Porter's team then prepares three different versions of the top-down plan — baseline, high, and low — and creates strategies to cope with each one. "Developing a plan on three different levels is a good idea in any environment," Porter says, "but it is becoming a necessity in this one."
Porter's prism of the future is on point with what Bain recommends to clients. "You can't exactly predict where the economy is going, but you can frame and bound things," says Gottfredson. He says a three-case approach is a wise idea, and suggests a list of nine variables that CFOs should be assessing on at least a qualitative level, including credit availability, the stability of commodity prices, and the adequacy of the government response to economic problems.
Tenet, however, currently regards health-care reform as too much of an outlier to be accurately factored into its forecasting process. "That would be trying to cram too much into one analysis," Porter says. So far, the company has "done only high-level modeling about possible reforms, because so much is unknown."
Risk-Spotting
When Bill Caton took the CFO seat at Navistar in 2006, amid a major accounting restatement, he realized that company culture bred "really good firefighters, but not necessarily fire-preventers." Now Caton says he is becoming known as "Smokey the Bear" for his efforts to push employees at all levels to look for looming disasters. Last year, Caton moved from the CFO spot to the newly created post of chief risk officer, in part to lead an enterprise risk management program that is helping to amplify planning and forecasting activities.
Previously, the $14.7 billion maker of heavy trucks, diesel engines, and other vehicle parts took a siloed approach to risk management, with managers at each major business unit — trucking, engine, and parts — working independently. That led to a wide variety of assumptions about the future, varying degrees of conservatism and optimism among the forecasts, and not much transparency for upper management. "You don't know if people are aggressive in their forecasts or conservative, yet you're letting people make these decisions as individuals," says Caton.
The disparities also led to overproduction. In some instances, he says, "we had forecast that things were going to improve 20% or 30% and then they didn't, which caught us off guard and created a lot of extra inventory." The commercial truck industry has been in a prolonged slump; in fact, Navistar cut its 2009 earnings outlook by about 45% in early June as the slump dragged on longer than expected.
Caton expanded an ERM initiative already under way (to improve internal controls) to encompass an enterprise view of the company's exposure. Now, heads of the business units meet monthly to collaborate on forecasts for sales volumes, production schedules, and inventory management. The different divisions are able to identify common risks and work together to help mitigate them.
"Forecasting isn't just about volume or sales; we need to forecast whether suppliers are going to be in business next year," says Caton. Finance and operations are more intertwined, too, with the purchasing department working more closely with the treasury group to optimize hedging strategies. To help, the company created a "risk committee" made up of employees from each business unit, added new finance hires with some risk-management expertise, and is now planning to roll out a unified ERM system next year.
One of the most promising developments from this approach: a new companywide "supplier watch list" that senior purchasing managers meet weekly to review. Based on intelligence from buyers who have been trained to spot red flags, and on assessments of financial analysts, the list concept has already helped Navistar prevent a business interruption, says Mark Bures, manager of ERM at the company. Late last year, a buyer learned that a trucking-parts supplier that also provided components to the Big Three automakers was trying to delay payments to its own suppliers. That landed the supplier on Navistar's list and led to a full review of its financials. Navistar considered its options and decided in January to choose a new vendor, a process that can take months due to the complexities of plant retooling.
Those proactive steps meant that when the original supplier abruptly shut its doors one Friday in March, Navistar was able to accelerate the switchover. "By Tuesday, we had product from the new supplier, with no shutdown," says Bures. "It was a real success to be able to do that — not to mention we were able to do it at a better price."
What's next at Navistar? Building ERM into the strategic-planning process and creating more accountability for the two-year forecasts each business unit must produce. "This is about showing how you're going to achieve a forecast, the risks you might face, and how you're going to mitigate them," says Caton. "If you're going to throw out some numbers, you're going to be tied to achieving them."
Predictions: E Pluribus Unum
One of the most promising ways to get an accurate forecast is to see how much people will bet on it. This method, often administered online through so-called prediction markets, has famously foretold the results of recent Presidential elections and Super Bowl matchups. Now, some companies are using the concept to help get a window into their corporate futures. "For the things prediction markets are good at, like sales forecasting, they're very good at because it's a type of prediction for which many people in many different places have pieces of the answer, and this is a way to sum up distributed bits of the data," says Andrew Blau of Global Business Network.
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