Estimates are, simply put, numerical assumptions. In strategic planning, we must deal with a variety of estimates. Some of these estimates are partially under our control (such as our sales number for the coming year) and some of them are completely out of our control (such as the growth rate in the domestic economy).
In strategic planning exercises, I often notice that participants are troubled by estimates. Some attempt to side-step their discomfort by avoiding the use of estimates, while others make estimates but make mistakes in their treatment in planning.
Those who avoid the use of estimates in strategic planning are pretending they are avoiding error. Nothing could be farther from the truth. The underlying reality of many estimates is critical to proper strategic decision making, and by avoiding their use, one inadvertently commits the error of pretending that no estimates are needed – and that none have been made. This is often covered up by the use of the assumption that nothing will change, or by the use of naïve projection (the assumption that past trends will continue in the future). By pretending that no estimate has been made, the transgressor opens the planning process up to some of the most common causes of assumption errors, which can lead to nasty surprises.
The fear of estimates lies rooted in the fact that we treat numbers differently than other data points. Some fear to quantify assumptions because quantification implies a certain type of accountability, which only adds to the stress felt when making decisions using uncertain information. While this higher level of accountability does exist, to some extent, it is not something to be avoided – especially in a learning organization. Treated properly, numerical assumptions create a greater opportunity to learn and hone one’s predictive skills, which is a very desirable result in strategic planning. When people seek to avoid the accountability of estimates on strategic planning homework, it’s a good idea to point out gently – but firmly – that we will have the estimate requested, but that no one will be punished for making an incorrect prediction.
Another issue noted above is when estimates are treated like facts. Some estimates – notably sales forecasts – are notoriously unreliable, and should be treated with great caution. Just because someone has quantified their assumptions does not mean that the assumptions have taken on greater weight or veracity. What it does mean is that you have the valuable ability to monitor the assumption for correctness and make necessary changes in your plans if the assumption turns out to be inaccurate.
In my experience, one of the greatest tools for managing and using estimates is systems thinking. Simply put, this approach to making assumptions calls for us to formulate a simple (or sometimes not so simple) flowchart of the variables that might cause numbers to change, and use this flowchart to test and often improve upon the numerical assumptions we are using.
How do you make the estimates called for in your strategic planning? Do you notice any of the errors identified in this article? What steps might you take to reduce the likelihood of these errors? To learn how success can sometimes lead to assumption errors please click on success.