Most companies fail at forecasting earnings

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%, according to a study of 70 multinational companies by The Hackett Group.

We’ve all seen cases where missed earnings projections led to sharp stock declines, CFO firings, or worse. But often companies don’t take the steps necessary to get better at forecasting, Hackett analysts say.

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The fallacy — and cost — of giving quarterly earnings guidance

Many executives believe that the quarterly game of giving Wall Street “earnings guidance” provides various benefits: visibility, reduced stock volatility, better valuations. But thorough research by McKinsey & Co. indicates that the practice doesn’t actually work — there’s no evidence that it produces the expected benefits — but carries its own costs.

The two costs:

  • It takes up valuable management time to prepare the guidance reports (i.e., it’s a distraction).
  • The practice produces too much emphasis on short-term performance.

In my opinion, that short-term mindset gets in the way of long-term strategic thinking and thwarts important investments in areas such as innovation, human capital, environmental sustainability, safety, and competitive intelligence. This short-term mentality — called “short-termism” — could be the No.1 problem in American business.

Oh, and McKinsey’s researchers found that, when some companies stopped providing the quarterly guidance, there were no dire consequences.

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CEOs need a “sensor network” to anticipate disruptive competition

Competition can pop up in many unexpected places, including college dorms, startups, Asian outposts and various disruptive technologies. A new study of the intensifying competition in high-tech industries finds that companies are OK at identifying market-altering changes but aren’t as good at anticipating such changes or acting on their observations.

My personal view: Companies need forward-looking staffers — some combination of futurists, competitive intelligence professionals and strategic planners — to help them anticipate their future business environment and get them to think beyond their traditional competitors and core markets.

The joint study by Deloitte Consulting LP and the Business Performance Management (BPM) Forum includes a survey of 181 company strategists (e.g., chief marketing officers, top strategic planners) in the high-tech industries (semiconductors, electronics, telecom, IT and Internet). The summary is here, and the downloadable report (.pdf) is here.

When asked which tools and processes they use to identify and analyze course-altering market changes, 95% of respondents indicated that they participate in industry forums and associations (i.e., they focus on their traditional competitors).  “A large majority also participates in an annual strategic planning process that incorporates competitive benchmarking and competitive intelligence reviews. However, these activities are not providing the forward-looking market view necessary to anticipate market-altering change,” the report says.

In an interview, John Ciacchella, a principal with Deloitte Consulting and leader of its technology industry group, told me that companies need a “sensor network” that helps the CEO discover new market entrants and new market opportunities.

The study also identifies the roadblocks to actually doing something about new market forces.

What issues prevent you from executing course-correcting actions?

  1. Management focus on near-term profitability
  2. Inadequate size of opportunity in the near term
  3. Management focus on established businesses and customers
  4. Metrics (e.g., lack of easily quantifiable business case)
  5. Risk-averse culture
  6. Entrenched interests
  7. Management hubris or arrogance

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Base: 181 strategic executives at high-tech companies
Source: “Competition at the Crossroads,” Deloitte Consulting LP and BPM Forum, June 2007

What resource issues prevent you from executing course-correcting actions?

  1. People (e.g., insufficient strategic planning talent)
  2. Cash (e.g., insufficient funding to identify changes and assess options)
  3. Information (e.g., insufficient market data, insufficient competitive intelligence)
  4. Technology (e.g., rigid or insufficient IT systems)

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Base: 181 strategic executives at high-tech companies
Source: “Competition at the Crossroads,” Deloitte Consulting LP and BPM Forum, June 2007

Taken together, you can see that myopia — management focus on the short term, and insufficient strategic planning talent — are big concerns.

The study concludes by saying companies should ask themselves the following questions:

  • Do you have the right strategic planning resources in place, in terms of people, processes and technology, to drive effective decision-making and better anticipate the changing landscape?
  • Are your indicators forward-looking?
  • What is your risk profile? How are new investments and growth opportunities assessed versus traditional models and business lines?
  • Is your corporate culture ready for change? Does it support exploration and identification of new models and business opportunities?
  • Are the processes in place, across your organization, to adequately react to change?
  • How much are you willing to bet, and is your strategic-planning process designed to consider risks and opportunities at a corporate level, outside of current product lines, customer markets and technologies?

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Related: New CIO role: Spot disruptive technologies and help develop new products