No Pressure, Right?

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So we're banging away on our proposal, trying to find that happy medium between "so expensive they'll never go for it" and "so cheap we'll lose our shirts trying to do it." As you might expect, a lot of this involves pushing numbers around on spreadsheets and playing 'what if.' And it's not like the formulae involved are real complicated, but there are an awful lot of them, which is why I worry about things like this:

A simple spreadsheet error cost a firm a whopping US$24m.

The mistake led to TransAlta, a big Canadian power generator, buying more US power transmission hedging contracts in May at higher prices than it should have.

In a conference call, chief executive Steve Snyder said the snafu was "literally a cut-and-paste error in an Excel spreadsheet that we did not detect when we did our final sorting and ranking bids prior to submission," Reuters reports.

Maybe TransAlta is an extreme example, but this kind of thing happens all the time. I especially like this one, which had the potential to be an order of magnitude worse than TransAlta:

In about 30 minutes, officers from my own company would meet their counterparts from another multinational company to negotiate a multi-year cooperative marketing agreement. Breaking the news was not going to be easy.

My own boss would be a key player at the table. He was well briefed on the business case from our analysts, showing that we could improve profits by $200 million at a net cost of $20 million. ROI for the other company also looked good.

I didn't look forward to telling him, now, what I had just discovered: our gains are really projected as $25 million--not $200 million. We just lost our negotiating elbow room.

Why didn't we know this sooner?

The business case came from some very competent analysts. They had checked and re-checked input data and assumptions continuously during several weeks of case building. Certainly the Excel-based financial model at the heart of the case projected $200 million in gains and $20 million in costs. What I found at the last minute, was that some very long spreadsheet formulas had parentheses out of place. When I put them where they belonged, our projected gains fell by seven-eighths.

Everyone on our side was relieved, I think, when the negotiations fell through later that day. We had learned the truth about spreadsheet errors, in spades: They don't reveal themselves.

To paraphrase Barnum, there's a spreadsheet screwup born every minute, and two to take advantage of it. First, this relatively harmless case:

By way of example, in November last year we bought ScS Upholstery (a specialist sofa retailer) at 172p after it warned on profits. A spreadsheet error had caused the wrong cost to be input into the system, with the result that their gross margin had slipped without management knowing. We knew that this would quickly be rectified, and sure enough the share price bounced back rapidly.

Although we sold at 224p in March (strong results last week sent the price above 240p), we were very happy to take our profit once the short-term mis-pricing had been eliminated.
Although I have to wonder how the investment firm knew about the spreadsheet error.

And second, this case where ENA ate ISIS' lunch:

Education Networks of America (ENA) operates the Internet network connecting schools across Tennessee. ENA twice won multimillion-dollar state contracts with bids that appeared higher than others. Jacqueline Shrago, who was the Education Department's project manager, said the ISIS 2000 bid appeared cheaper until costs for all three and a half years were computed. Looking more closely, it appeared that ISIS had made an error on a spreadsheet and that the bid actually was higher than ENA's, she said. 'We asked questions in the protest period, and they would not give an answer,' Shrago said. She said ISIS never explained, either, to federal agencies, which fund a large part of the schools computer system. So ENA got the contract.

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This page contains a single entry by Chris published on December 6, 2004 7:29 AM.

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