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Business economists: not just forecasters.

How do U.S. corporations use their centralized economics organizations? According to a survey of U.S. nonfinancial corporations, their main function is still forecasting; business economists also provide analyses of domestic policies, of specific industries and markets, and of international issues. The functional areas most often supported by such organizations are strategic planning, treasury/finance, and budgeting.

FORECASTING REMAINS the key function of the typical corporate economics organization, but nowadays that forecasting goes way beyond the traditional macro forecast of the U.S. economy. Not only do business economists forecast the overall U.S. economy, but they also forecast specific industries, markets, and products, and foreign economies and exchange rates, as well.

Even so, the economics function in the modern industrial corporation transcends forecasting. As such, it also involves the analysis of domestic economic policy issues (including tax proposals, government spending, and other legislative issues), of specific industries and markets, and of international economic issues (including foreign trade and country risk).

Moreover, the support that economists provide pervades the entire structure of major U.S. corporations. The typical economics organization provides its major support in the areas of strategic planning, treasury/finance, and budgeting, but most economics organizations also provide significant support for a wide variety of other areas. Among the most widely supported of these other areas are product management, public affairs/public relations, business case analysis, and the regulatory area, with lesser, but still significant, support provided for company productivity measurement, labor relations/collective bargaining, mergers and acquisitions, and anti-trust matters.

RESULTS FROM COMPANY SURVEY

Those are some of the major results of a recent survey of the economics organizations in thirty-two major U.S. industrial corporations, which collectively employ nearly three million people. In the fall of 1991, as part of its quality/benchmarking process, the AT&T economics organization distributed a thirteen-page questionnaire to fifty-five industrial companies that have identifiable economics organizations. A total of thirty-two of those companies answered the questionnaire, and those responses are the basis for the findings reported in this article. Participating companies are listed in Table 1.

The survey was conducted mainly to gain information on the macro economics organizations in industrial companies. The economics organizations in financial corporations and consulting firms were not surveyed because of large perceived differences between their functions and those of economics organizations in industrial companies. Moreover, it was not feasible to survey industrial companies that do not have explicit, identifiable corporate economics organizations. Economics functions are undoubtedly performed in those companies, but they are not organized in a way that can be easily surveyed and measured. Finally, the survey did not cover all the business economists employed even by industrial corporations that do have identifiable economics organizations. Most importantly, it did not cover economists working in a company's operating units, and many respondents to the survey reported that substantial amounts of human and financial resources are devoted to economic analysis and forecasting in their companies' operating units. [TABULAR DATA OMITTED]

VARIED TASKS PERFORMED

The work done by business economists in corporate economics organizations involves a variety of functions and tasks. That variety is reflected in the way that economics organizations allocate their staff in the performance of those functions, tasks, and other responsibilities. Table 2 indicates the average allocation of staff for the economics organizations surveyed.

TABLE 2

Allocation of Economics Organization's Resources

Average of All 32 Respondents

Percent of Economics Organization's Staff Engaged In:

Forecasting and Analysis of the U.S. Economy 21%

Analysis and Forecasting of Specific Industries
 and Markets 24
Analysis and Forecasting of International Issues 14
Product Forecasting or Micro Modeling 10
Analysis of Domestic Policy Issues 8


Other Analytical Areas (e.g., Market Research, Client

Support, and Demographics) 14

Administration and Direction of the Economics
 Organization 9
 Total 100%


FORECASTING DONE BY ALL

The key function of the economics organization is forecasting, and all of the economics organizations that responded to the survey provide economic forecasts to their companies. Almost always, those forecasts entail more than mere numbers -- they also include discussions of the forces shaping the outlook and of the business implications of those forecasts. Those discussions are communicated to the economics organization's clientele along with the forecasts themselves.

U.S. Macro Forecasts. In all thirty-two companies, the economics organization provides its company with both short-term and long-term forecasts of the U.S. economy. Nearly all economics organizations (30) prepare their own short-term and long-term forecasts of the U.S. economy -- only two economics organizations merely distribute forecasts that are prepared exclusively by outside vendors. However, most economics organizations that do prepare their own forecasts of the U.S. economy use forecasts from outside vendors as an input to those forecasts (23 for short-term forecasts and 25 for long-term forecasts).

In almost all of the companies, the principal users of the forecasts of the U.S. economy are the companies' operating units and top management. According to the survey, the operating units and management use the forecasts for long-range strategic plans (cited by 30 respondents), for near-term operational plans (28), as general background (27), and as a required input for budgets (25).

Of those economics organizations that prepare their own U.S. forecasts, twice as many describe their short-term forecasting procedures as "largely judgmental" as those who describe them as "largely econometric" (18 versus 9). For long-term forecasts, nearly three times as many say their procedures are "largely judgemental" as those who say they are "largely econometric" (20 versus 7).

In terms of forecast horizon and frequency of preparation, considerable uniformity was revealed by the survey: Almost all of the economics organizations reported that their short-term forecasts extend at least two years into the future (25 of 27), and two-thirds indicated that they prepare the forecasts, roughly two-thirds of the economics organizations have forecast horizons of ten years (18 of 28), and about two-thirds prepare those forecasts once a year (18 of 29).

Industry Forecasts. Twenty-five economics organizations reported that they provide their companies with forecasts of U.S. industries. Most of those economics organizations prepare their own industry forecasts (22), and of those most purchase the forecasts of outside vendors for use in preparing their forecasts (16). Just over half of the economics organizations that prepare their own industry forecasts indicate that they are "largely judgemental" and that their forecasts are most often prepared each quarter. However, the forecast horizons vary considerably (generally from two-to-ten years out).

Regional Forecasts. Half of the economics organizations (16) provide their companies with regional forecasts (of regions, states, or MSAs), but in seven of these cases the economics organization merely provides forecasts purchased from outside vendors. For economics organizations that prepare their own regional forecasts, there is an even split between those describing the forecasts as "largely econometric" and "largely judgemental." The forecasts most often extend five years out, and they are prepared each quarter in most cases.

International Forecasting. Most economics organizations provide forecasts of foreign economies (29), and almost as many provide forecasts of foreign exchange rates (25). About three-fourths of these economics organizations actually prepare these forecasts -- as opposed to merely distributing the forecasts of outside vendors -- but most economics organizations do purchase the forecasts of outside vendors and use them as an input in preparing their own forecasts.

Economics organizations provide international forecasts for a variety of reasons: to provide their clientele with general background (cited by 19 respondents); as a tool in writing foreign contracts (14); and as an aid in foreign exchange operations (9). Of those economics organizations that prepare their own international forecasts, almost three-fourths describe them as "largely judgemental;" more than four-fifths of the forecasts extend at least two years out; and short-term forecasts tend to be prepared each quarter, while long-term forecasts are more likely to be prepared once a year.

OTHER FUNCTIONS ALSO IMPORTANT

As important as the forecasting function is, much of the economics organization's resources are devoted to other functions, as noted in Table 2. Those functions include analyzing domestic policy issues, specific industries and markets, and international economic issues. For example:

Domestic Policy Issues. All but one economics organization reported that they provide analyses of major governmental policies. These include various legislative proposals; federal tax, fiscal, and monetary policies; state and local tax policies; and trade policies. The major purposes of these analyses are to advise top management on policy issues of special importance to their companies (cited by 27 respondents), to help the company participate in outside policy-influencing organizations, such as the U.S. Chamber of Commerce, the Business Roundtable, etc. (26), or to assist the company's lobbying activities (19).

Specific Industries and Markets. Twenty-seven economics organizations assist the company's operating units in applying the U.S. economic forecast to the specific industries, products, and services important to those operating units (i.e., in determining how their revenues, expenses, etc., are affected by changing macroeconomic conditions). Furthermore, most economics organizations (19) provide analyses of particular industries on a recurring basis, and most (20) provide analyses of international trade (by industry and/or product), at least on an ad hoc basis.

International Economic Issues. Most economics organizations (17) provide analyses of various legislative proposals affecting U.S. trade, and most (19) provide country risk analyses to evaluate business and investment prospects in various countries.

These outputs of the economic organizations are used in a variety of ways throughout their companies. When asked in the survey about the areas in which they make their largest effort in terms of time spent, 24 economics organizations indicated strategic planning, 19 treasury/finance, 18 budgeting, 14 product management, 11 business case analysis, 10 public affairs/public relations, and 9 regulatory. However, most economic organizations also provide significant amounts of support to their companies in the areas of labor relations/collective bargaining, mergers and acquisitions, company productivity measurement, and antitrust matters.

SIZE OF ECONOMICS ORGANIZATIONS VS. SIZE OF COMPANY

In terms of headcount (based on all thirty-two respondents), the average economics organization consists of 6.5 persons, including 3.3 academically trained professional economists, 1.6 professionals other than economists, and 1.7 skilled support persons.

The particular size of the economics organization in any individual company is only partly related to the size of the company itself. For example, based on the survey results, one statistical regression indicated that 38 percent of the variation in the headcount in the economics organization could be explained by the variation in total company revenues; another regression indicated that 24 percent could be explained by the variation in total company assets; however, only 7 percent could be explained by the variation in total company employment. Thus, the size of a company's economics organization seems to reflect many other, less measurable factors, such as the scope and complexity of the corporation, the number of functional areas supported by the economics organization, and the intensity of the economics organization's involvement in those functional areas.

In recent years, the size of economics organizations has been shrinking, declining 22 percent over the past five years, from 8.3 to 6.5 persons. (See Table 3 for data on both the size of the companies surveyed and the change in the headcount of their economics organizations in recent years.) Twenty companies reported that the size of their economics organization has declined over the past five years. Of those, 18 cited company-wide downsizing as a cause, 11 cited increased productivity (e.g., computerization) of the economics organization itself, and 7 cited a reduced scope of activity (e.g., fewer forecasts or analyses being required). Counter to the overall trend, seven companies indicated that the size of their economics organization had increased over the past five years, primarily because of an increase in the scope of the activities required of them. [TABULAR DATA OMITTED]

In the survey, questions were also asked about the budgets of the corporate economics organization, and some 90 percent of the respondents answered those questions. However, the budget data were not comparable, company-to-company, because of a lack of consistency in the way that various companies do their budgeting.

DISSEMINATING OUTPUT; REPORTING AND BUDGETING ARRANGEMENTS

The survey also provided some interesting results on how economics organizations disseminate their output, on their reporting arrangements, and on their budgeting procedures:

In disseminating their output, written reports and memos are the most important method used by the respondents, followed by electronic distribution (e.g., via data bases, electronic mail, etc.), conferences conducted by the economics organization itself, meetings held by other organizations in the company, and personal visits to the clientele. Almost all of the respondents (31 of 32) prepare at least one publication on a regular basis for distribution within the company, with the average number being 3.6 publications per company. Those publications are typically issued quarterly or monthly. Meanwhile, 13 companies distribute at least some of the output of the economics organization outside the company.

The organizational reporting arrangements of economics organizations vary considerably from company to company: In 22 of the companies, the economics organization reports to a company officer, while in 9 companies it reports below the officer level. Functionally, the economics organization is most often located in the strategic planning department (14 companies) or in the treasury/finance organization (12).

Budgeting arrangements also vary by company. In only two companies is the expense of the economics organization billed directly to operating units. In 23 companies, all of the expense is treated as corporate overhead, which is unallocated in 13 companies and allocated to the operating units in 10, based on such things as revenues, investment, etc. In seven companies, the expense is treated as a combination of overhead and direct billing, with 60 percent treated as overhead and 40 percent billed directly, on average. However, since the survey was taken, two respondents have indicated that their budgeting arrangements are under review and may be changed in the near future.

CONCLUSIONS

The survey results provide a revealing look into the economics organization in modern industrial corporations. The survey results also show that the economics organization provides valuable contributions in many areas other than forecasting. Even though the size of the economics organization has declined over the past five years, the output of business economists continues to reach importantly into the entire structure of the modern industrial corporation.
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Author:Hoover, Dennis K.
Publication:Business Economics
Date:Jul 1, 1992
Words:2379
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