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Despite a market environment where missed earnings projections can lead
to sharp stock declines, CFO firings, or worse, most companies fail to
accurately forecast earnings and sales, according to new research by The
Hackett Group (NASDAQ: HCKT), a global strategic advisory firm.
According to results from Hackett’s new Book
of NumbersTM research “Aligning
Forecasting Practices with Market Dynamics,”
two out of every three companies are unable to accurately forecast
earnings for the next quarter, missing the mark by anywhere from 6% to
over 30%. Companies do only slightly better when forecasting sales,
according to Hackett’s research. More than
half of the companies in the study were unable to accurately forecast
sales for the next quarter. Accurate forecasts, for the Hackett study,
are defined as being within 5%of actual results.
In addition, forecasting is becoming significantly more challenging, the
Hackett research found. 14% of all companies in the study characterized
themselves as high risk/high volatility, a seven-fold increase over just
three years ago. And Hackett believes this is likely to continue to
increase, perhaps by nearly 50% over the next two years.
“It’s shocking to
see this level of poor performance in such a key area,”
said Fritz Roemer, who leads Hackett’s
Enterprise Performance Management Executive Advisory Program. “We’ve
seen companies take severe hits in the past few years after missing
forecasts. Analysts suddenly question the competence of senior
leadership. Stock prices become unstable and valuations drop
dramatically. In some cases, CFOs have had to resign. Yet companies
still refuse to make the necessary efforts to get this area under
control.”
Hackett’s Book of Numbers research outlines
an array of ways world-class companies improve the forecasting process.
Hackett recommends that most companies move from year-end to rolling
forecasts, which enable companies to more accurately match forecasting
horizons to the reality of turbulent market dynamics. Today, only about
a third of all companies utilize rolling forecasts, and that percentage
has not changed significantly since 2004. Hackett also recommends that
companies consider business risk and volatility when determining
forecasting frequencies and horizons. While a company in a low-risk,
low-volatility environment might manage with a six to eight quarter
rolling forecast updated twice per year, a company that sees its
environment as high-risk, high-volatility might find a rolling forecast
updated monthly to be more appropriate.
Hackett’s research also strongly recommends
that companies set accuracy targets for forecasting. While the majority
of companies measure forecast accuracy, Hackett’s
research showed that only 20% currently maintain accuracy targets.
Finally, Hackett found that leading companies manage forecasting
accuracy by making the forecast bias transparent and successfully
changing the behavior of forecasters.
“These are very basic steps that almost any
company can use to significantly improve their forecasting,”
said Hackett Finance Practice Leader, Global Advisory Programs Bryan
Hall. “By using rolling forecasts, which
force companies to look beyond the artificial horizon of their year-end,
by considering risk and volatility, and by measuring accuracy in
forecasting, companies can make real improvements in this key area, and
reap rewards from the investment community.”
Hackett’s Forecasting Book of Numbers
research analyzed results from more than 70 large U.S. and European
companies. All of the participants operate globally. The research
volume, which is available exclusively to members of Hackett’s
Enterprise Performance Management and Finance Executive Advisory
Programs, looks at five key perspectives on forecasting: Aligning
Horizons and Frequency with Market Dynamics; Disentangling Forecasting
from Budgeting and Management Reporting; Creating a Rolling Forecast
that Works; Improving the Forecasting Process; and Creating Accurate
Financial Forecasts. It includes case histories describing the efforts
of several companies to achieve world-class performance in forecasting,
and also offers nearly 50 charts detailing Hackett research metrics in
this area.
About The Hackett Group
The Hackett Group (NASDAQ: HCKT), a global strategic advisory firm, is a
leader in best practice advisory, benchmarking, and transformation
consulting services including shared services, offshoring, and
outsourcing advice. Utilizing best practices and implementation insights
from more than 4,000 benchmarking engagements, executives use Hackett's
empirically based approach to quickly define and prioritize initiatives
to enable world-class performance. Through its REL division, Hackett
offers working capital solutions focused on delivering significant cash
flow improvements across business operations. Through its Hackett
Technology Solutions Group, Hackett offers business application
consulting services that helps maximize returns on IT investments.
Hackett has worked with 2,700 major corporations and government
agencies, including 97% of the Dow Jones Industrials, 73% of the Fortune
100, 73% of the DAX, and 45% of the FTSE.
Founded in 1991, The Hackett Group was acquired in 1997 by Answerthink
which was renamed The Hackett Group in 2008. The Hackett Group has
global offices in the United States, Europe and India.
More information on The Hackett Group is available: by phone at (770)
225-7300; by e-mail at info@thehackettgroup.com;
or on the Web at www.thehackettgroup.com.
Book of Numbers is a trademark of The Hackett Group.