In this episode of The Strategy Podcast, I want to focus on the sixth mistake I see companies make as it relates to strategy execution. And this is a problem of focusing management on the noise and not on the signal.
And this happens inadvertently, it’s not intentional, but it’s driven by the way we do the planning and then the way we do the follow up analysis on how did we do versus the plan.
And this particularly happens in places where we make detailed forecasts and detailed budgets, particularly at long timeframes. So you’re looking at an organization that’ll be planning 12 months out, but getting to a very extraordinary high level of precision as to what the sales forecast is and what the manufacturing forecast is and those that are then maked up into a highly precise budget that’s going to need to be completed.
And then, as you get trough the year you end up having to go through this of analyzing why aren’t you on plan?
And then doing all this work to explain the variances when reality is its the amount of error you have in your forecast that matters.
So, if you’re within the standard error on the forecast, you shouldn’t be having to do a lot of variances analysis.
Because that’s within the range of what’s expected. But when you have a very precise number instead of a range you end up having to do all of this work on the back end to do this variance accounting on the front end you came up with all this work to come up with a very precise number when reality is you’re giving the amount of uncertainty in the world, there’s only a range you could actually be expected to achieve.
And actually planning in ranges as opposed to planning in precise numbers would be a much more effective way in helping the organization figure out, when its focusing on signal and when its focusing on noise. When you’re dealing with all kinds of levels of false precision, your in the noise.
And this can be extraordinarily time consuming and distracting and it ends up being very discouraging, disheartening to people who know they’re actually doing a false level of precision in the planning, and then a false level of variance accounting.
Or variance accounting gets a falsely precise plan that’s just disheartening for people and make work for people. They know that. So don’t let them fall into that trap of planning and counting and tracking at a false level of precision.
Be very careful about that and make sure that you don’t overly… ask for overly precise forecasts or overly precise budgets.
This is The Strategy Podcast. I hope this has been helpful and useful to you in your work. I’m Alex Nesbitt. I’ll see you in the next podcast.