Monthly Archives: August 2010

Spreadsheets Will Cost You Billions

I’ve told you many times that spreadsheets, the cockroaches of the workplace, can cost you billions, but I’m not sure that you’ve been listening. So I’m going to remind you of two situations where poor spreadsheets literally cost a company billions. As per this classic article in CIO on eight of the worst spreadsheet blunders ever:

Fidelity Loses $2.6 Billion

In January 1995, an accountant omitted the minus sign on a net capital loss of $1.3 Billion when transcribing the net realized gain from the funds financial records from one spreadsheet to another. As a result, they estimated that they would make a $4.32/share distribution, a number that was off by $2.6 Billion. Needless to say the shareholders weren’t happy when the truth was discovered.

Fannie Mae and it’s $1.13 Billion “Honest” Mistake

In a news release back in October 2003, Fannie Mae stated that a review of the third-quarter financials revealed a $1.136 Billion error in total shareholder equity as there were honest mistakes made in a spreadsheet used in the implementation of a new accounting standard.

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Working Capital Improvement: The View from 30,000 Feet

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

There has been considerable emphasis in improving working capital among large and small enterprises alike. While the reasons may seem obvious, to state a core objective: unleashing working capital provides more cash for other areas in the business and reduces dependency on credit. According to a recent benchmark by CFO Magazine(c) the working capital metric, DWC – Days Working Capital, of the top-1000 US-based public companies (excluding financial service companies) degraded 8.2% from FY 2008 to FY 2009, the worst degradation in years. Interestingly enough, when reviewing the individual performance of these companies, 464 of these companies actually improved their DWC

The Best are Balanced

Working capital initiatives can seem daunting, but an analysis of the data can lead to some key insights. Using the same data and stack-ranking all 1000 companies by DWC (1 = best improvement, 1000 = most degradation) identifies a trend among the top 25% of companies (Chart 1) who improved DWC by a median of 23%. A deeper analysis of the data on the three sub-metrics which make up DWC — Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO) yields a further understanding into what drove this performance. A key finding is that 29% of the Top 25% of performers saw improvement in all three sub-metrics: DSO, DIO, and DPO. In other words, their improvement initiatives were not just in one area, they were in all three areas.

Median DWC Improvement from FY08 to FY09
The median DWC of the top 25% of performers improved (dropped) by 23%

Looking further down the rankings at the remaining 75% yielded the following insights: 57% of the bottom 75% saw improvement in NONE of the three DWC sub-metrics.

The conclusion from 30,000 feet: focusing on all three metrics greatly improves the odds of improving DWC. Not focusing on all three? The results are obvious.

Thanks, Sudy for explaining the key to improving working capital is to focus on initiatives that improve the core metrics and not the stupidity I ranted about yesterday.

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I’m Starting to Get Sick of all this Working Capital Management Talk

Ever since the recession hit full swing, it’s been working capital this and working capital that. And I’m getting tired of it. And it’s not because I don’t like working capital management. In theory, when it’s done right, working capital management is worth its weight in gold. The problem is, at most companies, it’s still done very, very wrong, and ends up being the lead weight that drags the company down until it drowns.

Here’s what usually happens. The company starts by:

  • Paying some invoices early to take advantage of favorable currency exchange rates … which is good and the right thing to do, and then it continues by
  • Paying some other invoices early to take advantage of early payment discounts … which is good for the company, but not necessarily good for the supplier. (If it allows the supplier to avoid taking high-interest loans, it’s good. But if the company is just taking advantage of their financial problems, it’s not.)

And it enables these early payments by:

  • Delaying payment to other suppliers … which is not working capital management at all as it risks the suppliers’ ability to deliver and jeopardizes the supply chain.
  • Delaying payment to contractors … which could jeopardize the contractors’ solvency if they’re small and it goes on for too long.
  • Delaying raises and bonuses … which does wonders for employee morale.
  • Delaying expense reimbursements to its employees (from two weeks to four, four weeks to eight) … which is just wrong. Employees aren’t a company’s piggybank.

And then, when there’s no slack left in the system, it:

  • Lays off 10% of the workforce.

And proves it doesn’t know a damn thing. And that’s why I don’t like hearing all this substance-free hype about working capital management.

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A Hitchhiker’s Guide to e-Procurement: Sectors

Mostly Harmless, Part XXIII

Previous Post

Enterprises generally fall into two categories: public or private. While the basic requirements for e-Procurement are unchanged whether the installation is intended for the public or private sector, each sector has its own standards for procurement and the system must support the standards, and quirks, of the sector in order to ensure adoption and success.

Since most of the posts to date have implicitly assumed that the application is going to be deployed in the private sector, this post will primarily discuss the public sector and some of the sector specific procurement processes that should have an impact on system selection.

In the public sector, most purchase orders for goods and / or services over a certain value are the result of a public competition. This means that once a requisition is approved for new products or services above a certain value, which can not be assigned to a standing offer or contract, the next step in the process is an RFX or e-Auction. As a result, the e-Procurement system will either need to contain RFX and / or e-Auction functionality, or integrate with such a system. The integration can be as simple as XML file export (of the details of the approved requisition that needs to go do bid) and import (of the details of the winning bidder and submitted pricing), but the workflow has to support the process and integration.

Also, as alluded to in the previous paragraph, new purchases below a certain threshold can be made against standing offers / contracts as long as the appropriate policies are followed. Some organizations will allow a buyer to use the standing contract of their choice (provided a certain dollar threshold is not exceeded in any calendar year), others will dictate round-robin selection in an effort to insure fair allocation of funds, and another group of organizations will use a hybrid policy and allow buyers to select the supplier from a set of preferred standing offers or offers that have not received their “fair” share of business.

Another area of increased complexity is approvals. In the private sector, the rules are usually cut and dry. For example, under 1K for approved products, the employee only, under 10K where all goods that can be bought on contract are bought on contract, the supervisor, under 100K, the VP, and the CPO’s approval is only required if the purchase is over 100K. In the public sector, there are approvals based on value, based on contract vs. standing offer vs. one-time buy, repeating payments, type of good or service (engineering will have to sign off on machine parts, HR on temp labor, etc.), MWBE percentages (as contracts over a certain value may be required to have MWBE components), environmental sign-offs (if the buy is for products or services with a significant environmental impact or products or services for which there are environmental standards), etc. Where it is quite uncommon for a requisition to require more than three approvals in the private sector, many requisitions can easily require six or more approvals in the public sector.

Payments are a little bit trickier too. Not only must they be processed according to standard terms and conditions, but they generally must be made on regular payment dates, and may be withheld indefinitely at any time due to orders from higher ups, which is common when governments have not approved their budgets for a year by a given deadline. Plus, many government departments are tax exempt (as it doesn’t make much sense for a government to tax itself) from local, state, and federal taxes, and the taxation rules need to be powerful and flexible.

Finally, the reporting requirements in the public sector are much more onerous than in the private sector. If the tool does not contain a modern analysis and reporting package that can meet all of the requirements of all of the departments and divisions and associated reporting requirements, it will need the ability to do a full export of all data required to produce those reports in a third party analysis or BI tool.

Next Post: Terminology

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If Mark Anderson is Right, it’s a Long Road to Recovery

According to a recent article in Strategy+Business on a return, not to normal, but to reality, Mark Anderson believes that three critical measures need to be put in place before serious recovery can begin:

  1. Better Protection of Intellectual Property

    Considering that most protection seems to revolve around patents that are abused by software patent pirates, not much progress has been made here.

  2. Reforms to Prevent Jackals and Vampires from Dominating the Market

    Specifically, reforms to prevent short sellers (jackals) and sophisticated investors who take profits without contributing either market balance or information (vampires) from dominating the markets. No progress has been made on this front either.

  3. Rebuilding of the Manufacturing Base of the Industrialized World

    Considering the outsourcing craze is still in full gear, especially now that even China is outsourcing to Africa, it could be a while before the manufacturing base in the developing world can even dream of being close to capacity again. Despite the fact that they haven’t learned the lessons of their peers who have found that they needed their expertise in-house and that the offshoring machine didn’t work very well.

Plus, thanks to the glut of hot money in the global liquidity pool, when the damaged parts of the split economies begin to come back, this liquidity will likely create a whiplash effect, throwing countries into hyperinflation before they can respond effectively. It seems inevitable.

And with the unemployment rate predicted to stay at 10% overall, it’s looking like a very long road to recovery.

So make sure to get your supply chain in order … you’re going to need the competitive advantage!