Why?

u4cu2b®

turning uncertainty
to advantage

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The challenge

At the start of the 21st century one thing more than any other is challenging business, policy makers and planners - uncertainty. After a long period of sustained predictable growth, we find the comfortable certainties of recent times are no longer a good guide to the near future.

Almost daily we open our newspapers, or turn on our radios and TVs, to find another major company issuing a profits warning with huge impacts on share price, cost of capital and reputation. Confidence suffers, mistrust grows, risks aren't taken, opportunities are missed and so the cycle continues - reinforcing and deepening.

In every sphere of activity managers, planners and analysts are struggling to make sense of the volatility and uncertainties that surround them in order to produce accurate forecasts that will guide their decisions and actions. The evidence of the struggle isn't difficult to find with:

  • difficulty in predicting performance and keeping to forecasts, even in the short term;
  • volatility and uncertainty in key value drivers;
  • significant and unexpected margins of error using traditional forecasting approaches;
  • opportunities missed as uncertainty makes identifying and valuing strategic options difficult;
  • valuations heavily discounted as markets assume the worst;
  • companies and directors punished for getting forecasts wrong.

We leave the debate as to why this situation has occurred to others. What concerns us is how we can cope with - and even thrive - given the uncertainties that abound. Sitting on our hands is not an option. Sooner or later investors will seek returns elsewhere. Our competitors will take our customers if we are too cautious to act.

Traditional forecasting techniques have sought to avoid relying on judgement. They seek certainty by looking backward, inward and downward for detailed historic information that can be projected forward.

In times of high growth but low volatility, this approach serves well enough because changes are predictable. However, this approach fails to deal with the uncertainty and risks that arise in volatile situations. Our research has found that:

  • people find it difficult to articulate and make judgements about uncertainty and risk;
  • traditional analysis tools have difficulty in capturing and processing information about uncertainty;
  • business models do not capture soft relationships between key value drivers;
  • sensitivity analysis fails to capture the effect of many factors varying simultaneously to reveal the range and likelihood of possible outcomes;
  • interpretation of traditional forecasts can be inaccurate or misleading, obscuring the true drivers of value and strategic options available to the enterprise.

In uncertain times we need to be able to capture hunches, gut-feel, opinions and best guesses in ways we can measure, track, manage and exploit. We need to spot the early signs that our assumptions are turning out differently from our expectations and react quickly to keep ahead of the wave.

We have been working with leading corporations to develop new approaches to forecasting that can model and manage uncertainty. The prize, for those who can understand and control uncertainty, is that they should be able to exploit the volatility to their advantage.

Part of the solution lies in the systems, tools and techniques we are developing for forecasting. But success also requires a change in mind-set towards the forecasting process. No longer should it be viewed as a remote centralised process primarily used for control, performance management and communication with investors.

Forecasting, and foresight, should be at the heart of our daily decisions, giving us the insight to identify opportunity; information to make the right decisions; and the tools to manage our activities and realise benefits with certainty. This is the goal that we, and our partners in industry, are aiming for.

 

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©2003
Duncan Crane
Ian Wallace