Forecasters Beware

Forecasters Beware

Shell's experience shows that scenario planning can work, but it has pitfalls. Among the most common is the tendency to treat it like forecasting. Forecasting is predicated on a stable past, and suggests a single, predictable future. Forecasters simply take the current trends, tweak them a little and run the numbers out farther into the future, sometimes adding a high and low case just to cover their bets. Deloitte Consulting's Charles Thomas notes that the problem with forecasting is the underlying assumption that the future will look a lot like the present; only the magnitude of the key variables may change.

A company might believe that the market segments in play now will continue basically unchanged for another decade. To build a high or low case, you would construct a forecast by underpopulating and overpopulating a market segment with potential customers, says Thomas. "What you're not going to see," he adds, "is that this political movement is getting started, here's a group of people that has become wealthy overnight because of a bubble in the stock market, and these political sanctions went into effect. And bang, your segment just disappeared completely." Scenario planning might help you prepare for that; extrapolation won't.

For CIOs, scenario planning can provide that more complete picture. It can help them make long-term IT-related decisions, better align IT systems and infrastructure with the company's strategies, achieve buy-in from top management and in-house clients for IT spending, and gain a more authoritative voice in company strategy.

Indeed, some analysts believe scenario planning can be used particularly effectively in just such relatively short-term planning—and that's particularly true now that the rate of change in business has increased so significantly. Consider how deregulation and the Internet have combined to transform the utilities industry, putting a premium on fast-paced energy marketing and trading. Says Amy Oberg, manager of competitive intelligence and future foresight at Enron Corp. in Houston: "The tactical is becoming the strategic because of the compressed time frame."

But don't count on it to generate the numbers needed to build a business case for a technology investment. Although it is rigorous, scenario planning tends to be more qualitative and strategic than quantitative: It can help you choose which path to take, but not how fast you'll get there, or how much it will cost you. And if you're looking for a business case, you'll still need the more traditional return on investment, internal rate of return and other standard tools in the project planning toolbox.

This article was originally published on 06-01-2001
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