[IMGCAP(1)][IMGCAP(2)]Microsoft Excel is, without a doubt, the most commonly used software program in today’s finance department, from the CFO down to the staff accountant.
The advantages of Excel are obvious– it is cheap, it is easy to use, it is flexible, and it is extremely powerful (even more so if you dig into the 90 percent of features that most users never touch). However, many of the characteristics that make Excel so appealing to an individual can also make it a problem for an organization. Excel is difficult to control, difficult to secure and, over time, can lead to processes that are inefficient and represent significant risks to an organization.
How much Excel is too much? When does Excel stop being part of the solution and start being part of the problem? When does the use of Excel in an organization cross the line from productive to addictive? In this article, we identify principles for distinguishing between “good” and “bad” Excel, and provide guidance on how companies can encourage the former while eliminating the latter.
As a starting point, it is important to have an understanding of how much Excel is being used and what jobs it is performing. In the WeiserMazars 2011 Insurance Finance Leadership Study, 87 percent of the CFOs surveyed indicated that their organizations had moderate to heavy reliance on spreadsheets as part of the financial close process. CFOs also reported heavy spreadsheet use in budgeting and forecasting processes, and in information reporting and analysis.
Several companies reported using more than 500,000 spreadsheets as part of their quarterly close. This astounding fact raises many questions, such as “How much does it cost to maintain 500,000 spreadsheets in terms of man hours and salaries?” and “What are the inherent risks associated with such a large number of manual processes?”
To understand what represents an effective use of Excel, it’s useful to examine the ways in which Excel differs from more complete automated solutions from the standpoints of cost and effort. One of the great draws of Excel is its flexibility and speed of deployment. Compared to a general ledger system or a data warehouse, for example, an Excel solution takes very little time to implement and can quickly solve a small, tactical information management problem.
When using Excel there is no need to request an information technology project, no waiting, no budget impact, and no permission required, all of which make for a compelling value proposition. However, over time the Excel solution tends to require more manual effort to run and maintain since each spreadsheet is powered by human input. In contrast, a more complete automated solution has a much higher upfront cost, and requires more effort to initially implement, but it pays this back over time with each transaction or reporting cycle.
One can think of these two models in terms of a chart showing cost over time. The cost for an Excel solution starts relatively low, but reaches an ongoing regular cost that is higher than a fully automated solution. The cost of an automated solution, on the other hand, starts much higher, but reaches an ongoing regular cost that is much lower. Thus, the automated solution will cost less per transaction the more it is used, whereas the relative overall cost of the Excel solution is greater the more it is used. Thus, longevity becomes a key criterion for determining whether Excel is an appropriate tool, or to put it another way, the longer the expected lifetime of a solution, the less appropriate Excel is as a basis for that solution. Conversely, for solutions that have a short expected lifetime, Excel may well be the optimum choice.
Another key in determining whether Excel is an appropriate tool to solve a given problem is the time sensitivity of the resulting process. As discussed above, the effort, and therefore the elapsed time, of using Excel in a process is typically greater than using a fully-automated solution. While the Excel solution may be implemented sooner, the cycle time of the process will suffer for a lack of full automation. Therefore, for solutions that support time-sensitive processes, Excel is a less appropriate tool.
One should also look at the variability of the process being executed. For processes that will vary widely from one execution to the next (for example, the creation of custom quotes or cost models) an automated solution can be difficult to implement. As a rule, more fully-automated solutions require a certain consistency whereas Excel can react more quickly to dynamically-changing requirements.
The last factor to look at in evaluating Excel usage is control. Since the enactment of Sarbanes-Oxley and other similar regulations, organizations and their auditors are increasingly focused on the controls that ensure proper reporting of financial results. In this context, the flexibility of Excel becomes a significant liability compared to a more secure, fully automated tool. Because it is so easy for a user to change an Excel model, either intentionally or in error, it can be difficult to maintain control over processes that utilize Excel.
So, using the criteria of longevity, time sensitivity, flexibility and control, how do we evaluate the various uses of Excel within a finance organization? Given the results of the Leadership Study, it makes sense to start with the financial close process for which 87 percent of the respondents indicated moderate to heavy use of Excel. The financial close is a process with a long lifetime. It is expected to be executed every quarter as long as an organization operates. It is a time-sensitive process, particularly for publicly traded companies for which there are external deadlines, although even in private companies, speed to closing is a key objective to support timely management information. The financial close does not require a great deal of flexibility. Once the close process is in place, it is expected to run in a relatively consistent fashion. The financial close requires tight controls, more so in publicly traded companies.
On the basis of this analysis, it is clear that the financial close process is the last place an organization should be making heavy use of Excel; the dynamics of the financial close play against Excel’s strengths and toward its weaknesses. In fact, the WeiserMazars 2011 Insurance Finance Leadership Study indicates that there is a growing trend toward reducing spreadsheet use in the financial close process. Companies with best-in-class financial close performance—five days or less—have a much lighter reliance on spreadsheets than those with longer close cycles. As one CFO succinctly put it: “We have a monthly two day hard close. We don’t have time for spreadsheets”.
At the other end of the spectrum, in what processes should Excel be adopted as the optimum solution? Ad hoc financial analysis is probably the best example of this type of usage. By its very nature, this analysis is short-lived, as it is typically conducted on a one-time basis, tends not to be as time-sensitive as the financial close, has requirements that differ from one analysis to the next, and does not demand significant controls.
Prototyping is another area in which the use of Excel is appropriate. Even if the process being modeled does not fit the criteria for long-term Excel use, the development of a prototype for the process prior to implementing a more automated solution is a great job for Excel. The prototype is, by definition, short-lived and requires a great deal of flexibility for iterative development. Investing the time to prototype in Excel can reduce the development time and risk of a more fully automated solution.
However, vigilance must be exercised to ensure that the prototype doesn’t become the ultimate solution.
Excel is a powerful and highly versatile tool but, like any tool, it is more appropriate for some jobs than others. Its unique blend of power and flexibility has caused it to become significantly overused in jobs for which it is not appropriate, which can lead to reduced efficiency and increased risk. Using the criteria of longevity, time-sensitivity, flexibility and control, an organization can analyze its existing use of Excel, identify those areas where it should be replaced, and establish guidelines for its continued use going forward. The first question that needs to be asked is, “How many spreadsheets are we really using, and how much is this costing us?” If the number alarms you or, worse, can’t be counted, then be assured you are addicted to Excel.
Michael Flagiello is a partner in the Financial Services Consulting Group at the accounting, tax, audit and advisory services firm WeiserMazars LLP and can be reached at (917) 816-9900 or by email at Michael.Flagiello@WeiserMazars.com. David Hurst is a principal in WeiserMazars’ Financial Services Consulting Group and can be reached at (215) 485-8517 or by email at David.Hurst@WeiserMazars.com.
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