, budgets are mission critical for not-for-profits. I don’t think anyone would argue with that. The question then is what’s required to facilitate an effective budget process?
The Baptist General Convention of Texas was the first non-profit I worked with as a client of XLerant (back in the early days when my partner and I did all client implementations of our budgeting solution). Jill Larsen, the CFO of BGCT taught me more about not-for-profits than could ever fit on this post. But let me highlight a few of the observations she shared with me here:
-
Since many program managers do not have a business background, they are not nearly as familiar with Excel as people in the Finance organization are.
-
Program managers find the budget process stressful and intimidating. Being sensitive to that is vital to serving them and creating an effective budget process.
-
Program managers would much rather work with something that looks and feels more like, say TurboTax, than a spreadsheet.
-
Program managers don’t think like accountants, especially when it comes to budgeting. Unlike accountants (who tend to think strictly in terms of G/L accounts and amounts) program managers think in terms of the programs or events they’ll be running, and the resources required to make them happen.
-
Taking to heart all the observations listed above, the budget process needs to reflect programs, events, projects and initiatives – all developed by the program managers who will be delivering them through the year.
As I mentioned, I learned a lot from Jill (in fact we all continue to learn from her). If you’d like to read a case study about the Baptist General Convention of Texas, which can provide further insight, you can access it here.
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
I’ve had the distinct pleasure of working with some of the best run companies over the years and I’ve come to appreciate what really separates them from “the merely good”. Some of what makes great companies so successful, like hiring great talent, is quite obvious. But in this blog I’d like to share one of their lesser known secrets to their success.
Every company has to deal with complex problems, and many organizations become adroit in dealing with them. Here’s an example of a complex problem, “How can we forecast Revenue by SKU?” Another might be “How can we extract data from our G/L and get it into our reporting package?” Another might be “How can we identify our most profitable Product Lines?”
What complex problems have in common is they do have answers… you just know they’re solvable. If you’re willing to burn the midnight oil (or get someone else to work late) you can deliver an answer. Solving complex problems involves a lot of “sweat and stamina”, as one of my old boss’s use to say… there is an answer at the end of the rainbow.
By contrast, ambiguous problems can’t be addressed by brute force. Here’s an example of an ambiguous problem, “Morale is down in the Finance department, what should we do about it?” Another example might be, “How do we get willing participants in our annual planning process, especially from those people outside of Finance?”
Ambiguous problems can’t be solved by an excel model, they can’t be addressed by formulas or by putting in more hours at work. And that’s the chief reason why average organizations shy away from dealing with them. They’re perpetually stuck at the “Where would we even start?” stage.
But the best run companies recognize the enormous value of effectively dealing with ambiguous problems. They don’t shy away from them, instead they call them out. If morale is down in the Finance department they’ll find out why. And they won’t not stop at a superficial understanding, but dig deeper. When they find out the fundamental reasons why morale is down, they’ll work to address the root issues and won’t waste time with window dressing.
What’s the payoff to addressing an ambiguous problem? Well, in the case of turning around the problem of low morale, you can attract and retain the talent the organization needs to succeed. It could even be the key to being able to beat your competition, rather than being beat by them.
The best run companies get that. Sure, they tackle complex problems every day. But unlike everyone else, they go out of their way to name and frame ambiguous problems – and attack them head on.
Now, what does all this mean for you? Let’s take an example. Say you’re contemplating a redesign of your budget process. One of the complex problems you’ve identified is that management wants to get a better grip on Benefits expenses. An important step they want to take is to separate out Payroll Taxes (a big number) from the rest of the benefits expenses. The complex problem is how to (accurately) calculate Payroll Taxes, both Federal and State, applying the appropriate cap and rate. Oh, and calculate it by individual employee, for increased precision and accuracy.
Figuring out how to address this complex problem requires thinking through the math involved and translating that into necessary formulas. Hard, complex work, but you’ll get it done.
But let’s say the redesign of the planning process also includes the goal of getting more willing participation from front line managers. That’s going to require putting yourself in their shoes, and delivering budgeting solution that allows them to “think like a manager”. It’s an ambiguous problem that requires empathy and understanding; not formulas and models.
While the payoff of addressing the complex problem of modeling Payroll Taxes by employee can be big, effectively dealing with the ambiguous problem of getting more willing participation in the process is huge. And what’s more, Senior Management will value the Finance department much, much more, if they can find a way to get willing participants in the planning process. Senior Management knows that particular ambiguous problem is harder to solve, and has a larger payoff to the business, than say, finding the right formulas and models to project payroll taxes.
As Finance professionals we are trained to solve complex problems, but as managers we need to learn how to solve the ambiguous ones.
As usual, your thoughts and comments are welcomed.
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
XLerant recently completed a survey on budgeting and I wanted to share some of the highlights with you here. We will be publishing a whitepaper on the results as well, and if you’d like to reserve a copy, just click here or use the URL below:
http://blog.xlerant.com/budgeting-survey
The whitepaper will provide all the details and statistics, today I just want to highlight some of the major highlights (from my perspective anyway) of the approximately 150 people to date that have participated. You’ll notice I’m not including pie charts and graphs here, apart from the one atop this page, which seems to indicate there's some room for improvement, to put it mildly. We’re saving the catchy graphics for the whitepaper itself, but in this blog post we’ll share the headlines and some key take-aways:
Budgeting is mission critical. You probably already knew that, but isn’t it comforting to know that a majority (over 90%) of your peers agree with you?
Budgeting is getting more scrutiny than in the past. Given the economic downturn, and the need to do more with less, again, that might not be surprising to a lot of you. On the other hand, misery loves company. You’re not the only one feeling the heat… more than 2/3 of survey respondents are feelin’ it too.
It’s a matter of Control AND Flexibility. Survey respondents said that they want to improve financial control in the process… and they wanted to improve end user flexibility to prepare a better budget. Overwhelming they said they wanted both. Now before you conclude that you can’t have your cake and it eat too; I think the underlying desire is to provide flexibility in a controlled environment – and that is an achievable goal.
Excel is the most widely used application for budgeting. Approximately two thirds of respondents said they’re using Excel for budgeting; about 10% are using whatever their ERP system has to offer, and the rest are using a combination of purpose-built third party tools or something home grown.
Now since the majority of organizations surveyed are using Excel for budgeting, we filtered the results so we could see exactly what’s going on there. For example, the survey revealed that among those organizations using Excel for budgeting:
The Chief Complaint of Finance: "The mechanics take too much time, and they don’t have enough time for analysis." A close second was “Department heads hate the budget process. They simply do not put enough thought into it”.
The Chief Complaint of Department Heads : “I do not recognize the final budget number as mine.” That was followed very closely by “The budget templates do not let me budget the way I think.” These complaints are the flip side to Finance’s complaint that the department heads hate the process and don’t put enough thought into it.
The Chief Complaint of the Sr. Executives: “The budget does not tie to the strategy”. Forgive me, but if the budget doesn’t tie to the strategy, what does it tie to? Scary thought.
What does it all mean? That’s what the whitepaper is all about. You’ll get the demographics of who participated; see the detailed results for each specific question, and a clear headed assessment of the implications for redesigning the budget process. You can use the link at the top of the page, or simply click here to pre-order your copy.
Now, if you’d like to add your voice, we’d welcome you to take the survey yourself. It takes less than 10 minutes to complete, and you’ll even get a chance to win an iPad 2 if you do.
https://www.surveymonkey.com/s/XLerantBudgetSurvey
As always, your comments are welcomed, please feel free to post them below.
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
Raymond Panko, a professor at the University of Hawaii, is the leading expert on spreadsheet errors. Who makes them, why they happen, what rate they’re seen in the average spreadsheet, you name it. He wrote a paper on the subject called What We Know About Spreadsheet Errors first published in the Journal of End User Computing.
You can download a copy of the condensed version here: What We Know About Spreadsheet Errors
In the meantime, here’s an excerpt.
In recent years, we have learned a good deal about the errors that people make when they develop spreadsheets. In general, errors seem to occur in a few percent of all cells, meaning that for large spreadsheets, the real issue is how many errors there are, not whether an error exists.
Most studies looked at errors at the end of the development stage, when subjects said that they were finished developing their spreadsheets. Cell Error Rates (CER) across these studies were similar, despite the fact that subjects ranged from novices to highly experienced spreadsheet developers. One study even compared undergraduate business students, with little spreadsheet developing experience, and MBA students with more than 250 hours of spreadsheet development experience. Their Cell Error Rates were very similar.
Even when a task was selected to be very simple and almost completely free of domain knowledge requirements, the Cell Error Rate was about 2%.
Respondents were keenly aware of the dangers of error and spent considerable time working to reduce errors, including the creation of cross-footings, doing spot checks of formulas with calculators, and having others look at output. However only 1 of the 11 interviewees said that they had done a complete code inspection of a spreadsheet; and in that case it was a spreadsheet given to that person by someone else!
Later, Hendry and Green did a similar study, this time with 10 spreadsheet developers. They added a phase in which the subject walked through a spreadsheet with an author. They found that subjects often had a difficult time explaining parts of the spreadsheet that they had themselves built.
They also found that some of the spreadsheet developers had run into serious problems trying to make parts of the spreadsheet analysis fit the row-and-column layout of spreadsheet program.
We are overconfident about the accuracy of spreadsheets, despite the large amount of information to the contrary. One study gave three spreadsheet development tasks to nine highly experienced spreadsheet developers, all made at least one error, not all of which were caught and corrected. In fact, 63% of the final spreadsheets overall had errors. Yet when asked about their confidence in the correctness of their spreadsheets, their median score was "very confident."
Overconfidence is corrosive because it tends to blind people to the need for taking steps to reduce risks.
Whatever specific techniques of improvement are used, one broad policy must be the shielding of spreadsheeters who err from punishment because a climate of blaming will prevent developers from acknowledging errors. Quite simply, although the error rates seen in research studies are appalling, they are also in line with the normal accuracy limits of human information processing. We cannot punish people for normal human failings.
To read more, including the author’s suggestions for mitigation, please review the article >>>
What We Know About Spreadsheet Errors
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com
Instead of debating the relative merits of rolling forecasts over annual budgets, the right question to ask is “What’s the best way for us to plan in our organization?” Because maybe the answer involves elements of both.
There’s an annual budget process that’s approved by Management and/or the Board of Directors, and it’s used among other things to set performance targets. Few organizations lock away the budget in a drawer. Instead, every month they compare Actual vs Budget and complete a variance analysis. That analysis can, and often does, lead to a reforecast.
So an Annual Budget and Rolling Forecast can co-exist.
Rather than debating the good and bad of budgeting versus rolling forecast, you’re much better off devoting your time to answering the question “What is the best way for us to plan in our organization?” Here are some common objectives people have in improving their planning process:
-
Improve the reliability of our financial projections
-
Build a greater sense of ownership and accountability of the numbers
-
Align the goals of the organization and line up the proper resources behind them
-
Minimize the non-value added mechanics of the process
-
Improve the decisions made in the process to maximize the benefit of planning to the organization
If these are the goals, then what changes do you need to make to your planning process? And if you are considering a move to Rolling Forecast, or Zero Based Budgeting, or Value Planning, or Activity Based Budgeting anything else; you need to determine how the changes to your process will get you closer to any of your goals.
As Finance professionals we’re usually pretty detailed oriented, and rigorous in our thinking. We need to apply those same skills when it comes to assessing any recommendation for changing your budget process… and recognize a false choice when we see one.
Lawrence Serven
Founder
XLerant, Inc.
www.XLerant.com