Excel - A Problem With Capitalism in the 21st Century?

Excel models have been in the news again this week, as the FT highlighted data problems in Thomas Piketty’s Capital in the 21st Century.

Excel modelling issues like the ones highlighted in the FT article are not new. They make the news every few months.

Last year my company, F1F9, published “The Dirty Dozen”, an ebook highlighting 12 other high profile spreadsheet disaster stories.

Excel modelling of one kind or another underpins nearly every significant business decision. If the use of Excel is as risky as these high profile errors would lead us to believe, is this not an enormous systematic risk to the global economy?

Many people think so. Canadian computer scientist Daniel Lemire, for example, argues that you shouldn’t use a spreadsheet for important work. Others, like spreadsheet expert Felienne Hermans, disagree arguing that only a fool blames their tool.

The reality in business is that a. decisions have financial implications that need to be understood and b. the de facto tool for understanding the financial implications of most business decisions is Excel.

The question is therefore not should we stop using Excel. But rather how can we use Excel safely.

On June 17th the ICAEW will formally publish their Twenty Principles of Good Spreadsheet Practice. Adhering to these principles will help avoid many of the problems that occur with Excel modelling.

The first 4 of the ICAEW principles deal with the business environment. This an excellent place to start as the business environment is critical to spreadsheet quality:

Principle 1. Determine what role spreadsheets play in your business, and plan your spreadsheet standards and processes accordingly.

Many businesses don’t realise how critical spreadsheets are to the decisions they are making and therefore don’t prioritise them as something that needs to be managed.

Principle 2. Adopt a standard for your organisation and stick to it.

Most financial analysis is undertaken and communicated using Excel spreadsheets. And yet here's an experience that most people relate to: trying to read somebody else’s spreadsheet is very difficult, often impossible.

If we received a written business document that was as dense, convoluted, and impenetrable as many spreadsheet models, we would not accept it. We insist on clarity and simplicity in business writing, we should insist on the same in spreadsheet models.

Shared standards transform the use of spreadsheets in business. No longer is the spreadsheet “owned” by one person who then has to update and interpret it because nobody else can understand it. Modelling standards such as FAST allow models to become shared, collaborative business tools.

Principle 3. Ensure that everyone involved in the creation or use of spreadsheets has an appropriate level of knowledge and competence.

Just as knowing how to use Microsoft Word doesn’t make a person a good writer, having a good knowledge of how Excel works doesn’t make a person a good financial modeller or analyst. These are separate skills.

Principle 4. Work collaboratively, share ownership, peer review.

Without adopting Principle 2, it’s almost impossible to work collaboratively on spreadsheets. This prevents shared ownership and peer review.

Analysts are human. Errors will occur. Without a collaborative approach based on shared standards, many more will go undetected.