False certainty

Why budgets and forecasts can be a dangerous distraction when running a company.

From Oblique Strategies.

There are things that happen in both large companies and startups that are so ingrained that they rarely get challenged. Some for a good reason — they work really well and don’t need any changes. Repeatability is efficient. I’m going to make the argument that one of the most commonly used processes is not only inefficient, but can be dangerous to use. I’m talking about budgeting and revenue forecasting. Cost budgeting and liquidity planning (to not suddenly — and unexpectedly — be bankrupt) is a separate thing, so let’s put that to one side for now.

More specifically I’m referring to long term projections (6 months+) that have the aim to show what a certain outcome is going to be.

The main reason why I don’t like them is that they are almost always wrong. And what’s worse is that while everyone knows that they are wrong, people take comfort in having them in place. It feels like you have a plan — and one that you can communicate to others (investors etc) because it is written in a language that they know and appreciate. They can validate your plan. They know it is most probably wrong too though.

This is a strange dance that we all do. It’s a bit like feeling comforted by having a map in your hand, even when you know the map is wrong. It doesn’t really make any sense. A map which is half wrong becomes all wrong if you don’t know what part of it can be trusted.

This creates false certainty. And that is dangerous. Because false certainty may make you too calm about things that aren’t happening (“we haven’t budgeted that happening until August anyway”), and too worried about things that aren’t happening straight away (“we’re coming in below our forecast for January”). Neither is good.

A hard-liner would say that coming in under your projected results is an underperformance. Fire the VP of Sales, and so forth. That could be the case. It could also be that the projections were incorrect to begin with and now it feels like a cop-out to change them. But what if the market changed since you made the projections? What if key staff left? What if you had assumed certain metrics and… you were just wrong about them? It happens all the time. What if any form of volatility occurs, more or less? Then the projections are going to be wrong because of reality occurring. A reality that you could not foresee. But that doesn’t make it wrong. Wrong, however, is steering your company on the assumption that whatever figures you jotted down six months ago is a more valid benchmark than the reality that you are now experiencing.

Now you might be thinking “that’s fine and dandy — budgets and forecasts are never perfect — but they are better than nothing”. Well, I’m not too sure about that. I wonder how many projects have been prematurely cancelled due to them not living up to their initial expectations. Closed down because of a lack of vision, perseverance, or sometimes just a complete misread of the market.

In larger corporates, this misreading is often done by people that aren’t even running the business. I’ve seen this so many times. A fool — using a foolish method to begin with — making foolish assumptions that then become an unhittable benchmark. The project is deemed a failure because a pencil-pusher put the wrong figures in Excel.

Projects get shut down because the corporates are certain they didn’t live up to their expectations. Or rather, they are falsely certain. Which doesn’t make them wrong by default, but it puts them at great risk of being wrong. Or at the very least, making the right decision but for the wrong reasons.

I’ll be returning to this theme in my writing going forward. It is something that I’ve thought about a lot, and the search for a better way seems like a challenge worth taking on.