In last week’s article, we looked at the “precursor approach” to workforce planning. We saw how using this approach was a great way to split the difference between extensive statistical modeling and relying on “gut instinct.” Here we’ll take a look at some precursors that can be used in conjunction with the first element of a workforce plan: forecasting company growth. We’ll start by compiling a list of some of the common precursors that can be used for forecasting industry and company growth rates. If you’re experienced in economic or strategic planning you know that there are a variety of “leading indicators” that economists use. Below you’ll find a list of leading indicators (both internal and external) that indicate whether your industry or company is about to experience a change in its growth rate. External Indicators (Of Change-In-Growth Patterns) When you look at the economy in general ó and at your industry in particular ó you’ll find certain leading indicators for growth (or shrinkage). Such indicators could be:
- Capital expenditures. “Lead/lag firms” increase or decrease their long-term capital expenditures (buying/orders).
- Purchasing. There is an increase or decrease in industrial purchasing (the Purchasing Managers Index is published by the Institute for Supply Management, formerly the National Association of Purchasing Management).
- Revenue growth.Lead/lag firms indicate revenue growth/shrinkage in their 10k filings.
- Interest rates. Commercial or consumer interest rates are rising or falling (which impacts customers and your firm’s ability to borrow).
- Consumer confidence. Consumer confidence ratings are increasing or decreasing (indicating their willingness to purchase).
- Analyst forecast. Industry analysts project an increase or decrease in sales and profits within your industry (they might be incorrect, but their predictions alone can impact confidence).
- Hiring. Lead/lag firms increase or decrease job postings on their website, or The Conference Board’s Help-Wanted Advertising Index (which measures the placement of want ads) changes.
- Layoffs. Lead/lag firms increase or decrease layoffs (AIRS and other firms report layoffs on a weekly basis).
Internal Indicators of Changes in Growth Patterns (Within Your Firm) Within your own organization there might be several leading indicators or warning signs to watch, including:
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- Business plan. Your firm’s own strategic plan has projected growth increases or decreases.
- Sales forecasts. The long-term sales forecast indicates a future increase or decrease.
- The budget. Your firm’s CFO has projected budget increases, freezes, or decreases for future budget cycles.
- Production. Production schedules and forecasts indicate future increases or decreases.
- Customer orders. Advance sales/orders are increasing or decreasing when you compare this year to last.
- Profit-related precursors. Profit growth or overall profit is increasing or decreasing.
- Revenue-related precursors. Revenue growth or overall revenue is increasing or decreasing.
- Revenue per employee. This ratio is increasing or decreasing.
- Market share. Your competitive market share is increasing or decreasing.
- Percentage of profit from new products. The percentage of total profit that comes from recently introduced products (i.e., those developed in the last two years) is increasing or decreasing.
- Capital burn rate (for small firms). This indicates whether the firm will or will not have surplus funding within a year.
- Overhead costs. The percentage of overhead costs (relative to all costs) is increasing or decreasing.
- Unfilled orders. The backlog of unfilled orders is increasing or decreasing.
- Plant capacity. Percentage of plant capacity utilized is increasing or decreasing.
- Inventory. Warehouse inventories are increasing or decreasing.
Other events and trends that might be useful as indicators:
- The number of products in beta testing or the product pipeline is increasing or decreasing.
- Product development time (time to market) is increasing or decreasing.
- Key senior managers are approaching (or have announced) retirement.
- Key senior managers are buying or selling large amounts of stock.
- Key senior managers change their compensation mix away from cash toward stock options.
Don’t Be Overly Optimistic Many workforce forecasts and predictions are inaccurate because they put an too much emphasis on statistical methods and not enough on common sense. But an equally frequent reason is that HR professionals routinely rely on “straight line” forecasts. To compound the problem, these straight-line forecasts almost invariably predict growth, largely because HR people tend to be overly optimistic and frequently “over-forecast” the positive. This optimism can be a disaster in a fast-changing world, so when working on your precursors, focus on the negative. Spend most of your time and resources trying to develop precursors that warn you of an economic downturn. A surprise downturn is three times more likely than a surprise upturn, because no one is looking for it. And in a downturn you need to layoff people ,which is much more difficult and painful than having to suddenly increase hiring. One last warning: Be careful of sales forecasts as precursors. They are notoriously inaccurate (generally too positive), so track their long-term accuracy before you use them. Conclusion Identifying patterns and precursors or lead indicators are a relatively easy and inexpensive way to turn HR “guesstimates” into logical forecasts. If you are new to forecasting I suggest you first build relationships with people in finance and strategic planning who have experience in identifying leading indicators. They may have already identified those for your firm and industry, and at the very least they will have access to large amounts of forecasting information. One last bit of advice: also look for forecasting “partners” at other companies (obviously non-competitors). By working together you’ll ease the workload and decrease the chance that you’ll be “surprised” by a sudden downturn. Once you completed your business growth forecast, it’s time to move on to assessing how many and what type of employees your firms will need to meet the projected growth or shrinkage percentage.