Does forecasting have a future?

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Future of forecasting illustration created for Director

In this age of economic and sociopolitical turbulence the work of professional prognosticators is far from easy. Director asks the experts how they are raising their game

Economic uncertainty has become a perennial certainty. Surprise election results now fail to surprise. Forecasting consumer behaviour has never been such a tricky endeavour, while the Foreign & Commonwealth Office’s list of high-risk territories shows no sign of shortening any time soon. As British businesses are forced to operate in an increasingly turbulent world, we ask experts in five fields what they’re doing to make their proverbial crystal balls a little less murky.

Politics
The pollsters failed miserably to predict the outcome of the past two UK general elections, the Brexit referendum and the US presidential election. It’s tempting to blame the influence of fake news posted on social networks, given that allegations of foreign interference via such media are rarely far from the headlines. But Ian Goldin, director of the programme on technological and economic change at the University of Oxford’s Martin School, suggests that other forces are stronger.

“The growing extremism we’ve seen is part of a broader set of factors, of which the web is an amplifier, not a cause,” he says. “Change is accelerating and our social-security safety net is weakening. People are getting left behind more quickly and insecurity is growing. There is a distrust of authority and expertise. Because house prices, rents and transport costs have increased so much relative to their incomes, people are getting locked out of dynamic cities where unemployment is low, pay is relatively high and citizens are more comfortable with change and immigration.”

So where does that leave those whose job is to gauge public opinion and forecast electoral outcomes accordingly?

“Predicting turnout, especially among young voters, has been very difficult. Empirical models that worked in the past are simply becoming redundant,” admits Ben Page, chief executive at Ipsos Mori. “Like aircraft designers after every plane crash, the pollsters review what went wrong and make adjustments, but there is no magic bullet.”

Perhaps there’s no need for one anyway. Page notes that a study of opinion polls across the world shows that they are, in general, actually becoming more accurate.

Economics

The playwright George Bernard Shaw once said: “If all economists were laid end to end, they would still not reach a conclusion.” More than 120 years after he co-founded the London School of Economics, his wry observation has lost little relevance.

“Global connectivity, political uncertainty and the increasing complexity of financial markets have made the already hazy task of economic forecasting even harder,” says Tej Parikh, senior economist at the IoD. “Although technological advances such as big data analytics offer them the opportunity to capture more granular information about economic behaviour and trends, businesses will always have to be agile.”

Paul Hollingsworth, senior UK economist at Capital Economics, agrees, noting that their profession has “taken a bit of a beating in recent years” for its failure to predict, among other things, the 2007-08 global financial crisis. “More emphasis needs to be placed on possible ranges of outcomes and the associated probabilities, to enable businesses to plan for the worst but hope for the best,” he says.

Andrew Goodwin, lead UK economist at Oxford Economics, believes that “a premium on adaptability” is the smart way forward. He explains: “We find that the best approach is to combine sophisticated tools with expert insight and to identify alternative scenarios.”

Parikh, meanwhile, points to the value of “stronger intelligence-sharing and collaboration”, especially among SMEs. Given that the Office for Budget Responsibility has dropped its 2018 GDP growth forecast from 1.6 per cent to 1.4 per cent, calculated circumspection – or what he calls “stress-testing organisations against an array of macroeconomic scenarios” – seems wise advice indeed.

Global risks

“In many respects it’s becoming easier to assess business-related risk owing to the increasing accessibility of open-source information and intelligence,” says Phil Cable, co-founder and CEO of risk management firm Maritime Asset Security and Training. “Global competition has forced businesses to spread their wings and trade in places where they wouldn’t otherwise go. But assessing personal risks and employees’ safety, security and health concerns in places where western standards are limited is still challenging.”

The Ipsos Mori Global Business Resilience Trends Watch 2018 survey, conducted in partnership with International SOS, revealed that 42 per cent of organisations had altered the travel arrangements of their employees in 2017 because of risk ratings pertaining to security threats and natural disasters.

“We approach personal risk using what I call the ‘family test’,” Cable says. “Would I send a loved one to a given destination without doing X, Y and Z first?”

International SOS’s travel risk map (travelriskmap.com) is a good reference point for those feeling cagey about travelling overseas on business. But even when you’re working in the relative safety of a UK office, instability in remote territories can have a disruptive effect on your day-to-day operations.

“There are more participants in our lives now – whether they’re businesses, individuals or countries – and there’s more and more complexity,” Goldin says. “We’ve moved from a world in which maybe

200 million people were connected in the late 1980s to one in which more than six billion people are connected. The silos we used to work in no longer apply. We can sell to places anywhere in the world, but there’s a downside – a pandemic can now cause a financial crisis, for instance. Hurricane Sandy, had it been bigger, could have led to a global crash.”

We should not, he warns, expect the pace of change to diminish any time soon. “Our institutions are evolutionary, but what’s happening in commerce, in real systems, in flows of data and finance – is revolutionary by comparison. And this means that the regulation we have, the systems we have, the box-ticking exercises we have in risk management committees are increasingly unfit for purpose.”

Goldin continues: “Diversification is a very effective hedge against shocks. That can be applied to goods and services – what you produce and how and where you produce it – while the supply chain is another channel for diversification. Don’t be dependent on one supplier, so that a flood in Thailand or a strike in Portugal could put you out of business.”

Consumer behaviour

Forecasting how the public might spend its hard-earned cash is a far better-informed exercise than it ever has been. So says Steve King, co-founder and CEO of Black Swan, a firm that predicts consumer trends using what he calls “the world’s most advanced database of consumer thought and opinion” – aka the internet.

“Never before have we lived in an age when so many people have shared so much information about themselves, or when this knowledge has been so readily accessible,” King says. “It’s going to be incredibly interesting to see how the development of disruptive connected technologies such as the internet of things will change our behaviour in unexpected ways.”

To fully exploit the sheer volume of customer-related information to be found online, real-time monitoring and instant responses are imperative, he adds. “Micro-trends are effectively created and destroyed almost overnight now. Brands must start moving with the times and away from qualitative future-gazing. They need to adopt new platforms that continually analyse social trends and offer quantifiable, robust predictions powered by artificial intelligence and machine learning.”

A “softly, softly” approach, meanwhile, is recommended by Director columnist Will Higham. He’s the CEO of Next Big Thing, a consultancy that specialises in analysing consumer trends.

“I advise my clients to do what Lego has achieved so successfully over the past few years: incremental innovation,” Higham explains. “You identify a trend; create a prototype product or service based on that trend; run a quick, low-cost trial; and test the results. If it works, you scale it up. If it doesn’t, you identify a new trend and start the process again.”

Commercial prospects

While no one can rid the business world of uncertainty, the IoD works in several ways to mitigate it, not least of which is its continual lobbying of the government “to get the best environment in place for enterprise”, says its interim director of policy, Edwin Morgan. “For instance, we were the first business group to call for an implementation period after March 2019 so that Brexit isn’t a massive upheaval.”

The IoD also helps businesses to build the kind of structural integrity that helps them to withstand adverse shocks. “While we’re telling ministers about our members’ skills and infrastructure needs, we’re informing our members about political developments to help them plan,” he says. “Our events will cover how, for instance, Brexit might affect areas such as customs.”

CPD for leaders, Morgan adds, is also crucial in future-proofing enterprises. “To this end we’ve just opened the IoD Academy. This is a great new space for running courses on subjects such as how to build resilience into your organisation and how to be in a stronger place when adversity arrives out of the blue.”

It’s clear that, while the forecasters are doing their best to light the road ahead in a fog of uncertainty, for business the famous motto of the Scout movement – “Be prepared” – has never been so apt.

More on forecasting

Why economists know all about the perils of prediction

2018 has lift-off – the IoD’s predictions for the year ahead

About author

Nick Scott

Nick Scott

A former editor-in-chief of The Rake and deputy editor of the Australian edition of GQ, Nick has had features published in titles including Esquire, The Guardian, Observer Sport Monthly and Rolling Stone Australia and is a contributing editor to Director magazine. He has interviewed celebrities including Hugh Jackman, Daniel Craig and Elle Macpherson, as well as business people including Sir Richard Branson, Charles Middleton and Nick Giles and Michael Hayman MBE.

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