Yearning to go golfing tomorrow? If its sunny you are in for a great day. But if it is pouring you might want to make other plans. So should you book a tee or not? You can't know for sure, and neither can the meteorologists. What should you do?
In business life we face these types of decisions all the time. That is why we turn to forecasting. The difficult part is to put a number on the relevant parameters that will have a bearing on the outcome. Will it rain or not is not the relevant question. Trying to figure out the probability of rain will take you much further.
Let's investigate.
When predicting the future, there seems to an obsession with trying to get numbers that are precisely right.
"The financial departments usually demand precise numbers in forecasting. This is problematic because then you are not really taking into account uncertainty and the variability that comes with it" says Jonni.
The problem is that instead of demanding precision they should in fact be focusing on accuracy. Precision and accuracy are used interchangeably, but they are not equivalent.
Precision is about getting things precisely right. If we go back to the golf course and you are at the first tee, precision would be a 'hole in one'. But that does not necessarily imply that you are a great golf player, it just says that at that particular time, you were lucky. But if you tend to put the ball in the hole consistently with a few shots, it indicates that you are a good player. If people were betting on who wins the game, they would probably focus on the player who has a proven track record of hitting the ball near the hole consistently rather than the player who has once mastered a 'hole in one'.
The financial department tends to demand a 'hole in one' when it comes to forecasting when they should in fact focus on accuracy: getting as many balls as possible near the hole. In business terms, it's about finding a relevant range rather than a precise number.
"People tend to think that the more precise the forecast, the better. It's actually quite the contrary", says Jonni.
"Focusing on a specific number implies that you do not understand the risks involved in the decision-making. Playing with various ranges makes you prepared for different future scenarios and helps you identify and tackle risks", adds Mats.
Focusing on predicting an exact number will only get you to be precisely wrong.
"When focusing on the relevant range, you keep the risk and reward equation transparent for you decision making", says Jonni.
Did you book the tee time? Be prepared, take an umbrella along and enjoy!