Future Tense

Forecast Sharing
Good forecasts have long hinged on finance's ability to dig into operational metrics, but increasingly companies are realizing that communication, and data, need to flow both ways. "It doesn't make sense to sit in an ivory tower anymore and make projections," says Lillis. "You don't get buy-in from leadership."

Business-unit leaders, for example, can run "distress simulations" on their own, increasing awareness of how their performance alters corporate results. Park Nicollet Health Services, a Minnesota-based primary-care and hospital provider, uses a baseline run-rate model and a second version that executives of its 54 business units can tinker with, says CFO David Cooke. A primary-care-facility manager can change patient volumes and the mix of commercial versus Medicare payers, for example, to measure the effects on profit margin. "Last year we lost $84 million because [the Medicare and Medicaid mix] went up unexpectedly," Cooke says.

Serving a higher percentage of government-insured patients (which is a current trend) means taking steps to boost productivity — asking doctors to see two more patients a day, for example, Cooke says. New software (from Cognos) may help, because it will give business leaders the ability to input data directly rather than route it through finance. That may allow the company to move more quickly as it tackles important challenges such as staffing (it can take a year to recruit a surgeon) and determining whether it should consolidate facilities.

While companies are developing a new appreciation for greater hands-on involvement from business managers, they do see limits, particularly when it comes to tying forecasts to compensation. Mueller Inc., a supplier of metal roofing and steel buildings, recently took such responsibility away from individual managers. "We were very poor at forecasting," says Phillip Arp, CFO of the Ballinger, Texas, company. "Managers couldn't back up forecasting with anything concrete and they felt pressure to give a number higher than the prior year, so we removed the performance contract piece."

Now, individual managers are responsible for executing against a matrix of recommendations based on branch sales levels that Mueller's finance unit provides. "They receive a set of tools that gives them guidance on their potential profitability, which includes margin, compensation, head count, asset levels, and mainline expenses," Arp says.

Age of Certainty
If the downturn in the economy does anything for corporate forecasting, it might be to sway organizations to become habitually conservative in their financial planning.

Apache Corp., a $10 billion energy exploration and production outfit, "constantly reassesses what the future looks like" based on the latest oil and natural-gas pricing and other macro inputs, says Roger Plank, the company's finance chief. But the modus operandi is to "plan for the worst and hope for the better." In its three-year projections, Apache uses a lower-price forecast for oil and gas than market pricing indicates, to prevent having capital spending outrun cash flow if oil prices underperform the futures market. "When I started with Apache, every year there was an escalating assumption, but prices didn't cooperate," Plank says. "The rate of return didn't turn out to be real." Forecasting more conservatively has allowed Apache to build up a $1 billion cash position.

The downside risk is slow growth, but Plank thinks it's a risk worth taking. "Anyone can assume higher prices and borrow against that, but with today's prices that doesn't make sense," he says. "It's worth missing out on a little of the upside in order to be flexible and have money when others don't."

Vincent Ryan is a senior editor at CFO.

Mapping the Future
Can intuition succeed where facts fail?

Multiple standard deviations from the mean are by definition rare, so it's not surprising that a world banking crisis caught many companies unawares, even if it seems wholly predictable in retrospect. Nor is it unexpected that CFOs are now scouring the horizon for more such "black swans." Supplementing straight-line extrapolations with scenario planning — the kind of forecasting that emerged from Royal Dutch Shell's planning department in the 1970s — can help executive teams challenge deeply held beliefs and assumptions, and cut down on blind spots about the future.

Scenario planning creates a set of stories, or narratives, that aid executives in thinking about "multiple, plausible, relevant, challenging futures and how a company might respond if they unfold," says Nick Turner of Global Business Network, a consultancy. "It's thinking about the horizon beyond the horizon." Scenario planning is not an attempt to predict the future or write contingency plans for every possible outlier; it's more about highlighting the limits of executives' perceptions around a core business question — like whether a firm should expand into China.

"Scenarios are really about helping to inform intuition," Turner says, instead of "just looking at the data and the facts." They help companies plan strategic options in light of what future events might imply for their industry, clients, and products. "Scenario planning is like fast-forwarding five years and writing the history of the period — how events unfolded and what the actors were doing," says Turner.

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