Banking on Growth…Again

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By: Russell Pearlman

Things were looking so promising for the big tech firm last February. 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 expected 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.

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 the workforce by 10 percent while freezing thousands of open positions.

It’s become painfully obvious: wide swaths of corporate America bungled their recent growth projections. In the fall of 2022, fully 29 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 was on hold.

Experts say that these overly rosy forecasts aren’t surprising—and that firms will resume making them once the latest economic downturn ends. Leaders’ incentives largely depend on optimistic projections. CEOs have an average job tenure of about six years, and they don’t get higher salaries, board seats, or increased prestige if they don’t promise growth. “No one wants to be the CEO of a company that’s shrinking,” says Matthew Josefy, a professor at the Indiana University Kelley School of Business. Many leaders believe that they’ll be punished by stakeholders if they don’t promise significant growth—whether or not they ultimately produce it. This is especially true for many leaders of smaller firms, who have sold investors on the promise of meteoric growth. They have to keep that story going, Josefy says, even as prospects seem to be leveling out.

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This wouldn’t be the first time companies have botched sales projections—the bursting of the dot-com bubble in 2000 made many growth forecasts look foolish. But the stakes are higher now, because desperate companies hired literally millions of workers to bring about their rosy projections. Now those same companies are embarking on waves of layoffs and cutting back on ambitious expansion plans.

People well below the executive ranks may have an even rosier picture. Salespeople, for instance, are naturally an optimistic bunch, says Mark Grimshaw, Korn Ferry senior client partner and member of the firm’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 pros recommend against relying on any single forecast. Combining multiple, independent judgments, they say, is more likely to yield an accurate answer. The most important fix, and perhaps the easiest one to achieve, is to have someone inside the company—someone not overly incentivized to pick rosy scenarios—who will ask tough questions about growth projections. “They won’t suffer from the same thing salespeople do,” Grimshaw says.