Predicting the future is no simple task! For those poor businessmen and women ambushed by the hasty assumptions behind many predictions, the guys and gals responsible for gazing into crystal balls are very important. Every successful business and government enterprise needs sound economic forecasts, realistic profit plans, and sensible departmental budgets to measure progress and performance. Together these analytic tools establish important objectives to guide management into the murky future. Therefore, anyone responsible for achieving objectives ought to be fully aware that failure to “measure up” to some guideline could result in a near-term curtailment to his or her career aspirations.
As hard as it is to look into the future, many daring prognosticators act as if they were doing so with the certainty of a proven science. Frequently, the predicted results have been committed to paper before all the assumptions are identified and the details added up. Then, when the final assumptions about sales are “negotiated” or “handed down,” and the “bottom line” is calculated and approved, the projection is cast in bronze, worshiped as Nebuchadnezzar’s Golden Idol, and used to whip the slaves in the bureaucracy into a frenzy of goal-oriented efforts to turn an impossible dream into reality. For talented MBAs it’s all fun and gruesome games like in those glorious days of the triumphant Romans.
For years I used to work on the teams who were assigned the task of building budgets, fabricating profit plans, and projecting how those lofty, honorable business objectives were going to be achieved. Hours of overtime, millions of numbers, thousands of assumptions, hundreds of pages of arcane financial data, and a small dollop of common sense were involved. By the time the “Profit Plan Package” was complete after months of preparation, any resemblance it had to reality was purely coincidental.
But who would challenge this work of eminent importance conducted with the utmost seriousness by the most informed participants? Anyone could, but nobody would. That’s because by the time everything was wrapped up, the over-worked prognosticators were already behind schedule in making next month’s urgent profit forecast.
My father’s answer to that old question: “So, how’s your wife?” fits so well in business today: “Compared to what?” The silent, infamous floating zero is the “what” in business. I discovered it during my second year of preparing budgets. It was the notorious starting point from which all the cruel measuring began. It was the focal point from which a line drawn on a graph originated.
After studying statistics in college, I was well aware how everyone played with numeric analysis. Sophisticated “experts” frequently used medians rather than means to improve the “relevance” of the statistics. Sample sizes were too small to be valid. Misleading interpretations of data prepared from answers to ambiguous questions were published.
Almost nothing you read using statistics in current newspapers and magazines could be trusted, e.g.: extrapolations of popular opinions based on a limited telephone sampling, estimations of the number of homeless from experts, and calculations of the disparity of female income versus male income based on global median numbers, not specific job by job comparisons in the same workplace. I find it totally exasperating to read such honestly presented, thought provoking misinformation.
Honesty, logic, and sound analysis can easily go out the window when speculating about the future. There will always be some unconsidered factor discovered after-the-fact that can be used to explain why the future evolved differently from what was expected. So, to facilitate forecasting, humans have invented the floating zero to replace the line in the sand that our forefathers invented.
Once there is some kind of an agreement about where to pin down that bobbing zero, we can begin to construct our frame for the forecast. Should we use last year’s results, last month’s results, or the assumptions adopted by marketing that justified launching our newest product? Or just tweak our latest presentation to acknowledge the slight downturn other companies are now predicting?
The situation could be a lot worse, but who wants to go to the wood shed today? Something might happen tomorrow to bail out our forecast and save the boss’s derriere. Yes, that magical ill-considered factor that might cause favorable consequences!
Pinning the floating zero on the graph of anticipations usually falls to the person with the highest authority. He or she is considered to be endowed with inordinate vision and the power of divine prophecy. If only we didn’t have to start making forecasts without his or her input. The guesses of underlings that initiate the process rarely are close to fixing ground zero. Much time and effort are wasted in arriving at a fuzzy forecast before preparers are advised that they stuck the zero in the wrong place.
A 5% improvement versus last year is totally unacceptable. Try again. Will 10% be enough? Many forecasters will agree to adjust their assumptions just to get the job done on time. Where is the dollop of common sense? In the judicious acceptance that the boss is always right!
Well, the Sales people are responsible for achieving the top line, and the purchasing and manufacturing people are responsible for harnessing costs and expenses. Who do you like best? Who would you like to see succeed? Which group of “friends” are you going to favor? You know the company isn’t going to make this forecast, even with luck! The Law of Unintended Consequences sooner or later rears its ugly head. Reality turns the straw for Rumpelstiltskin into gold or vice versa: the company’s gold into straw.
Here is how the floating zero comes in to the picture. Each line item in a forecast has a starting point which marks where progress should begin. Obviously, if that point is below the actual achievement level, then exceeding this objective in the future requires no further effort.
Since no one can know all of the actual achievement levels and understand the reasons why former expectations have been achieved or not, there is some play in placing the starting point, the floating zero. However, once that zero is in place, the crucial assumptions and their rationalizations are concocted to justify the projected results. Then, during the forecast period we carefully watch to see how well the unfoldment of the subsequent months fits the projection.
You can’t compare tomorrow with today without identifying what today is, or just was. Thus, subjectivity comes into play in interpreting the fuzzy picture of the factors affecting today’s results. If these factors are not carefully analyzed and honestly admitted, the misunderstanding of them can permit a false evaluation and lead to a dubious location of the zero.
But who cares? There aren’t enough hands and time to study the details that affected the recent results. Charge ahead with old data, extrapolate what the accountants booked. Live and be well, because some good news may cover up the bad news! Publishing the forecast is our job in the Budget Dept., not producing the desired results.
If you work in Sales and Marketing, your whole life depends on making the Sales objective. This is the most important “guestimate” in the Profit Plan because production schedules will be based on building that number of products to be sold. An error in the Sales objective will cause over or under production and extra costs to alter production schedules later on.
The sales floating zero usually fluctuates between what a realistic sales staff expects to sell and what Top Management feels the company has to sell to achieve the desired bottom line. Various iterations of profitability are cranked out by forecasting teams to ascertain what the sales assumptions “ought” to be. Bored already? You haven’t sat through any “production planning meetings” and watched salesmen squirm as they buy into impossible commitments!
For Manufacturing the work of estimating how much it will cost to produce the official schedule is equally daunting. Industrial Engineers must determine for each job how much time each direct laborer will spend in machining parts, assembling, and painting each product. Allowances for learning the jobs, increasing productivity and efficiency, machine down time for repairs and adjustments, etc. all figure into the standard time expected by the Industrial Engineers to produce one unit.
Then calculations will be made using approved production schedules to estimate how many laborers must be hired, including replacements for sick time, vacations, and other absentee factors. The direct labor floating zero can include a launching allowance, a budget attainment allowance, and a phase out allowance depending upon the time of the year in the production cycle. When you summarize all this, you end up with the well known SWAG (scientific wild ass guess!) about the cost of direct labor. Would you believe college graduate engineers spend a great deal of time with stop watches making these estimations?
I once made a study of direct labor in 16 plants for a company in the automobile industry. This group of factories produced power trains for cars and trucks. Two of the plants were using incentive pay systems to motivate their employees to produce more “output” than Industrial Engineering had established as the criteria. One of the plants was in first place in performance, and the other was in last place.
Because the systems were complicated, no one at Group Headquarters understood why the incentive system seemed to work in one plant, but not in the other. Top management wanted to change the incentive pay system to “day rate” pay because they “felt” that workers in the second plant were being overpaid per average hour worked.
What my investigation proved was that no one was using the same floating zero to measure performance. When all the factors were finally evaluated, the first place foundry should have been in the middle of the pack, and the last place transmission assembly plant should have moved up just below it.
The vice presidents responsible decided not to change any reporting, however, since Top Management was used to seeing the two plants where they were in the direct labor performance reports. One of the VPs was especially adamant that nothing be changed because his foundry was on top of the ranking.
This attitude proved that it doesn’t matter how performance is evaluated as long as you beat your floating zero objective and end up ahead of your competitors! Nevertheless, a word to the wise: it’s usually beneficial to understand how the measurement tools are being used: for or against you!
Well, the one lesson I learned about floating zeros is never to argue about the future. That’s very time consuming and counter-productive. Nobody has a fix on the direction of the economy or the size of the demand for your product in next’s year marketplace. Discussions about these assumptions are futile, but necessary to consume the time allotted so that there is some evidence behind the random factors selected “for starters.” (Here the famous Peter Principle comes into play!)
One thing for sure is that a plan with an ambitious objective is guaranteed to make everyone unhappy: the more unhappiness, the better. The tougher the plan, the more equal is the distribution of the impossible task to be accomplished. Any argument about the task for your department can create the suspicion in your boss that you are either trying to negotiate an easy objective or you are unfit to manage the activity you are responsible for. Neither suspicion will be beneficial to your long term career aspirations.
My recommendation is: love your local budget analyst and profit planner. Of course, if it is possible, take care of the person who has the power to approve the floating zeros. This is essential in business, in politics, and wherever budgets are employed. The friendship with the person who messes around in the mucky details of the collection of mundane sales and accounting data and then extrapolates them into the unknown future can be very valuable to you. And a leg up to the better jobs that pay bonuses and stock options!