Estimations are part of our daily lives either when we do our shopping, cooking, driving and many more scenarios. Yet, we very often fail with our business estimations. In this article we will talk about what estimations are, why they often fail us in business situation and how to potentially improve them.
Estimates vs. Guesses
A simple differentiation between the two is the following:
Estimates are based on a intentional thought process supported by data.
Guesses are spontaneous conclusions resulting without primarily considering the underlying data.
While both have different meanings it's always possible to guess something or to estimate something. In business situation you usually want to use estimates or at least educated guesses which are somewhere between estimates and guesses.
Why Are Business Estimates Often Invalid?
- They are defined as a fixed value instead of a range.
- There are conflicting agendas with accurate estimates, the person doing the estimate and the management/company
- The management overpowers the person doing the estimate
- The management or person doing the estimate confuse it with goals. Just because you want it to be in a certain way doesn't mean that it is realistic.
- The person doing the estimate didn't base it on sufficient data
- The person doing the estimate didn't communicate the resources the estimate is based on sufficiently
- Estimates aren't re-evaluated regularly enough (e.g. changes effecting the estimates)
What Can Management Do About It?
- Estimates cannot be done by every person, so don't expect to receive accurate estimates by every employee. At least learn the different tendencies of your employees (some over-estimate and some under-estimate on a regular basis).
- Learn which employees are able to do estimates and trust their expertise (listen to their reasoning).
- Not every person is able to withstand the questioning of the management and gives in to your view too early instead of standing their ground.
- Don't let your own agenda conflict with the estimates. An estimate should be based on data not on your or the companies agenda.
- Try to understand when an employee may be in a conflict with an accurate estimation and his own agenda (sometimes bonuses depend on estimates).
- If you don't believe in an estimate it is still in your hand to communicate a different estimate to shareholders or business partners. But always keep in mind the estimate you received by one of your employees or consultants. Don't push the blame if it fails on the employee if you forced them into changing their estimate.
- Re-evaluate estimates with your employees, understand what was good, what was bad.
What Can The People Doing The Estimates Do About It?
- Getting questioned by the management regarding estimates is normal. Management has to understand that your estimates are based on valid arguments. If you are confident in your estimate stand your ground. Your responsibility is to give an estimate as accurate as possible.
- The basis for your estimates have to be derived from data. This also involves the available resources because the management may decide to change or re-allocate resources which can make an estimate invalid. The more you have the easier it is to defend against questions.
- Always give your estimates as ranges. A estimate which is a single value is most likely going to fail (e.g. exact date of finalized project, exact sales figures).
- Make sure you communicate the basis of your estimates.
- Re-evaluate your own estimates, understand what was good, what was bad.