Embracing Uncertainty in Forecasts and Budgets
In today’s business environment, deviations from expectations are punished harshly, not only for underperformance but also for erratic over-performance where companies are seen to be surprising even themselves. Poor business visibility and smaller supply-chain buffers make it increasingly difficult to set and manage expectations as well as to create consistent and fair incentives.
Past patterns of ignoring uncertainty – with single-number forecasts – cause many dysfunctional behaviors in organizations. This Executive eBriefing shares some recent experiences that illustrate the benefits of embracing uncertainty early in the budgeting process. Leading companies are able to move beyond "point estimate arm-wrestling" and instead develop a shared understanding of underlying uncertainties and anticipated variances in performance. By untangling the dual roles of a budget as both a performance target and a management forecast, these early adopters are able to set expectations better and actively balance the risks of investor surprise.
