Articles
Posted By Ian

Forecasting; useful… and dangerous


In 2013, dairy giant Fonterra was forced to undertake a recall of batches of its products due to a fear that they might be contaminated. Although it was later proven that the batches were not contaminated, the episode did reveal a number of interesting points.

lightning

First-off, Fonterra was demonstrably not prepared for the above incident and could not have predicted that that specific event would occur at that specific time. Another point was that the Ministry for Primary Industries (MPI), the agency responsible for overseeing primary industry, also did not foresee such an event and did not have a plan to respond to it. And lastly, many months after the event, an industry analyst, when being interviewed on radio, confessed that his forecast re Fonterra’s performance over the previous twelve months had been well out (due mainly to the scare) but then immediately went on to predict the result for the following twelve months.

More recently, New Zealand has been badly affected by the highly variable, and generally downward trending, dairy commodity prices. It has been grimly amusing to hear the analysts, having totally failed to predict the current situation in terms of timing and variability, go on to forecast future prices – to such an extent that tea leaf prognostication started to look like a reasonable option.

Usefulness

In short, the above got me thinking about the usefulness of forecasting, the industry that has grown around it, and the possibility of hidden dangers. A part of that thinking was the obvious dichotomy of the hopelessness of trying to predict future events with certainty versus, for example, the need of a government to match infrastructure to changing societal needs.

In times past, whatever happened was considered to be fate and there was no concept of risk let alone the notion of forecasting. These days, a need has developed for us to have confidence in the future. For instance, if we can reliably forecast a four-day period of flat seas, activities such as the building of giant sea-based structures become easier, or even possible. Yet there is always the unknown; the scenario that didn’t figure in the risk management analysis.

‘Unknown’ events happen all the time, otherwise how can we account for the many huge failed corporate deals, strategies and outright failures – were they all due to incompetence? Striking ‘out of a clear blue sky’ these events profoundly affect organisations and individuals yet we continue to lead our lives as if the future were predictable: and why not? We have to live our lives!

Why not indeed

My concern is that in forecasting there is an element of ‘the Emperor’s new clothes’ inasmuch as a constant stream of confident predictions creates an environment that lulls us into a false sense of knowing what is going to happen next year, month, day, hour or indeed, second. This blanket of forecasts arises from many sources each trying to meet our need for confidence in the future: news media, commercial and government organisations, economists, seismologists, political polls, and meteorologists meeting our need to know when to dig the garden.

Basically, we like to feel that we can see ahead with confidence yet there is plenty of evidence to the contrary. We unthinkingly plan our next meal with a loved one, yet…

I am not suggesting a morbid preoccupation with terrible possibilities, merely an acceptance of the obvious.

Danger ahead

So what is wrong with trying to forecast events? Nothing! But why are we surprised when things do not play out as we expect?

After thirty years of running my own business, there has not been a single year that played out as expected or planned. Major opportunities arose from nowhere and severe hiccups interrupted or cancelled plans. At the time, my main concern was not following the plan but rather my ability to hang on to the tiger’s tail.

The danger of forecasting, and its associated plans, is that it may actually reduce our preparedness due to an unacknowledged sense that we have ‘got things covered’. Our plans may take into account the low probability event but cannot cover the ‘Didn’t see it coming’ event. This in turn may lead to our deeper level of preparedness (refer Hardiness) not being up to the task; if and when it arises.

From an individual standpoint, stress arises when there is a misalignment between our expectations and what actually happens – reality! Our arrow riding smoothly on the wind of forecasting gets severely bent when it meets the concrete wall of reality thereby dashing our plans and dreams and generating stress in proportion to the gap between our expectations and our level of preparedness. This gap is readily seen in the many ways people respond to natural disasters. Some people accept what has happened and swing into action to deal with what is facing them while others, facing a lesser difficulty, are totally distraught and see their lives as having been ruined for ever.

The concept and practice of Hardiness does not get much attention because it only reveals itself when a situation arises that tests it. For example, I have seen senior executives who, operating well under ‘Business as usual’ circumstances collapsed when advised that their job was under review and they were invited to re-apply. The high level of their fear was evidenced in significant negative behaviour that did little for their standing in the current organisation or for their prospects in the re-structured one.

Within organisations, a lack of preparedness for the ‘blue-sky’ or worst-case event can be magnified. The marketing department puts out a long-term forecast which is then bought into by executive and translated into ‘The plan’ which in turn generates resourcing strategies and so on and so on. A form of self-referencing ‘group think’ takes over with each department responding to the other’s needs – and it all looks good – until a sudden catastrophe arises that dramatically upends all the forecasts. And remember the forecast was based on sound data.

A strategy

  1. Develop your mental awareness and preparedness, by spending a little time each day deliberately reflecting on the day that has been, the days ahead, and what actions need to be taken to build your (and your organisation’s) Hardiness.
  2. Accept that what you have built-up can vanish in an instant – notwithstanding the forecasts.
  3. Build your, and your organisation’s, Hardiness. Not just your ability to rebound (Resilience) but your ability to handle, and build on, negative experiences. In other words, continually expand your comfort zone so that you are less likely to crumble in the face of adversity.
  4. Have a plan for the worst-case scenario that you can imagine for your situation.

hardiness

The ultimate question

When launching into a new project, venture or adventure, or reviewing your current situation, here is a question to ponder: ‘If the worst case does eventuate are you prepared to accept it?’