Like a local weatherman, many high-tech CFOs are under fire for making bad financial forecasts. Predicting quarterly results isnt easy, but savvy consulting firms have built strong internal systems to make more accurate—though certainly not perfect—sales forecasts.
Armed with those forecasts, smart CFOs pull no punches as they manage financial expectations on Wall Street. Just ask Inforte CFO Nick Padgett. During a recent conference call with Wall Street analysts, Padgett did the unconventional. He digressed from his prepared text to give analysts a reality check.
Padgetts comments deflected criticism that the Internet strategy firm was too conservative in its financial outlook.
“We tell you what we think is right, not necessarily what you want to hear,” Padgett told analysts. “But our too-conservative guidance over the past three quarters has saved us both from external embarrassment and from internal bad decision making.”
A Triple Play Indeed, for the last three quarters, Inforte met its income estimates when most of its competitors missed. Firms like Lante, Scient and Viant have slashed payrolls and shuttered offices, while others like MarchFirst and US Interactive have filed for bankruptcy.
Meeting financial expectations is not an exact science. While many solutions providers have some type of systematic forecasting models, the more successful integrators seemingly have evolved forecasting into an art form.
Like Inforte, computer services giant EDS Corp. and solutions provider Cognizant Technology met their forecasts for Q1. EDS posted its eighth consecutive quarter of double-digit growth in EPS; Cognizant its fifteenth.
Secret Formula In their attempts to make accurate forecasts, all three companies tightly manage their sales cycles, including potential business from new clients as well as existing ones.
“We forecast in three areas—projects under way, follow-on phases to existing projects and net new projects,” says Infortes Padgett. “Sales is the key. It drives all but the first area.”
Its forecasting model has allowed Inforte to remain profitable. The company has a positive cash flow and has avoided layoffs. Unlike most of its rivals, Inforte last July refrained from raising revenue estimates and bulking up its staff, because it saw some deceleration in its revenue forecast.
“We didnt know it then, but the weakness was the total bursting of the dot-come bubble and the related decrease in urgency from Global 2000 companies,” says Padgett.
The company then estimated Q4 revenues below Q3s level and followed that with a substantial cut in its Q1 estimates, because its forecast was indicating “that the economy may be in far worse shape than most people imagine,” Padgett says.
In addition to bringing in new business, the sales teams at Inforte, EDS and Cognizant provide intelligence about changing market conditions—something companies with little or no sales processes—like Scient and Viant—were not able to do.
In addition, all three companies use more than their sales forces to gain business. EDS, for example, has established a Global 1000 enterprise client program to expand sales to current clients.
“The more business we get from existing clients, the better our visibility,” says Bob Segert, managing director of corporate strategy at EDS.
Cognizant similarly has account managers on-site at about two-thirds of its clients. Their job: to expand the existing client relationship by identifying additional opportunities.
For solutions providers, keeping track of their sales cycles and delivery systems is an extensive task in which all relevant personnel participate, either by inputting data—which is updated constantly—retrieving it, or both. Noncompliance isnt tolerated.
EDS, for example, wont pay commissions to salespeople who fail to update new sign-ons to its Sforce system.
“Our sales and marketing system is the basis for much of our operational decision making,” says Padgett. “That forces us to keep the data up-to-date.”
In March 2000, when Infortes data indicated weakness in B2C solutions, the company redeployed some staff in that area to other areas and slowed hiring. That helped the consultancy meet its Q2 through Q4 forecasts.
Inforte bases its forecast on rolling 12-quarter plans; Cognizant uses 12 rolling months and EDS eight rolling quarters. A year-and-a-half ago, EDS abandoned its static annual operating plan, which was refreshed only once a year, for its current, more dynamic model. This model “forces every profit-and-loss manager to look at his business more aggressively, and it in- creases accountability and visibility,” says Segert.
Visibility in IT services, which contributed about 75 percent of EDS revenue in the first quarter and 50 percent of Cognizants Q1 revenue, tends to be strong because much of the business relies on long-term contracts.
Cognizant CFO Gordon Coburn attributes the companys forecasting success to its offshore business model.
Cognizant hasnt missed its forecasted numbers since it went public in 1998. When it reported Q1 earnings in mid-April, it had 90 percent of its revenue for Q2 already committed and 80 percent committed for its third quarter.
“Price gets us in the door,” says Coburn. “Quality and breadth of service keeps us there.”
Given any climate, a solid forecasting model makes all the difference.