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The science and art of good forecasting

Reliable forecasting will not only allow businesses to better understand their operations, but will also help buffer against the impact of uncertainties

The science and art of good forecasting

Since 2008, the world economy has undergone a number of shocks that have seen the worst downturn in western economies since the 1930s (and arguably prior to that). The Eurozone continues to languish and the UK is likely to see its first ever triple dip recession. Economists now believe that the current low growth rates seen across Europe are set to stay for the foreseeable future and certainly into the 2020s.

Added to this low growth background, pharma is going through particularly testing times, with patent cliffs looming for many, reduced pipelines and increasing pressure from cash starved healthcare systems. On the creative side, there is a continued shortage of good talent, creating significant upward pressures on salaries, by far and away the biggest cost of any agency. 

Against this backdrop, agencies and clients alike are struggling to come to terms with the new economic reality and increased levels of uncertainty, which means it is more critical than ever that both client and agency work together to exploit ideas and resources to maximise their respective financial positions.

Looking back at previous articles in PME, there is no shortage of discussion around strategic issues, creative processes, and collaboration. However, much of this can come to nothing when financial pressures lead to cutbacks in marketing programmes, or when products do not perform inline with forecast expectations.

Nearly all situations require some form of forecasting, from simple day-to-day decisions to complex launches

In this environment both agency and client alike need to look to simple, boring, unfashionable financial tools and processes that deliver the headroom that allows businesses and business relationships to grow and flourish.

In support of forecasting
Key among these tools is reliable forecasting. Nearly all situations require some form of forecasting – from simple day-to-day decision-making, right through to complex product launches and mergers/acquisition activity. A well-constructed forecast will allow businesses to better understand their operations and quickly assess the impact that external and internal changes will have on them. 

Through forecasting, decision-makers are able to identify the optimal course of action; that which will have the greatest chance of success. And, importantly, it will also give them the ability to react to unexpected issues – avoiding or at least limiting potential pitfalls and maximising new opportunities as they arise. In the face of the uncertainties we all face in our business and day-to-day lives, the key aim of forecasting is to increase confidence and allow decision-makers the freedom and flexibility to work toward their objectives.

The art and the science
A robust forecasting process can be characterised by two key ingredients. The first, the science part, is a logical empirically-based model and can be very simple or bewilderingly complex, depending on the circumstances. Often using complex statistical forecasting techniques, it is this element of the forecast that often gets the most airtime with an incomprehensible array of jargon – intimidating those who are not specialist forecasters. Although these tools can be very complex, they do not always need to be – the old mantra 'simple is best' is particularly applicable to forecasting. All that is needed from the model is that it is sufficiently detailed to be flexible, adaptable to changing circumstances and easily used and understood by the end user.

The second ingredient, the art of forecasting, is very often the most overlooked, yet it is just as important as the scientific element. This comprises a number of simple, more intuitive, yet devastatingly effective aspects, including a good helping of informed judgement and good old-fashioned common sense.

All too often, forecasts are put together with one of the two ingredients missing or out of balance. An entirely logical statistically based forecasting process will often present results that, at first sight appear robust and have an inherent logicality, yet cannot be applied in the real world. On the other hand, a forecasting process that does not have the rigour of a proper, detailed framework will often fall apart under interrogation and render it unreliable.

Picking the ingredients
Producing a reliable, informative and usable forecast is one of the most difficult exercises that will be faced by client and agency staff alike. 

This is where the bean counters can come in. Accountants are routinely selected by businesses for their all-round commercial and business acumen, rather than the parochial number crunching stereotype. 

With their financial background you would expect accountants to be solely focused on the modelling or scientific aspect of forecasting. But increasingly they are called upon to display other characteristics: 

  • Making informed and reasonable assumptions where information is inadequate or non-existent 
  • As part of their central role in the business, they must have an awareness of the impact of decisions on others, especially when resourcing decisions are being taken and must also be aware of all internal and external factors that impact the business
  • Being organised and effective in an increasingly complex world where there are many moving parts to consider
  • Striking a balance between science/art
  • Finally, as forecasts can never be precisely accurate, acceptance of failure and working out how to move on and strive for continual improvement.

The use of forecasting is obvious in looking at 'big issues' such as product development, key acquisitions and other corporate activity – and is often best left to specialists in strategic business development teams. However this does not diminish the need to improve forecasting at all levels of business – and agency and client financial management can have a key role in improving the overall client/agency environment to the benefit of all. 

Impact of uncertainty
For agencies, remuneration arrangements have been moving away from retainers to project fees for some time. This gives the client much more flexibility and transparency in his costs, but significantly increases uncertainty for agencies.  

Without sound forecasting in place, this can mean too much, too little or inappropriate resourcing, which creates instability for agency teams. This often leads to an increased propensity for errors and reworking and a breakdown of reliance between the agency and client. The impact on clients is that quality can be compromised and there is inevitably less continuity in strategic and creative thinking and continually re-worked projects can, at best, be costly and frustrating and at worst can result in incorrect messages being sent to the market.

Be organised and effective in an increasingly complex world, where there are many moving parts to consider

Assisted by the bean counters, everyone has a part to play in this. As intimated in Matt de Gruchy's article in October 2011, 'Work Together to Deliver Value', clients and agencies should get together on a regular basis and set the overall framework for the period ahead. This allows longer term planning and better resourcing. As with all forecasts, inevitably there will be tactical divergence from these overall plans as time progresses, but with clear, open communication channels at all levels, the potential impact of these changes can be minimised. The overall framework should be a morphing, fluid tool that acts as an enabler of change and not be used as an obstacle to either prevent change or worse, to be used as a stick.

So perhaps the time is right for a different perspective to be added into the mix – let the bean counters in!

Article by
Doug Hill

member of the EACA Health Communications Council and UK finance director and CFO Asia Pacific Sudler & Hennessey

7th May 2013

From: Marketing



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