7 Ways Executives Get Blindsided by Excel

Billion dollar mistakes only happen when a lot of people make a lot of grave errors, right?

Wrong. As you’ll read below, billion dollar mistakes can be as simple as a typo if you’re using Excel. Here are 7 ways executives have been majorly blindsided by the popular spreadsheet software.

1. Material errors, catastrophic decisions

It’s not difficult to make a minor error in Excel spreadsheets, and checking for errors once the spreadsheet is done is a lot like searching for a needle in a haystack. The worst part? The vast majority of spreadsheets, including those at your own company, have errors.

In fact, according to F1F9, around 88% of spreadsheets have significant errors in them. Another 50% of spreadsheets used by larger companies have material defects. What’s more, because each part of a spreadsheet relates to other parts, one minor error can easily snowball into a disastrous mistake that continues to affect your company for months or even years.

Perhaps one of the most dramatic examples was the London Whale trading fiasco in 2012, JP Morgan’s infamous $6 billion mistake that caused them to misreport their VaR for years. News broke that it was actually a minor Excel error that started the whole debacle in the first place.

Toward the very end of the massive JP Morgan task force report it’s clearly stated:

“…further errors were discovered in the Basel II.5 model, including, most significantly, an operational error in the calculation of the relative changes in hazard rates and correlation estimates. Specifically, after subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR…. It also remains unclear when this error was introduced in the calculation.”

Basically, someone accidentally entered an Excel formula incorrectly, and as a result, one of the largest banks in the world misreported its VaR by a factor of two for years. In fact, they don’t even know how long the error was taking place.

Another example is Reinhart and Rogoff’s famous, often-cited 2010 research paper on healthy debt-to-GDP ratios. It was found a few years ago to contain an Excel error that significantly skewed the results, despite it being used for countless research and policy efforts. Their spreadsheet mistakenly excluded Australia, Austria, Belgium, Canada, and Denmark from the final analysis, which left them with an average GDP calculation .3% lower than it should have been.

Not only are these material errors costing companies insane amounts of moneys, but they’re also eating up hours upon hours of valuable time and even causing permanent damage to their reputations.

2. Hidden data, wrong conclusion

One of the most infamous Excel mistakes occurred after the 2008 collapse of Lehman Brothers, and many still haven’t forgotten it.

One of the most infamous Excel mistakes occurred after the 2008 collapse of Lehman Brothers, and many still haven’t forgotten it.

British banking company Barclays made an offer to purchase Lehman Brothers, which they sent over in the form of an Excel spreadsheet detailing all of Lehman Brothers’ assets with the cells for assets that Barclays did not want to buy hidden rather than deleted. When the spreadsheet was converted to a PDF and sent off to the bankruptcy court, the hidden cells reappeared, and Barclays unintentionally purchased them all. Essentially, they ended up taking over an additional 179 deals they never wanted and simply had to deal with the losses.

Ill-informed decisions based on hidden and incorrect Excel data happen all the time. Do you trust your Excel model? Is it worth losing billions over?

3. Slow to close in a rapidly changing world

Does a sense of dread wash over at the end of every month when it’s time to close the books? Are your employees there putting in extra hours, staying up late nights, and coming in on the weekends to close the books each month?

Let me guess, you’re still closing the books with Excel.

All those late nights and extra hours increase the chances of human error, and if you’ve been paying attention, you know that small Excel errors can easily turn into big disasters.

While Excel may have been sufficient for facilitating the close process in the past, with improved technology and changes happening faster and faster, it now has a tendency to eat up more time and money than it saves.

In today’s ultra-competitive environment, a quick, efficient close process is critical to staying on top. Even if your spreadsheets are flawless, they’re likely still holding you back in terms of speed.

According to Mary Driscoll, Senior Research Director for Financial Management at APQC, “An ideal close would take around 10 days — anything beyond 20 days is competitively worrisome. In fact, companies that complete the process in fewer than 10 days will spend 50 percent less than their slower-to-close competitors.”

Of course, the key to reaching that goal is implementing a more streamlined, automated system for facilitating the close process.

4. Missing important insights and losing decision-making opportunities

Spending so much time and energy in Excel also means that means that employees are so wrapped up in the close process that important insights and decision making opportunities often pass them by while they are busy working on something that should be automated.

More than 70% of top finance executives polled by CFO say that their number one goal for 2017 is to support financial decision making within their company. Over 90% recognize they need to take advantage of all the financial and operations data they have on hand in order to inform those decisions.

Here’s the thing: spreadsheets make timely decisions very, very difficult. Executives often find their hands tied for weeks or even months while reports are being created and updated. Both of the top goals for 2017 require a shift away from closing with Excel to a more effective and automated software solution.

Once that has been implemented, employees can shift their attention to other, more complex decisions that really propel a company to growth and success. It also allows financial professionals to be more than just spreadsheet monkeys, using the time and brain power they’ve freed up to pay closer attention to trends and data analysis. The new insights that arise from this shift in focus can lead to game-changing business decisions.

What changing to a more efficient and automated close process really does is allow your company to shift from focusing on maintenance to focusing on growth, and that can make all the difference.

5. More data means worse decisions…HOW?!?!

Bigger is not always better, and this is especially true when it comes to big data.

We have so much data at our fingertips nowadays that we often don’t know what to do with it. You likely aren’t using the vast majority of data that your company has at its disposal, especially if you’re still relying solely on Excel for data analytics.

Here’s the thing: Microsoft Excel is slow. While you’re wasting valuable time trying to consolidate, forecast, and reconcile in Excel, businesses with software that is optimized for data analytics have already started taking action, and you’re two steps behind. Competition in business these days is less about winning and more about surviving first.

This is why good predictive analytics are so important – using the right data to see emerging trends before they happen and make smart decisions based on these predictions.

Take it from Viral Chawda, Managing Director of Data and Analytics at KPMG, who tells CFO:

“Traditionally, CFOs could envision only a few scenarios to manage the changes facing their businesses. But amid today’s disruptive environment, CFOs need the help of “extended intelligence” — tools that will help them see around the corner to emerging trends and potential threats.

With advanced analytics, including predictive analytics and machine learning, CFOs have at their disposal tools that broaden their view and present a wider range of scenarios that could potentially disrupt their businesses.

It is up to CFOs to embrace predictive technologies and use the insights derived from them so that they can help keep their businesses relevant and prosperous.”

6. Using the same old programs will yield the same old results

If you’re not innovating, you can expect to fall behind.

Just look at Major League Baseball. Endless data on players and the game is floating around out there, but teams like the Boston Red Sox and the Chicago Cubs continued on in mediocre fashion, incapable of competing at a high enough level to get their hands on a championship.

It wasn’t until a true innovator and data analysis prodigy joined the game and created his own computer program, Carmine, optimized for analyzing players’ stats and tendencies, that this started to change. His name is Theo Epstein, and his computer program is responsible for the latest World Series win by the Chicago Cubs, their first in 108 years. Of course, that was after he already led the Boston Red Sox to a World Series win in 2004, their first in 86 years.

Epstein refused to make decisions without Carmine, and he even replaced scouts who were unable to adapt to new technologies with people who were eager to use data to recruit the best team in the world. The man and his computer program almost single-handedly ended two of the three longest championship droughts in the history of Major League baseball. In fact, Carmine, his computer program, is valued by these teams more than some humans.

While Excel can be useful, relying on it entirely instead of experimenting with new software and technology will keep your business chugging along at the same rate until it inevitably falls behind. If you feel like your company might be on a plateau, there’s a good chance that improved systems for data analysis could give you the push you need.

7. Organizational knowledge is not transparent, and can easily be lost forever

One of the areas in which Excel is lacking the most is documentation and transparency. Anyone who wants to can go into a spreadsheet, make all kinds of changes, and leave, without much documentation made in regards to who made the changes when and why.

Because it’s hard to track data sources, incorrect data can be entered and easily go unnoticed.

Excel spreadsheets are also very specific to the person who made them, often offering no documentation. What would you do if that person were to leave suddenly? There’s a good chance that all of their organizational knowledge would be completely lost, as a replacement would have no idea how to properly decipher and use the data left behind in Excel.

Finally, imagine if a disaster were to strike your company, causing you to lose large amounts of data. If your data is primarily kept in spreadsheet format, chances are it would be nearly impossible to recover. Employees often do not follow proper procedure for backing up files and rarely save them in the same place each time, even when they’re told to.

Organizational knowledge is progress, and losing valuable information can permanently set your company behind.