Missing Targets – The Challenges of Good Forecasting

The United Kingdom National Audit Office recently released a very interesting report on the forecasting processes in government.

What initially caught our eye was the comment accompanying the release of the report:

Departments generally treat forecasting of future spending as little more than a technical activity, of limited relevance to financial management.

In fact, high quality forecasting is an indispensable element of project planning and implementation. We have seen many examples over recent years of government projects where weaknesses in forecasting have led to poor value for money. A first step towards improving the quality of forecasting would be increased transparency and scrutiny of forecasting and more concerted action at the centre of government.

Amyas Morse, Head of the National Audit Office

The report contains a litany of financial excess that can be linked to the absence of mature and reasonable forecasting frameworks.

Whilst it is self evident the report makes the valid point

Poor forecasts of aggregated expenditure can lead to late identification of under or overspending and rapid, poor value-for-money responses.

Interestingly – as an incentive – the report notes

HM Treasury has announced that departments demonstrating excellent financial management – including accurate aggregate spending forecasts – would be rewarded with greater budgetary freedoms.

The report forlornly observes that poor forecasting is an entrenched problem.  As to why that is the case it suggests:

  • Decision-makers need greater understanding of forecasts to provide effective challenge and manage risks.
  • When decision-makers need to introduce new interventions quickly they sometimes fail to recognise and manage the risks this creates for the quality of forecasts.
  • ‘Optimism bias’ is a significant problem, with analysts concerned about the pressure to provide supportive rather than realistic forecasts. 
  • There is often a weak relationship between analysts and finance staff, increasing the risk of poorly informed budgetary decisions.
  • There is insufficient information to assess the quality of departments’ forecasting.

The report is an excellent reminder of the importance of forecasting for good cost management.

The report’s release was accompanied by a study undertaken by Deloitte on best practice private sector forecasting approaches.

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