by Bill Fotsch and John Case, Forbes, August 23, 2016
A few years ago, a large travel-management company ran an experiment. Three of
its North American branches would try out a new way of running the business. The
rest would continue as before. After nine months the company compared the two
groups’ performance.
The results? Everyone of the three experimental branches beat its budget for direct
profitability, meaning branch revenue minus direct costs. The improvements ranged
from 10% to 20%. Together the three branches turned in $1.7 million in incremental
profit.
Exactly none of the company’s 24 other branches even made budget, let alone
exceeded it.
Regular readers of these posts won’t be surprised by the philosophy and techniques
the experimental groups adopted. In these branches, the books were open.
Employees tracked direct profitability every week. They brainstormed ideas for
improving results by generating more revenue and reducing costs.
One customer-relations rep, for example, began contacting vendors to recover
money lost due to hotel no-shows, cancelled flights, and the like. Over the first
several months she collected $189,093. This was just one of many individual
achievements, each of which was recognized and celebrated. Engagement and
results both soared, eventually leading to a companywide rollout. (You can hear the
employees’ enthusiasm and drive in a three-minute video they created about the
experiment.)
The linchpin of the system was something that many entrepreneurs think is
impossible: forecasting results from week to week.
We know about the “it’s impossible” reaction because we hear it all the time. “Our
business is too unpredictable,” company owners tell us. “There’s no way we can
come up with accurate forecasts.”
But forecasting is an essential part of open-book management. It enables you to
control your business by anticipating risks and opportunities. And if you engage
your team in the forecasting process, you’ll find that people are suddenly paying
attention to the company’s performance in ways they never did before.
Here’s how to make it work:
First, focus on forecasting just one key number—the one that determines whether
you’re winning. In the travel company’s case, direct profitability for a branch was
easy to understand, easy to track, and directly linked to the parent company’s
financial health. Your own key number could be revenues, shipments, or any other
variable that’s critical to the business’s success. Tie an incentive plan to
improvements in the key number and you’ll find interest skyrocketing. The key
number forecast becomes an ongoing forecast of the size of the bonus.
Second, involve individual team members in the forecasts. A useful technique is to
assign an “owner” to each line item that affects your key number. For example, here
is how a home remodeler tracked its overhead expenses:
Notice how this company has divided the expenses into understandable components
and listed the person responsible for each one. Everyone can see how the different
components affect overall performance.
Third, get people together weekly to update the forecast. After all, what is more
important to discuss each week than whether you’re winning? Often the update is
simply “no change from last week,” so it doesn’t take much time. When forecasts do
change, however, there’s almost always something to be learned. Encourage people
to provide a brief explanation of why they changed their forecast, so that everyone
can absorb the lesson.
Finally, when actual results are available at the end of the month, compare your
team’s forecasts to the actuals and discuss variances. This process encourages
additional learning. It also gives you a clear idea of who is on top of his or her part of
the business and who needs help.
Like most valuable endeavors, forecasting takes practice. But you can get started by
trying to predict next month’s or even next week’s results. Over time, stretch your
forecasting efforts to several months out. When your forecast is consistently close to
your actuals, you know you have the business under control.
The more you forecast, the more engaged your employees are likely to be. At the
travel-management company’s three experimental branches, staff members watched
the forecast every bit as closely as investors watch the stock market’s ups and downs.
And it wasn’t long before they got pretty good at it. One month, a customer team at
one branch had a forecast of $31,434. The actuals? $32,310.
Forecasting empowers people. It clarifies responsibility and priorities, thereby
encouraging cooperation. It gets the team thinking about cause and effect—what
they can do now to improve future results or avoid some identified risk. It makes
you a better businessperson, and it gets everyone on your team involved in helping
your company succeed.