Revenue had risen 37 percent in 2021, and 2022 was looking pretty good, too. Sure, the US Federal Reserve was choreographing a series of aggressive interest-rate hikes that would likely lead to a significant economic slowdown. But the tech firm’s CEO anticipated that 2022 would bring more opportunities to find new customers and charge higher prices. He told investors the firm anticipated an 11 percent hike in revenue for the year,
and would be expanding its workforce by 20 percent.
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When the economy turns, the results can be painful and
catch firms off guard. In 2022, for example, fully 25 percent
of S&P 500 index member companies missed analysts’ sales estimates—estimates significantly influenced by information provided by the companies themselves. It’s a figure that surpasses even the quarterly miss rates of the pandemic era, when much of the world’s economy stagnated. Companies have botched sales projections before—the bursting of the dot-com bubble in 2000 made many growth forecasts look foolish, for instance. But the stakes were higher in 2022, because desperate companies had hired literally millions of workers to bring about their rosy projections. Today, those same companies have embarked on waves of layoffs and scaled back ambitious expansion plans.
At levels below the executive ranks, people may have an
even rosier picture. Salespeople, for instance, are naturally
an optimistic bunch, says Mark Grimshaw, senior client
partner and member of Korn Ferry’s Global Sales and Service practice. Many will assume that if they closed three massive deals last year, they’ll do it again this year. Too many companies, Grimshaw says, don’t ask hard questions about growth projections. “You have to be able to look more realistically across the board,” he says.
The good news is that there are ways to fix forecasting. First, experts say, leaders need to create a culture where accurate forecasting is rewarded and appreciated. “It isn’t always,” says Grimshaw, who emphasizes that leaders must be firm about this intention. Other experts caution against relying on any single forecast. Combining multiple independent judgments, they say, usually leads to more accurate estimates. The most important fix, and perhaps the easiest one to achieve, is to have someone inside the company—someone not overly incentivized to promote rosy scenarios—who will ask tough questions about growth projections. “They won’t suffer from the same thing salespeople do,” Grimshaw says.
Things seemed so promising for the big tech firm early last year.
Not even 10 months later, the firm was acknowledging to investors, employees,
and everyone else that the growth had never showed up—that revenues had actually fallen from 2021. Instead of a hiring binge, the company began a purge, cutting its workforce by 10 percent while freezing thousands of open positions.
It may be hard to imagine, but even the most pessimistic economists say that the down economy will improve—at some point. But when it does, and enough time passes, experts worry that CEOs and their companies will once again make overly upbeat plans. And that once again, the results of over-hiring and overspending will be catastrophic, as they’ve been during this downturn. “During business cycles there are always those who say, ‘This time is different,’” observes Alan Guarino, vice chairman in Korn Ferry’s CEO and Board Services practice. “Rarely is it really different than previous cycles.”
It’s not entirely surprising that overly rosy forecasts are the norm today. Leaders’ incentives largely depend on optimistic projections. They are essentially obliged to promise growth, and if they don’t, they may not get higher salaries, board seats, or increased prestige. They may also be punished by stakeholders, for whom this promise of growth is virtually as important as actually achieving it. “No one wants
to be the CEO of a company that’s shrinking,” says Matthew Josefy, an assistant professor at the Indiana University Kelley School of Business. This is especially true for leaders of many smaller firms. They have to keep telling a story of meteoric growth, Josefy says, even if prospects seem to be leveling out. Small wonder that
the average CEO’s tenure is six years.
When the tough economy rebounds, will CEOs and firms resume their tendency toward overly upbeat forecasting and hiring?
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Percentage of S&P 500 firms which missed estimates in first quarter 2023, by sector
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