By Bill Fotsch
Many businesspeople think that the best way to get great performance is to link compensation to results—in other words, set up an incentive plan.
Incentive plans can be useful tools, particularly if they are thoughtfully developed and applied. But here’s a far more powerful method of improving results: ask your organization to take responsibility for forecasting.
Forecasting empowers people. It clarifies responsibility and priorities, thereby encouraging cooperation. It gets the team thinking about cause and effect—what they can do now to improve future results or avoid some identified risk.
And it pays off in all kinds of ways, expected and unexpected. Some examples:
A manufacturing company I worked with focused on job margin dollars per month, meaning shipment revenue minus direct labor and materials. When the team began weekly forecasting, members naturally started figuring out how to improve margin dollars on each job and how to get more jobs done in a given month. Ideas came from everywhere: ways to avoid rework, ways to save on materials, and so on. etc. Variances between actuals and forecasts, both good and bad, led to more learning and further improvements.
An engineering services firm focused on revenue per paid hour, as this metric drove its financial results. Here, too, employees began thinking about what they could do to improve outcomes. But then came a big challenge: two companies representing more than 70% of revenue substantially reduced their volume. The forecasts revealed the inescapable truth that the firm needed new customers. Although some employees weren’t particularly comfortable taking on a sales role, they did so. Sales soared.
Another client has an HVAC parts supply business. Each of the company’s seven branches updates its profit forecast weekly, and everyone sees the forecast of every branch. So not only do each branch’s employees think about how to improve results, they also see what their colleagues at other branches come up with. This company recently established an employee stock ownership plan, or ESOP. Now when it updates the profit forecast, it also updates the valuation, which is based on a multiple of prior profits. As you might imagine, this really brings the ESOP to life.
Like most valuable endeavors, forecasting takes practice. But you can get started just by trying to forecast next month’s results. Over time, stretch your forecasting efforts to several months out. When your forecast is consistently close to your actuals, you know you have the business under control.
Jack Stack once said that a company that can forecast its future controls its destiny. He’s right. Incentive plans can be good, but forecasting is better.