Portfolio Management with a spreadsheet?

Excel bubble plot

Do you often hear about spreadsheets as a good (even if basic) solution for portfolio management tooling? Ever since we offer an alternative solution (FLIGHTMAP)  I have come to appreciate the downside of spreadsheet-based portfolio management hands-on.

Thinking about the issue I see three main reasons why using spreadsheets is a bad idea:

1. Spreadsheets are inefficient

One of the most cited reasons for spreadsheets (in spite of their limitations) is their perceived low-cost. However, let’s assume we need tooling for good support of portfolio decisions. This impose requirements of the following kind:

  • Can we compare multiple projects knowing they are analyzed on the same conditions (are we comparing apples with apples)?
  • Can we track changes over time to project proposals (with some versioning mechanism)?
  • Can we analyze or simulate the impact of uncertainty about the future (this is about innovation…)?
  • Can we share information easily, and yet make sure access and authorization for changes are well-managed?

All this is functionality you can and should expect from an IT solution but is not offered by spreadsheets out-of-the-box. This leads to either cumbersome plug-ins, macro developments and tool integration projects (let’s say Excel with Sharepoint), or worse, to leaving all of this out of the picture. Which brings me to the next issue:

2. Spreadsheets are ineffective

In an effective portfolio management process, decisions are based on relevant analysis of realistic alternatives against strategic and financial goals and constraints. The simplest spreadsheet approaches based on force-ranking projects do not do justice to the decision support needs for executives in this process. That is oversimplification that does not offer decision support. Executives don’t just need help to separate the good projects from the bad ones. They want to see which and how many of the good ones they need when and how to meet their revenue, profit, and other goals with the least risk. They need to perform robustness checks on the business cases against varying scenarios for technology and market development. They need to understand dependencies in the portfolio.

Now, developing spreadsheets that can do these analyses will inevitably lead to huge and complex tools. Just try to update a spreadsheet for a project being postponed by 1 or 2 quarters; which is the most common what-if? question in real portfolio management. I have yet to meet the executives who rely on such overcomplex spreadsheets. They know this: 

3. Complex spreadsheets are wrong…

Research consistently indicates that complex spreadsheets are full of errors (see e.g. Panko or EUSprig). Causes for this problem: the low threshold access for anyone to build and change them, the intransparent way to build, change, copy, and overwrite formulas, and the lack of auditing in most organizations. Now, decision support with a serious probability of getting erroneous management information beats the purpose of tooling in the process.

I know a lot of spreadsheets are out there in portfolio management. What do you see as advantages in practice?

One thought on “Portfolio Management with a spreadsheet?

  1. Hi Jac,

    Main advantage of spreadsheet based portfolio mgmt I see are almost the same points as you write above, but then worded differenly.

    Advantages:
    – Low threshold, everyone has excel and many can work with it, I didn’t meet any analist yet that did not love excel. Hence, no a lot of change managment needed wrt to tooling part of portfolio mgmt improvement
    – Flexible; anyone can do his/her analysis, add own data and graphs, slice & dice: actually spreadsheets are designed to do exactly that

    Wrt your last point above, I wonder what you get if you research “systems” (not spreadsheets)… has this ever been done? I guess that many managers will pont out that “standard systems” never representing reality, how effective is that?

    Having said this, I don’t have a big preference of either spreadsheets or system based portofolio mgmt, I do think the main challange is more in dealing with data/information that comes out rather then how to get it.

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