Analyst Perspectives

Anyone who has had to regularly produce a written business forecast that goes out more than a couple of months understand all too well Yogi Berra’s famous observation: “It’s tough to make predictions, especially about the future.” Certainly the economic events of the past two years have regularly made forecasts obsolete in a very short period of time. Using the wisdom of crowds can help the accuracy of forecasts in some cases because the impacts of individual biases are largely cancelled out. But surveys of expected business trends turn out to be most accurate in stable business environments when simple extrapolation turns out to be the best forecasting tool. It’s less reliable at turning points because people tend to extrapolate from current conditions. Nonetheless, I think it’s always good to examine surveys of expected business conditions, if only because they accurately summarize current attitudes.

In that light, Adaptive Planning’s recent poll of financial executives is hardly reassuring and confirms the lack of overall lack of enthusiasm over the economic outlook. Even allowing for the natural conservatism of those in the finance function, it points to continued slow recovery in the US economy for at least the next several quarters (which is in line with other such surveys). The poll found that just under half (46%) expect a “W-shaped” (bumping along the bottom) recovery. A pick up in job creation is not in the cards until next year or later, according to 80% of the participants and 41 percent think employment growth won’t begin until the second half or later. There are mixed feelings about the business outlook for individual companies – half expect growing revenues but one fourth think they will fall and almost one-third expect to see staff reductions in the second half of the year. The trends in the survey over the past 18 months reflect the mood of the North American economy: things have stopped getting worse but they’re not getting better in any kind of hurry.

The survey also pointed to a key feature driving the North American and European economies: uncertainty. I believe It is this lack of faith in the future that is a major factor (along with limited credit availability for small and midsize enterprises) “driving” the sluggish recovery in North America and Europe. It might be tempting to compare this period of uncertainty to the 1930s, except that today’s “great recession” conditions are far, far more benign than those that prevailed in those days (25% unemployment in the US, rapid trade deceleration, political instability on a worldwide scale, and so on).

Planning in a period of uncertainty is more difficult but also more important. Integrated business planning is all the more important at economic inflection points because of its focus on improving coordination between business units in their planning function and rapid replanning cycles. We may indeed be in a “W” shaped recession, so it’s especially important for companies to be able to better anticipate how they will navigate through these ups and downs. More importantly, those better able to get off their marks as the economic climate improves are likely to be more profitable and achieve better market position as the expansion unfolds.

Anyone can plan poorly. Any tool will enable your company to plan poorly. Having the right information technology can make planning a more effective process if it’s used to shorten your planning cycles, enhance forward-looking visibility, promote contingency planning and better coordinate the plans created by individual business units. For years, we’ve demonstrated throughout primary research that (except for companies with 100 or few employees) the use of desktop spreadsheets as the primary planning tool is counterproductive. The tools for improving planning are available and affordable for all companies. The first step in finding the best way out of this recession is replacing desktop spreadsheets in your planning process with a dedicated planning application.

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Regards,

Robert D. Kugel CFA - SVP Research