Avoiding insanity in forecasting
pharmafile | July 12, 2010 | Feature | Sales and Marketing | forecasts, marketing
The definition of insanity as ‘doing the same thing over and over again and expecting different results’ – is now well established, but this hasn’t made this madness any less commonplace. In fact, based on this definition, there appears to be a fair share of insanity in pharmaceutical marketing and forecasting!
One of first problems with forecasts is how they frequently become divorced from strategy. It is generally understood that forecasts should reflect brand strategy, yet in practice the two commonly become separated. Marketers often seem to move through the review process changing the strategy, but somehow not the forecasts that run alongside it – or worse, management tell them that they like the strategy, but need to see higher numbers, with the result that the forecasts change without any adjustment in the strategy which is meant to be delivering those results.
If we build forecasts that are solely based on what might be regarded as typical for a given situation (e.g. ‘third to market product with X attributes in a given therapy area’), rather than trying to demonstrate the financial uplift contributed by the proposed strategy, then we are indeed ‘doing the same things and expecting different results’.
If we are to retain an element of sanity in our strategic planning, then we must accept that the plan itself and the forecast that goes with it are interdependent, and we cannot adjust one without truly adjusting the other.
Adding an additional layer
There is a huge difference between a base (what’s typical) forecast and a ‘strategic’ forecast, and it is important to understand this. A strategic forecast helps the marketer make decisions about which strategy to pursue, whereas a base forecast is really about using the ‘safe’ forecast to resource the business and manage shareholder expectations.
Base forecasts should be based on what is typical and consequently they will commonly align with investment analysts using historical analogues. What they don’t do is enable managers to understand what strategy they should choose, for example when launching a product to maximise sales growth and ROI. This limits them to forecasting ‘inside the box’ of what typically happens and so what is typically done.
If we want to be able to value the possible uplift from different strategic approaches we could take, and then make the best possible business decision, we need to add another layer to our forecast: The Strategy Layer.
Evaluating different strategies
There are various forecasting techniques which need to be brought into play. The technique that is most underestimated, and with which marketers feel least comfortable, is the hypothesis-driven forecast. Inevitably marketers are reluctant to hypothesise, sometimes viewing it as ‘pulling numbers out of the air’ – but in truth, the well informed human brain is very good at drawing fast conclusions with only slices of information, and often our first-pass opinion about something is more accurate than many believe, a subject expounded on by Malcolm Gladwell in his bestseller ‘Blink’.
It is often better to place an assumption in the model that enables you to move forward with the process, than let every unconfirmed piece of information stop the forecasting process until you get the actual certified information.
Those hypotheses can then be validated by relying on past experience, conducting primary and secondary research, using analogue analysis, or even running a conjoint analysis.
However, as these hypotheses get tested, the forecast may change. And that is where there needs to be flexibility in the strategic plan, because to change one and leave the other unchanged is, as we shall see, madness.
Diligence and politics
Marketers will typically be asked to present their plans and forecasts to senior management. When this happens, they will be scrutinised on strategic matters, and asked if certain things could change.
Often this leads to tweaks – or even major changes – to the strategic plan. Unfortunately, this may not necessarily result in whoever is doing the forecasts – and it may not be the same person – changing them accordingly. So the strategy changes but the forecast doesn’t.
This is something which must be laid at the door of the marketing manager’s own diligence. However, often they don’t actually know which parts of the plan are contributing what to the forecasts, so they then struggle to quantify what a change in the plan will mean to the end result. So rather than changing the forecast and then being challenged as to why they have changed it by the particular amount, the common approach seems to be to do nothing.
But the blame cannot always be laid at the marketing manager’s door. We often see another, politically-driven situation arising later in the planning process, when the plan has been submitted and the forecast sign-off is later. At this stage, senior managers are sometimes guilty of saying that they are happy with the plan, but want an extra £X million on top – which can be, and often is, an unrealistic expectation against the plan as it stands. It just doesn’t make sense to demand more from an unchanged plan. Changing the forecast to fit expectations, rather than what is actually achievable, makes the situation particularly difficult.
What can the marketer do at this stage? Simply saying “I don’t think this plan will deliver it” will not wash if they have not made the link between the plan and the forecast robust enough to make a business case.
Red Lines
The solution is to make sure that there are red lines between each element in the plan and the forecast. It’s the classic ‘breaking down the elephant’ situation.
First, you have to bear in mind that there is a baseline which is going to happen anyway – even if the marketing team went on holiday and never came back.
Amazing as it sounds, the company would still be selling a certain amount, due to environmental changes, or rollover from past initiatives, existing equity, and so on – and that is sometimes higher than marketers like to admit. Once you have established that baseline and trend it forward, then you can start to identify the amount by which the marketing strategy itself is going to add to that baseline.
We call this the ‘quantified marketing challenge’ – in other words, the gap for marketing to fill. If you have positive underlying growth, this is a smaller part of the forecast. So already we have narrowed down the focus point for where those ‘red lines’ need to start to be drawn.
You can take that quantified marketing challenge, and think about how you are going to actually deliver it. This is where the patient-flow based approach comes into play, determining where in that flow we will be able to leverage more patients, or increase value per patient. Then we can look at what the critical success factor for doing that is at each level.
If your forecasts are long-range, then you need to validate what you think can be achieved with analogues to quantify the uplift that certain critical success factors (CSFs) can be relied upon to achieve, i.e. examples where other companies have used similar strategies.
So, for example, historically there may have been two products in the market, and both of them went generic, but one of them may have put in place some sort of price promotion strategy. You would be able to see the impact they managed to achieve with this strategy versus the one which didn’t pursue that strategy.
However, if you are creating a shorter-term plan – an annual plan, for example – you can take the CSFs and go one step further, breaking them down into SMART tactical objectives, which can in turn provide an even more detailed part of the forecast.
You may have three tactical objectives for achieving one critical success factor. Being SMART, these are by their nature measureable, unlike the overall critical success factor, so you can start to draw those red lines between specific elements of the plan and the forecast.
So for example, one might be to go from 10% to 20% of GPs with a specialist interest (GPSIs) prescribing your product first line, by the end of the year. You can easily then look at the proportion of scripts that GPSI might represent and how many more scripts there would be in first line than in second line.
You can then quantify what that sort of uplift would look like overall for your sales. By doing this for each tactical objective, we can then add them together to see the value of the CSF they relate to – which feeds straight into the forecast. Better still, if you take the time to estimate the cost of the initiatives required to hit the tactical objective, you can then see the ROI by tactical objective and CSF and optimise accordingly.
Then if management say they want a further 10% sales growth, you can objectively show them how much more budget will be required and where the growth would come from. Your plan becomes completely defendable, because you have that direct link – the red line – between the plan and the forecast. Welcome to being bullet proof!
Tough Negotiation
The political element to agreeing the forecast is a triangulation process which will always be there. Traditionally, local affiliates want a low target so they can hit it and get a bonus; global wants a big target, because the bigger the brand overall the better they are seen to be doing. So there is this conflict of interest, which is always the subject of tough negotiation that requires objectivity for a harmonious resolution.
Of course, rewarding performance tends to be based on the forecast, not the plan – it’s the sales you hit against forecast, not how well you deliver the plan that gets measured.
However, there is an argument that if you put your plan together properly and you’ve done all the right things, then even if you don’t hit your forecast numbers, you are in a position to defend yourself and point out that, given the evidence, you made the right decisions. If you can tie your plan and your forecast together accurately and demonstrably, you are less likely to find yourself in deep water in the first place, and if you do, you are better placed to defend yourself.
Assuming that you remember to alter your forecast when you change the plan prior to sign-off, then you are most likely to end up with the task of convincing senior management that the plan that they have already accepted needs to be revisited if they want to change the forecast figures.
This is so much easier if you can demonstrate in your own forecast the contribution that each critical success factor – or tactical objective if you can drill down that far – is making to the forecast figures. You are likely to need to ask for more budget to achieve revised forecast figures, and being able to show you would spend it effectively is enormously important. If you have the evidence about exactly what is required to give a particular uplift to the forecast, it is a much easier task to prove that he plan needs to change.
Equally from a global perspective, senior management can have faith in the wrap-up figures they are receiving and reporting on. It’s a classic win-win.
The world of pharma marketing can sometimes seem a bit crazy. But good, robust, scientific discipline can bring sanity to the negotiating table, and end up with strategic plans which deliver accurate forecast targets. It’s time for a new Age of Reason.
Alex Blyth is head of marketing sciences at The MSI Consultancy. He can be contacted at ablyth@msi.co.uk.
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