Analyst Perspectives

In today’s economy, all companies are contending with a dynamic business environment characterized by volatile commodity prices and exchange rates, a shaky global financial system and slow growth in many countries. Many of them rely heavily on desktop spreadsheets to support the data collection and analysis related to their capital-asset planning. However, spreadsheets have inherent limitations that make them the wrong choice.

Spreadsheets are handy because most people already have them installed on their computer and have the basic skills to use them. They facilitate ad-hoc analysis and modeling. People who understand a business process and business objectives can quickly translate this knowledge into formulas and numbers. More formal software, such as dedicated planning applications, demand some degree of additional training for business users and may also require some ongoing involvement by the IT department to set up and maintain models and analyses. Thus for many departments and individuals this creates a barrier, and they conclude that it’s just faster, easier and cheaper to work with spreadsheets.

Yet spreadsheets fall apart as a modeling and analysis tool when used in repetitive collaborative enterprise-wide activities. Asset-intensive companies almost always have a high degree of centralization in making capital allocation decisions, so individual spreadsheets must be “rolled up” to gain a consolidated view of the investments. Our research shows that even people who are highly experienced in using spreadsheets find it difficult to combine more than a couple of them at a time. Since they lack referential integrity, models are brittle – meaning that when rows and columns are changed in one, it creates an error in the consolidated view. Spreadsheets have limited dimensionality and are not inherently time-aware. Yet one of the most important characteristics of capital investment analysis and management is the timing of the various activities and the cash flows associated with them. It’s therefore difficult (although not impossible) to impose global assumptions across multiple users and extremely difficult to manage the time dimension of investment modeling.

This can be an acute issue for fixed-asset-intensive companies: those with sales of $500 million or more and a ratio of revenue to net property, plant and equipment (PPE) at 2.5 or lower, or those with annual capital spending budgets greater than $200 million. It’s important for them to plan and manage carefully their fixed-asset investment process to identify opportunities to improve it. But spreadsheets limit the quality and effectiveness of their fixed-asset investment management process. As they attempt to weigh alternative opportunities and optimize their portfolios of property, plant and equipment investments, these organizations must contend with changing conditions in their business environment, which are more dynamic today than any time in the past couple of decades. As priorities shift, as costs change and as unforeseen delays arise, the aggregate capital budget has to be updated to reflect these changes and future cash flows recomputed. As they assess the impact of actuals, organizations need to examine future plans also to determine how they should be funded. Executives and managers therefore need to do more contingency planning to determine the impacts of a range of potential internal and external events such as schedules, the prices of final goods and commodities, exchange rates and interest rates. Spreadsheets are simply not up to the challenge of this type of enterprise-wide planning. They ultimately limit the kind and quality of the what-if analyses that a company can perform.

Moreover, for the past decade, low and stable interest rates in the major currency zones have been the one “given” in the capital investment process. It’s almost certain that this will not be the case forever, so fixed-asset-intensive corporations must be able to consider the potential longer-term cost of funding projects under conditions very different than today’s. If they’re using spreadsheets, this is possible but time-consuming and difficult to do across a large number of projects – and needlessly so given the affordable dedicated products now available.

Today, asset-intensive corporations that use desktop spreadsheets to do their capital spending modeling and analysis are likely getting good-enough results. Executives and managers are probably aware that bad calls have been made and that some “unforeseen events” actually were foreseeable but their impact was not disastrous. Accepting these outcomes as good enough creates little incentive to do it better, especially when most other companies are doing it wrong in the same way, too.

To perform better, fixed-asset-intensive companies need better technology tools to support their capital spending planning and management activities. Planning is important but not an end to itself, especially in today’s volatile business environment. The ability to respond to change is now more important than the ability to plan. Using a dedicated planning and budgeting application is a better alternative to spreadsheets, but planning software that has built-in project management features can be an even better option because it explicitly manages events that have time dependencies and aggregates individual investment project totals. Both of these capabilities make it easier to adapt to changing circumstances and do a better job of allocating a corporation’s limited capital resources.

A majority of companies with 1,000 or more employees already use some sort of dedicated budgeting and planning application, but many of these rely on spreadsheets to develop capital project proposals, assess their relative value and track their implementation. This desktop productivity application may be all a fixed-asset-intensive company needs to manage its capital spending, but it’s possible that the software’s current configuration may make it too hard to do this well. If so, finding an alternative that enables better capital planning, optimization and management is likely to be a cost-effective investment in its own right.

Regards,

Robert D. Kugel – SVP Research