The Hidden Business Cost of Spreadsheets

The last twenty years has seen the rise of business ERP and management systems. Software management systems that previously were financially out of reach for many businesses, are now seen as a reasonable, worthwhile investment. In addition, the initial very short list of available options available has now developed into a myriad of new software systems, each often allowing for different needs in different businesses.

However, one of the most common “computer systems” in use in many businesses is now Microsoft’s 30 year old Excel. We’re yet to visit a business that doesn’t use it and more often than not, management aren’t aware of exactly how widely it’s used by their staff.

The great thing about Excel spreadsheets, is how easy it is to start using. Anyone can open a new spreadsheet, start recording a list of data and even do some basic calculations. Unfortunately, for a business, this is also one of the worst features of Excel. Excel is often seen as a very easy, quick fix for business issues. It’s extremely easy to start using, with many users self-training or getting a “five minute overview”, which means it can become embedded into business process very, very quickly.

Businesses need to be responsive to customer needs. The perception that it’s important to be “responsive at any cost” often leads to the introduction of “stop-gap” business process and systems that can be implemented quickly. This is where Excel, or another spreadsheet package, steps in. Modifying an existing business ERP/ Management System can take time – you may have to engage you’re your internal IT; then you might have to get your software vendor involved to assist with implementation, or to create a new feature. To many businesses, all of the above sounds a lot more time-consuming and expensive than just opening a new spreadsheet and starting to record information.

However, the ease of use and associated the benefits that come from ongoing use, also bring a high level of risk. In 2013, the Wall Street Journal published the oft-repeated quote in their MarketWatch blog: “88% of spreadsheets contain errors”. They expanded this, stating that in large spreadsheets with a significant volume of formulas, even simple formulas, that level of risk exponentially increases. It could be something as simple as short-billing a customer, or miscalculating profit on a customer order, or it could be business-destroying, such as the 2014 JP Morgan $6.2 billion loss due to incorrectly calculated risk spreadsheets, or the US Mortgage Guarantor FannieMae and their 2003 spreadsheet error showing them as $1.3 billion more profitable than they actually were.

Once the new spreadsheet process has embedded itself in the business unit, it’s generally in there for the long-haul, becoming a medium to long-term replacement for a fixed software system.

As time passes, business users may decide the spreadsheet needs to be enhanced to add a calculation or change the presentation format. Unfortunately, because spreadsheets are so quick and easy to use, we often don’t manage changes as we would in any other fixed system. Changes might be made on-the-fly, or without checking and re-checking the results of the data.

Any change to a spreadsheet in use has the potential to create further errors. It could be that the new calculation formula isn’t quite right, or isn’t copied over the entire range; or that rows/columns are added and existing formulas aren’t adjusted adequately; or that rows/columns have been hidden rather than deleted and are still impacting the changes in the background. Even experts get it wrong – in 2010, two Harvard professors, Reinhart and Rogoff, wrote a paper stating that when a country’s debt hits 90% of its GDP, economic growth slows rapidly. However, their spreadsheet calculations were wrong (they’d accidently excluded the data sets for five countries) and the reverse was true.

The key is to effective use of spreadsheets is not to underestimate how easily something can go wrong. Assume it’s risk-prone, rather than seeing it as secure and robust. And remember that Excel and all spreadsheets are uncontrolled systems, i.e. unless you have changed cells to be read-only, anyone can change the data at any time.

There comes a point when it’s important to recognise that a process has outgrown spreadsheet systems and that it’s time to move onto a more structured, controlled software system. The complexity of the data involved and the business-critical nature of the process will determine if that change occurs sooner or later. It is difficult for a business to recognise when business processes are established to deal with the feature limitations, operational risks or design constraints of a spreadsheet.

In many circumstances, spreadsheets and Excel, can be incredibly effective tools. They can help you quickly get to grips with managing a new process, provide a tool set for data analysis and be used to record information that other internal systems can’t. However, they become a big problem very quickly when the stop-gap process they provided becomes a long-term business fix; or when the simple act of recording business data in Excel becomes a crutch. Don’t let your business fall victim to the many errors and inconsistencies that “spreadsheet processing” can introduce.

The Alchemist is Ruxana D’Vine and Michael Meryment, specialists in matching business needs to technology.