The Problems with using Excel to make Strategic Business Decisions
BY PIERS WILSON, CORNERSTONE DIRECTOR
Reading an article in Friday's Australian Financial Review Excel errors blot belt-tightening bible, it reminded me that this is a problem that most businesses in Australia also know too well. In this article Jonathan Shapiro highlights that the world's most senior policy-makers may have been misled by an error made in an Excel spreadsheet that ""sent the global economy down the wrong path to recovery"".
Ken Rogoff and Carmen Reinhart, Harvard economists, modelled the effects of high public debt levels on growth and the ability of economies to recover from financial crisis. However, when professors of a publicy funded university tried to replicate their results, they found sloppy formulas and omitted data had returned incorrect results. When calculating average domestic product for economies with debt exceeding 90% of GDP, instead of negative 0.1%, it was actually positive at 2.2%. Whoops!
Now, I'm no economist but, in my 18-year career in Financial and Business Analytics I reckon that 100% of Microsoft Excel spreadsheets that I've had the (dis)pleasure to review have contained an error of some sort. It's commonly said that 87.3% of statistics are made up on the spot, but this major mistake reminds us that strategic business decisions continue to be made every day using incorrect data and assumptions.
In researching for this blog, I found numerous published examples of Excel errors:
- JP Morgan reported in its company filings a Value at Risk calculation (VaR) that was exaggerated by a factor of 50% because of an incorrect formulae in a spreadsheet that was used to calculate their Basel 11.5 model. They had been reporting these numbers for years before this was discovered. Click to read.
- Tickets were oversold at the London Olympics because they were using Excel to reconcile ticket sales. Click to read.
So why do organisations continue to use Excel as an enterprise-wide modelling tool, a database, a budgeting and forecasting tool, and a reporting tool?
Don't get me wrong - I think Excel is a great personal productivity tool, but it seems bizarre that businesses don't invest more in an application that ensures more robust business practices. Software solutions have been around to tackle these challenges for at least 20 years, such as IBM Cognos TM1, Cognos Disclosure Management (CDM), Cognos Express, Oracle Hyperion Essbase, and SAP BPC.
At Cornerstone we've implemented hundreds of budgeting and forecasting solutions over the years, at both large and small organisations using Cognos TM1, Cognos Express and Cognos Planning. In most cases we're replacing 30-40 spreadsheets (350 in one case) that have been used to make strategic decisions. And yes, we found errors in all of these spreadsheets when we came to test our systems.
Do you know how much your spreadsheets are costing you?