Spreadsheets have long been used for waterfall calculations. Excel and other spreadsheet tools are easily accessible and affordable, and most everybody likes to think they know how to use them. As a result, onboarding and training costs can be kept to a minimum.
While spreadsheets are indeed useful to a degree, they certainly have their limits. After all, you can almost always get a result in a spreadsheet, but that doesn’t always mean those numbers are accurate. It’s at this point that spreadsheets can have costly repercussions.
The Problems with Spreadsheets
Distribution waterfalls, in general, are very complex, but the math behind them is not overly complicated. The problems typically arise within the confines of Excel. Take the example of Barclays, who accidentally made almost 200 contract purchases from Lehman Brothers in a bankruptcy buy-out deal. A pair of junior lawyers tried to reformat an Excel spreadsheet with over 24,000 individual cells of data and hid, rather than deleted, key cells.This mistake left Barclays financially on the hook for unwanted Lehman assets.
As illustrated in this example, the problems with spreadsheets primarily manifest as errors and risk. Let’s take a closer look at what this could mean for your organization.
Studies repeatedly show that 9 out of 10 spreadsheets contain at least one error, and further research shows that attempts to correct those problems often introduce additional errors. These mistakes aren’t typically software defects or bugs, either — they are the result of human error. In fact, these problems have become so widespread that there is even a consortium of professors, researchers, and professionals who study and develop processes and methods for spreadsheet risk management.
Common spreadsheet errors include mistyped numbers, wrong formulas or logic, rounding mistakes, incorrect cell formatting, and copy-and-paste inaccuracies. In some cases, somebody who knows what to expect may catch that there are one or more errors, at which point you still have to figure out where it is or what is causing it. In other cases, it’s not obvious, and the data is accepted as the truth. That brings us to the next problem…
Most organizations have a single person who is responsible for all of the data entry in waterfall distributions. They’re really the only one that understands it, and it’s very hard for someone else that’s in the business to help them or take that burden off of them. While other software programs typically have backstops and are always testing and double-checking calculations, that’s not often true with Excel spreadsheets. Yet this information is used in making important decisions and distributions.
Should one or more of the aforementioned errors occur, as is statistically likely, the cost to the organization can be to the tune of millions or even billions of dollars in time and money. That’s not to mention the potential for damaged reputations and business relationships, poor decision making, and lost future revenue.
The Benefits of IMS
Compared to spreadsheets, IMS automates the formulas and calculations, uses customizable templates to maintain compliance, and seamlessly connects to distribution processes. Customers can also expect to see the following advantages of transitioning from spreadsheets to IMS:
Creating the rules for a waterfall distribution can be very manual and time-consuming. Automating this complex process means distributions can be calculated much more efficiently and effectively — literally in minutes. The result is a huge time savings. And by reducing some of the admin work, employees can focus on more key aspects of their jobs.
Calculating waterfall distributions can be very complex, and the number of variables can make the task very cumbersome. Even one small typo could result in incorrect payouts, which can have major implications for your bottom line.
Further, in this industry, accuracy is not optional. The format of the paperwork is standardized, meaning it has to be correct and it has to follow the proper format. With templating, companies can be sure that they are compliant with those mandated guidelines, serving to also mitigate risk. Our Waterfall Audit feature can help troubleshoot any discrepancies, while our Distribution Workflow allows each distribution to be reviewed by other team members.
In a recent webinar, Jason Kelley, CFO of Investor Management Services, mentions that one of the greatest benefits of IMS is scalability. With a few projects, you may be able to continue using Excel to calculate your waterfall distributions. But at some point, that’s just no longer possible. It’s too much work and introduces many more errors.
With IMS, you can establish repeatable processes with higher degrees of accuracy, enabling you to manage larger portfolios. Since 2016, IMS has calculated $926,117,979 in distributions on behalf of customers.
At the end of the day, the increased speed, accuracy, and scalability offered by IMS means huge cost savings for any organization, and the benefits of IMS definitely outweigh the cost of continuing to use spreadsheets.