One of the under-utilized tools in compliance is forecasting. It can be a powerful addition to your risk management process because every business tries to plan for its future. It is a critical aspect of any management of any organization, non-profits, privately owned for profits and, of course, publicly traded companies. It is important that management be able to set out what it opines will happen in the next three, six, twelve and twenty-four months.
Ben Locwin, who has extensive experience within senior leadership teams in clinical and commercial scale pharmaceutical manufacturing and Research and Development has noted this “is really something that the businesses try to wrap their heads around in such a way that they can shunt resources where they think is appropriate in order to meet these future demands. Forecasting really at its heart is an educated guess and really as much as it becomes a reliable model more so and less so a guess, is based on the quality of the input data.” It is a process through which you are attempting to “prognosticate what the future will bring to you”. Unfortunately, forecast models are only as good as the data which are put into them or the GIGO (Garbage In, Garbage Out) Principal.
Forecasting methods are divided into two major categories; qualitative and quantitative. While both methods use past or historical data, in the quantitative method, one would consider past data and evidence to see how certain trends appeared. The qualitative method, tends to be more subjective. It could involve multiple variance factors. You would need to consider how would you document such variances over time and then assign a meaning to them. Whichever approach you utilize, you are using past behavior as some indication of future actions.
Forecasting typically will raise risks (and opportunities) which you might consider going forward. However, it does not assess or monitor these risks. Those are handled by risk assessments and risk monitoring. Locwin cautioned that simply because something is forecast does not mean will occur. Nobel winning physicist Niels Bohr said the following, “Prediction is difficult, especially about the future.” Locwin explained, “Whenever you’re trying to say how something will go, really the best you can do is try to look at past data and try to say what’s going to happen with that. In my prior probabilities, my prior knowledge tells me this, and therefore what will that mean for the final outcome?”
So while today’s lesson on risk in compliance begins with forecasting you should consider the research by Guy Mayraz, who ran a series of experiments at Oxford University’s Experimental Social Science center. The first lesson is the bias towards predicting what people hope will happen. If you want your business to increase, you have to believe your transaction/investment/deal will always make money. After all, have you have ever seen a business plan that was designed to lose money?
The second lesson derived from Phillip Tetler’s the Good Judgment Project and almost sounds like someone channeled their inner Howard Sklar and his maxim of “Water is Wet”. It is that “self-critical, open-minded forecasters do a better job than narrow-minded overconfident ones.” He goes on to further note that dwelling on our own fallibility is not something people do very well; whether it involves hanging out with our friends or on cable news. The result is that “Confident, eye-catching forecasts are the snack food of analysis”. Unfortunately, this is even more true in the business world.
Finally, forecasters must always remember that more than one outcome is possible. A strong possibility may be a possibility but it is not a certainty. One way to overcome this bias is to develop alternative scenarios. Richard Lummis, host of the podcast 12 O’Clock High-a podcast on business leadership has called this the “devil’s advocate” role at the business planning table and that every scenario-planner should create at least two contradictory alternatives to their rosier, positive scenario. Super forecaster Tetlock has noted that “Superforecasting Requires “Counterfactualizing””.
The ultimate point is that in any forecast there must be preparedness for contra-events. Elizabeth Holmes, founder of Theranos, famously said that if you have a Plan B as a back-up, you have already lost. I find that to be worse than not helpful in any setting, particularly the business setting. No matter what your forecasting or scenario planning model shows, prepare for other results. For any Board of Directors overseeing a compliance program or managing any type of risk, it all begins by asking questions.
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