1. 18 I AFP Exchange October 2014
How to assess your forecasting
process performance
Luca De Angeli, FP&A
Forecasting
the Forecast
FP&AFORESIGHTS
Copyright ©2014 by the Association for Financial Professionals. All rights reserved in all countries.

2. www.AFPonline.org AFP Exchange I 19
Ask most chief financial
officers and finance
directors to describe
an ideal forecasting process, and
they’ll likely portray it as part of
an overall integrated performance
management framework, ultimately
driven by value-based measures. At
the same time, however, they’ll admit
that achieving this vision involves a
significant transformation to their
current forecasting process, system
and organization.
Given today’s uncertain business
conditions, improved forecasting
capability can help organizations better
leverage their business model within
their industry. But transforming the
forecasting process first requires assessing
its performance.
In a recent Accenture survey of
237 companies, only 11 percent said
they were fully satisfied with their
forecasting capability, compared to 17
percent two years ago, and 20 percent
10 years ago.
The current forecasting cycle,
mainly focused on the one-year
budget, does provide a level of detail
(excruciating details, some would
argue) that can help shape incentive
compensation plans and capital market
communications. But far too often,
the end result of what is often a tough
process is simply shelved and forgotten.
In response, companies such as
Statoil, the large Norwegian oil and
gas producer, abandoned its one-year
forecast based on budget in favor of
a quarterly, rolling planning cycle.
Shell, the Dutch oil and gas company,
went so far as to guarantee the full
alignment between its five-year plan
and its rolling forecast.
As these two companies and others
show, a best practice is emerging. An
integrated business process is taking
place to match future change and
optimize resources allocation, while
avoiding the risk of over-reacting,
because of a better understanding of
current and future business models
and industry landscapes.
The forecasting process is fully
leveraged as a business tool to check
assumptions and anticipate upcoming
change both externally (i.e., industry
regulatory change) and internally (i.e.
operation disruptions, etc.):
• The forecasting is embedded
in the overall planning cycle.
The forecast is basically used
to confirm or review resources
allocation (capture the
momentum, increasing flexibility
to maintain full adherence to the
long-term strategy).
• Bottom up. The process relies on a
full involvement of budget owners,
both for their deep knowledge of
business drivers and involvement
in managing resources.
• Complex modeling techniques are
in place. Information technology
best-of-breed is fully leveraged to
grant data workflow and analysis.
Forecasting criteria
Traditionally, the forecast process
performance has been assessed
combining two benchmarks: the cost
of the process and accuracy. The cost
was usually calculated in terms of the
overall price tag of the process and the
number of full-time employees. A third
dimension, sometimes considered, is
the length of the process: the longer it
is, the better is expected to be.
In a fast-changing, uncertain
business environment, however, are
these measures the right to be used?
Experience has shown that while
accuracy is critical to any forecasting
process, it must correlate with the
length of the process. In today’s fast-
changing environment, the real value
of the forecast is not to capture the
right numbers but to understand
the pattern and to understand how
the business is evolving. This means
developing a complex statistical
measurement—factorial analysis—to
understand the key drivers.
To capture this concept, the
traditional benchmark measures
Copyright ©2014 by the Association for Financial Professionals. All rights reserved in all countries.

3. 20 I AFP Exchange October 2014
changes. These should include
the external market, a competitive
analysis and game theory, demand
and customers, as well as internal
data from operations, sales force
allocation and investment.
i. Here, FP&A should ask many
questions to verify the process.
Start by asking if there is a value
driver approach in place. Other
questions: How are forecasting
scenarios developed and which
what-if analyses are performed?
How is accuracy itself measured
and checked?
ii. Best practice: Conduct a
root-cause analysis. Factorial
analysis should be considered
in developing assumptions
to identify key value drivers.
Each key driver should then
be analyzed using a time series
regression. Where data are not
available, dynamic simulation
and assumption testing should
be used.
The adoption of this criteria, in
combination with the traditional
benchmarking performance measures,
can provide a better understanding of
your forecasting practice. Ultimately,
the evidence can be summarized in a
gap analysis that will represent the input
to develop the improvement plan.
Additionally, this performance
assessment approach will enable the
finance team to facilitate and increase
the process adoption rate, achieving full
ownership with their business clients.
Luca De Angeli, FP&A, is a consultant
with nearly two decades experience in
financial planning and analysis. He is
based in Switzerland.
ii. Best practice: Use an 18-month
rolling forecast, run every
quarter, leveraging assumptions
and key drivers to increase
flexibility in resource allocation
across business units.
2. Consistency:
• Check the forecasting planning
cycle, sales to operations, and
the direct involvement of budget
owners. This process is primarily
bottom up, where each budget
owner can shape future scenarios,
combining these with overall
strategic objectives and targets to
develop an action plan.
i. Here, the forecast is primarily
a reality check and should not
be considered as a process for
adjusting numbers to fill the
gap and meet targets. Budget
owners should be directly
involved and provide unbiased
data. Wide involvement
grants a more accurate picture
of the current position and
future outlook.
ii. Best practice: Conduct a
periodic business review
involves business leaders and
key department managers
to assess key drivers and
define possible scenarios.
This should lead to an action
plan with clear and validated
accountability for each
initiative. FP&A should act as a
facilitator for this process.
3. Modeling:
• Modeling should focus on a small
set of metrics and drivers that
are essential for keeping track of
FP&AFORESIGHTScontinued
Traditionally, the
forecast process
performance has
been assessed
combining two
benchmarks:
the cost of
the process
and accuracy.
should be integrated with broader
forecasting assessment criteria. This is
encompasses three dimensions:
1. Rolling:
• The rolling forecast works as
a business process when it is
fully leveraged by both the
shareholders and the business-
unit leader to gain flexibility in
addressing the change:
i. All parties must understand
how the resource allocation
process works and review it
for coherence with business
requirements specific to the
industry and the company.
As the rolling forecast is
prepared, FP&A should ask if
the forecasting is being used
to challenge and review the
budget and the long-term plan,
or it simply to passively report
the near future.
Copyright ©2014 by the Association for Financial Professionals. All rights reserved in all countries.