January 30, 2012

Jack Stack, the CEO of SRC Holdings, an employee-owned collection of companies headquartered in Springfield, Mo., has been using forecasting to help run the business since its start in 1983. In fact, forecasting is the key component of playing The Great Game of Business, a business philosophy created by SRC that is more commonly known as open-book management.

Over the years, Stack has relied on forecasting as a way to steer the SRC ship. That’s why, at a recent board of directors meeting, he decided to review the accuracy of the company’s forecasts going back to before the 2008 Great Recession. He dug out the forecast from Jan. 25, 2008, which predicted sales and earnings results through the year 2012. He then compared the predictions to the actual results.

Stack found that the forecasts were more than just good: With an accuracy rate of 96 percent, they were simply phenomenal. “We proved that the system worked even during the roughest economic period of time we’ve had in 30 years,” says Stack.

In fact, due to its solid prediction back in 2008, which was made before the recession was even on anyone’s radar, SRC not only met its earnings forecasts for 2011, it exceeded them, which has positioned the company for a robust 2012.

Granted, Stack admits that his company spends a lot of time and effort on their forecasting models—something, in his opinion, other companies aren’t doing enough of these days. “People aren’t dreaming big enough because they’re spending too much time in the present cleaning up the past and not enough time on developing strategies to get them where they want to go,” says Stack. “In business, you need to be going somewhere, and if you’re not leading people, you won’t get there. Forecasting is about building your own future.”

That’s why Stack says companies need to be forecasting more in a down economy. “You don’t just throw out forecasting because there are periods of uncertainty,” he says, noting that his company has now weathered four recessions over the past 30 years. “The whole idea is that there will be downturns, and developing contingency plans in case there is one—because there will be—should be part of your forecasting model.”

In other words, even if you’re plotting your firm’s growth out of the recession, you should still be thinking about what you’re going to do when another one comes around. But how do you do that? The simple answer is: by accumulating a lot of information about the past, but even more about the future—something that the economist John Nash of A Beautiful Mind-fame won a Nobel Prize for explaining through game theory. “You have to develop a passion to give and get as much information as you can to help you predict the future,” says Stack. “The more forward-looking information you collect, the better your chances are of being accurate.”

SRC tackles this mission with a process it calls High-Involvement Planning: a twice-a-year process that engages each and every one of SRC’s 1,200 employee-owners in helping predict the future of the company.

At a high level, the process includes division-wide presentations where the following template of information is shared.

• Projections about the national and global economy, including estimated changes in key indicators like interest rates

• An analysis of the competitive landscape and where the company might be most exposed to its competitors

• Customer survey data

• The projected sales-and-marketing budget for the company as a whole

• Both 12-month and four-year sales forecasts

• An action plan whereby the sales team plans to make those forecasts a reality

• A discussion of contingency plans: multiple “Plan Bs” for what the company will do if the forecasts aren’t made

But even after all of the information is collected, the process isn’t done. That doesn’t happen until every employee-owner votes on a scale of one to five about how confident they are in the story the numbers are telling. If the voting results show a lack of buy-in—the numbers could be too high or even too low—the process starts all over and continues until everyone has bought into what the future is going to look like. Rather than put the pressure of forecasting on just a few people, therefore, SRC has turned the process inside out. “It’s all about using the Wisdom of the Crowd,” says Stack, referencing James Surowiecki’s best-selling book of the same name. “When you get people to buy into the numbers, they’ll then figure out how to make them happen.”

Clearly, SRC’s 30-year track record of predicting its own success continues to impress even Stack himself. “I once heard someone say that if you can control the forecast, you can control the world,” says Stack.

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Photo credit: Courtesy of Indiana University

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Darren Dahl, Article, forecasting, open book management, Jack Stack, economy, Business Forecasting 2012, SRC Holdings, John Nash, James Surowiecki

Join the conversation ( 1 )

• Pamela Bauer 4 months ago

  

  So very true - "People are spending too much time in the present cleaning up the past". I am glad to see you writing here. I am a big fan of Open Book Management. I work with small business owners and have been preaching the benefits of this philosphy for their business and personal bottom lines for years. Especially now with everyone trying to do more with less. Thanks for the post