Does Rolling Forecasting Work?

Peter Drucker once said, “the only thing we know about the future is that it will be different.” Drucker’s words are as true now as ever. Recently, three prominent economists gathered at the University of Chicago to share their views on the economy and projections for 2012. Asked about heightened volatility, they all agreed it was partly responsible for slower spending growth. Many CFOs now refer to this volatility as the “new reality.”

Whether it is a temporary phenomenon or a permanent structural shift, the market’s increased volatility and uncertainty makes planning and budgeting hard for finance staff. How can Finance plan effectively without an idea of what the future looks like?

Some companies are trying to adjust. It seems the most popular process change companies are trying to make is a move to rolling forecasts. The idea of rolling forecasting is to keep the forecast period constant across the year. So, instead of updating forecasts only through the year end, companies using rolling forecasts are looking further forward in each forecast cycle. Many companies believe that rolling forecasts will help them identify trends and gain increased visibility into their future performance.

More Sizzle than Steak?

The purported advantages of rolling forecasting all make intuitive sense – but does it really work? Most companies find it harder now than ever before to predict the future. Will long-term rolling forecasts actually help if the forecasts are mere guesses?

The CFO Executive Board decided to investigate the benefits of rolling forecasts. After many research interviews and a benchmarking survey completed by 120 companies, here are some of our major findings:

1. More drag, same accuracy: Companies using rolling forecasts report less efficient performance management processes and no improvement in forecast accuracy. They update forecasts more frequently, creating additional work for the business and finance, but their forecast accuracy does not improve.
2. Better (adjusted) target-setting: Despite weak efficiency and average forecast accuracy, companies using rolling forecasting are more satisfied than others with their overall forecast output. Why? Well, these companies do report one very important improvement. They have more insight into the drivers of performance, and this allows them to better adjust targets mid-year. Other companies are less likely to make these adjustments, and, on average, less satisfied with their forecasting output.

So there are advantages to rolling forecasts, but they may not be as great as advertised; any business case for change should be realistic about what it will achieve.

What CEB is Doing for its Members:

• Full survey results on rolling forecasting: CFO Executive Board members have access to the full results of our rolling forecasting benchmarking survey.
• Improve Forecasting Capabilities: Finance Leadership Exchange members can visit our Forecasting Improvement Resource Center to improve your current forecasting capabilities, transition to a rolling forecast, and quickly make resource allocation corrections in response to business volatility.
• Forecasting Process Benchmarks: Finance Leadership Exchange-Elite members can review these forecasting process benchmarks, and learn how one company migrated to a rolling forecast.
• Best practice in rolling forecasting: CFO Executive Board members can replay our webinar with Eli Lilly’s Head of Planning discussing their transition to a rolling forecasting process.

For further information on this or related topics, please contact Myles Vander Weele.