How One Cell Discredited the Way the World Measures the Ratio of Debt-to-GDP and What That Should Mean for Using Spreadsheets for Finance
At every FP&A conference I have ever attended, the subject of spreadsheets comes up and those with a great argument for keeping them receive, what I perceive to be, the loudest applause. Usually the argument seems rather reasonable. For example, at the FP&A conference in San Diego earlier this year, a CFO of a Fortune 1000 company confessed that he still uses spreadsheets because it is the “ultimate ad hoc tool”. To paraphrase him: Spreadsheets are empowering; you can make them do amazing things, customize them to exactly what you want them to be, and keep massive amounts of valuable data consolidated for limited but somewhat immediate access.
The problem is that whenever the groupthink has concluded that the discussion is closed, everyone returns to the modus operandi of convenience until something terrible happens.
For All Countries That Manage Their Forecasts Based on the Reinhart/Rogoff Model, That Terrible Thing Happened Last Week
According to scholars at the University of Massachusetts, the “most influential article cited in public policy and debates about debt stabilization” is wrong. Specifically, a spreadsheet error has been revealed to have excluded five countries that would have invalidated the theory that countries with a high debt: GDP ratio suffer from slow economic growth. According to Matthew Yglesias of the Slate: (Read more of the Slate article here.)
“At one point they set cell L51 equal to AVERAGE (L30:L44) when the correct procedure was AVERAGE (L30:L49). By typing wrong, they accidently left Denmark, Canada, Belgium, Austria, and Australia out of the average. When you fix the Excel error, a -0.1 percent growth rate turns into 0.2 percent growth.”
According to Gawker, “When other revisions were carried out, the scholars found that the true growth rate should have been 2 percent” thus disproving the politically-charged but unwavering position. (Read more of the Gawker article here.)
The Difference Between Politics and Sound Business Practices
The reason you may not have heard about this is because when economists and politicians make aberrant or incorrect public statements very little happens. As Yglesias explains, “…naturally this is going to change everything. Or, rather, it will change nothing.” (Read more of the Slate article here.)
However, if a CFO makes an inaccurate public statement, far from little happens. The implications are massive. Stock prices and forecasts are implicated, lawyers get involved, fines assessed, and sometimes jail time is discussed.
This is not to say that if you don’t move away from spreadsheets you should be worried about going to jail. Rather, it is to say that there are very important reasons to stand up to the cognitive dissonance that is especially real within the corporate financial planning community. According to Robert Kugel, CFA, SVP & Research Director of Ventana Research, new research reveals that those in leadership positions or are closest to C-level decisions will inaccurately describe their processes as effectual when they are actually not. During the Webcast of the New Benchmarks for Long-Range Planning, he cites that only 27% of study participants claim executive contributions to the long-range planning process align to corporate strategy and support process. Kugel continues:
“We’ve done a good deal of research on a wide variety of core business processes so it didn’t surprise us to find that only about one-fourth of the participants in our research say that their executives communicate the company’s strategic objectives clearly and consistently. Since I’ll bet that about 100% of senior executives think that they are good communicators, there’s an obvious gap that a large majority of companies need to address.”
“Another interesting point that came out of the research was that people who are in charge of running the long-range planning process are much more likely to say that their executives communicate strategy well ‒‒ probably because they are closer to the informal channels of communication among senior executives.”
University scholars and industry analysts are in agreement by pointing out that the burden for individuals in leadership positions is fast becoming to illustrate a total confidence in their data.
Gone are the days where an elaborate spreadsheet will be enough to make a business case; especially those responsible for accurately articulating corporate financials and long-term investment decisions. Economists have certainly taken this cue; and they are not worried about the threat of fines and even jail time.
For more information:
Watch the Webcast of the New Benchmarks for Long-Range Planning
Download the Executive Summary of New Benchmarks for Long-Range Planning by Ventana Research