06 Apr 2023
In part one we uncovered the first five of our ten keys to effective assumption management. In this final part we discuss the final five keys to help you get a better understanding of what effective assumption management looks like. These keys will equip you with the knowledge to get you thinking about how to improve the management of assumptions in your organization.
6. Keep them as aggregate as possible and as few as practical
There is a danger that assumptions can proliferate so much they become unmanageable. The key is to keep them to what is actually driving the majority of outcomes using the 80:20 rule. If you are going to invest time in quantifying, time phasing, measuring accuracy and doing the RCA, the more assumptions there are, the more time consuming it will be. Start with the thinking behind the strategy to get to the core underlying assumptions and keep them at that higher level. Once the right level of assumption review is agreed, it should be supported by identifying opportunities and vulnerabilities associated with those assumptions. This should in turn drive the right level of contingency thinking (and planning) to be prepared for the inherent uncertainty of those assumptions.
7. Pro-actively run experiments to test the validity of assumptions
Assumptions, by definition, are uncertainties in the business. They are our best guess and should be routinely tested and validated. For example, when I was in industry, China was under my remit, and the local management team identified that its major competitors had sales teams of 2,000 people, while we had only 800. As a new regional manager, I was not inclined to agree that they should increase their sales team to 2,000 without further evidence, so I recommended an experiment. We doubled the number of salespeople in one small and discrete sales territory and measured the results over a six-month period. As it turned out, doubling the number of salespeople did increase sales, and the extrapolations to the rest of China validated the return on investment. Sometimes you just have to bite the bullet to test and drive out the 'urban-myth' assumptions.
8. Continually review assumptions and adjust as you know more
The business landscape is continually changing so assumptions are also continually changing, as does their impact on company plans. The marketplace is dynamic with consumer choices moving constantly, competitors changing tactics to get a competitive advantage, innovation strategies deliberately being targeted at being disruptive, technological changes, and even continually-evolving government legislation. What is today's prime lever for being competitive, could be tomorrow's Bakelite, typewriter, landline telephone, silver-based film, record player, CD, or VHS. Assumptions should be part of every monthly IBP Review allowing you to understand the things that are changing and emerging now, which could have an impact on future plans.
9. Understand that not all assumptions have the same time horizon or level of granularity
There needs to be a building-block approach to assumptions, which becomes more granular the closer we get to ‘today’. For example, when designing assumptions to support the demand plan, it often falls to Sales to not only build the assumptions, but also to forecast two-to-three years out. In practice this does not work well. The intent should be for Sales to own the shorter-term customer plans plus the promotional programme; Marketing should then own the assumptions around new product launches and product deletions, as well as the brand plan assumptions out two-to-three years. If there are category managers, they would own the category assumptions. Both Marketing and Category would view the world at a more aggregate level and over a longer horizon than the Sales assumptions. The Demand Review would then ensure congruence over the changeover of each time period, to ensure there are no step-changes from one level to the next.
10. Tie assumptions to major events and/ or periods of time
Peter Drucker suggested that forecasting the longer-term future is impossible, and recommended that, “The best way to predict your future is to create it.” Plans therefore are about creating the future, and then tying them to ‘events’ is another way to apply the 80:20 rule. If these events and specific plans are agreed, the company has highly likely addressed the 20 per cent of uncertainties that creates 80 per cent of the impact.
Typically, there is an annual rhythm to a business, such as Christmas, Easter, and School and Public Holidays. There are also other events that businesses may need to consider in their assumptions such as government elections, official interest rate adjustments, excise tax adjustments, major sporting events, and so on. If you think of these as events with specific ‘due dates’ you can define assumptions around what you think will happen, and what the bandwidth of uncertainty might be.
For more information on assumptions download our white paper here.