Management Excellence Toolkit-Part 4: Improve Your Estimating and Forecasting Effectiveness
March 16, 2011 by Art Petty Leave a Comment
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Note from Art: Your decisions define you as a leader and a manager, yet we spend very little time in our busy lives finding ways to improve our abilities in this area. This Management Excellence Toolkit Series will help you recognize the challenges and pitfalls of individual and group decision-making and offer ideas on improving performance for you and your co-workers.

Part 1 of this series emphasized the importance of developing, updating and referencing a Decision Journal. Part 2, focused on understanding how we make decisions and how various traps and biases often derail us. In Part 3, we tackled the power and importance of framing situations properly to improve your odds of success. Part 4 focuses on improving estimating and forecasting accuracy by strengthening management and leadership practices.

Let’s kick this one off with the conclusion: poor management and leadership practices make a tough job tougher by introducing pressures and biases that directly impact estimating and forecasting activities.

If these environmentally imposed biases weren’t enough, human nature gets a vote as well. Studies in the field of decision-making have shown, “we are systematically over-confident in our own abilities.”

Consider the unscientific annual BusinessWeek poll results: “90% of managers believe they are in the top 10% of all performers in their firm.”

Another annual survey is taken for incoming freshmen at Harvard, where 75% of the students believe they will end up in the top 15% of their class.

I’m all for optimism. It’s most definitely a beneficial human characteristic and possibly a good defense mechanism for the trials and tribulations of survival. However, it can lead us astray, sometimes in life or death situations.

The Thin Air of Life or Death Decisions:

Professor Michael Roberto in his excellent material on critical decision making uses the Everest tragedies of 1996 to showcase a myriad of decision-making errors that started with an over-confidence bias and literally cascaded downhill into a disaster from there. (Roberto’s content in this segment is based on Jon Krakauer’s article/book, Into Thin Air.)

As a backdrop, several of the expedition leaders in 1996 had only experienced the relatively calm conditions of the past few years on Everest. The leaders had not experienced the worst of the worst on Everest, and we’re lulled into a false sense of security by these conditions and their own recent successes in reaching the summit (a recency effect bias!).

One of the expedition leaders, Scott Fischer, was quoted as saying, “We’ve got the Big E completely figured out, we’ve got it totally wired. These days, I’m telling you, we’ve built a yellow brick road to the summit.”

Another leader, Rob Hall, responding to a worried climber, offered: “It’s worked 39 times so far, pal, and a few of the blokes who summitted with me were nearly as pathetic as you.”

Both Fischer and Hall along with six of their expedition members perished under brutal conditions made worse by a nearly unbelievable string of bad decisions, not the least of which was over-confidence.

Our Own Mountains to Climb:

While most of us are not planning on climbing Everest anytime soon, we have our own metaphorical mountains to conquer in the form of projects, budgets, campaigns and business plans. And unfortunately, we’re every bit as susceptible to the many decision-making traps, including estimating and forecasting errors, that can lead to disaster in life or death circumstances.

Consider:

If the management culture is one that values strict adherence to schedules and reinforces this perspective by punishing those who miss schedules, people and teams naturally add significant padding to their estimates.

For complex projects involving multiple work groups, this padding practice across all of the teams adds up to significantly longer project estimates. And let’s face it, work expands to fill the time allocated for it. The cost, time-to-market (or implementation) implications are huge!

Alternatively, I’ve observed over-zealous executive teams declare a time-to-market mandate without consideration of the project complexities. The pressure on the project teams results in estimates executives “want to hear,” but that have no basis in the reality of the work. As time and cost estimates are missed, the environment tends to deteriorate into one of finger-pointing, excuse-making and general dysfunction

Fear Impacts Estimates:

While fear pushes project estimates out into the future, this same environment likely results in ultra-conservative sales forecasts on one hand and unrealistic cost estimates on the other.

For anyone accountable for revenue and/or expense numbers, you tend to take your cue on these numbers from environmental pressures. I’ve observed managers who felt pressure to inflate revenue forecasts out of fear of being viewed as naysayers and poor team players, while at the same time, deflate expense numbers out of fear of being viewed as not having control over costs.

Fear in the workplace creates estimating and forecasting gamesmanship.

Prior Performance May Be a Poor Predictor:

Much like the recency effect displayed by the Everest expedition leaders, we open additional trap doors for our estimating and forecasting approaches by relying too much on prior performance in spite of changing conditions. The past is interesting, but in times of significant change or distress, it is a lousy predictor of future performance.

Data, Bloody Data:

We live in data-filled world and it’s common to hear management talk about the importance of making data-driven decisions. I’m all for it. After all, that’s why your firm spent countless dollars and suffered through nearly endless schedule delays and cost over-runs to implement the latest business intelligence tools. However, even the best system and the cleanest data cannot compensate for our propensity as humans to seek out information that confirms our opinion and discount or discard information that doesn’t. This confirming evidence trap is a frequent contributor to estimating and forecasting errors.

Six Ideas for Minimizing Estimating and Forecasting Errors:

1. Commit to improving management practices that impact estimating. If you are struggling to gain reliable project or business estimates, chances are there are systemic problems created by poor management practices. To the extent possible, you need to cultivate an estimating and forecasting culture free from fear of reprisal and low in gamesmanship. This includes eliminating practices that encourage over-confidence or extreme prudence. It also includes minimizing fear as a factor that unduly influences estimate development. The best project managers and project sponsors work hard to create a safe environment for estimate development, often serving as buffers between their working teams and the pressures coming from top management.

2. Beware the group effect. Groups tend to be over-confident, and have been shown to take larger risks and offer more aggressive estimates than individuals worki