One of the things that I am often requested to do, is to improve (in other words, bring up to professional standards) the financial models that some companies are either creating in-house, or are procuring from inadequate (read: cheap) financial modelers. (Ironically, this also means that they end up paying way more than what they would have, had they assigned the project to a professional modeler from the get-go, but that is a point to be developed another day.)
One of the issues that I most commonly encounter, is that of multiple input cells, for the same constant. So, for instance, if the model requires the price per unit of product to work properly, it is oftentimes the case that inadequate modelers will ask the same input from the user in two different cells. This is financial engineering hubris, as it may result to the user forgetting to update all cells, thus getting unreasonable outputs. Even worse than that, is the case where the result is actually wrong, but because the outputs seem reasonable, no one can spot the error.
This is a best-practice principle in financial modelling that goes way beyond efficient spreadsheet design. It is a principle that is also applicable in best practice management and can also help in producing effective decision-making processes. By that I mean that the most effective and efficient decision-making principle, is that of assigning clear responsibility to a certain individual for a certain project. It is OK if that responsibility is somewhat restrained and contained by organizational principles and processes. It is also OK that whoever has this absolute responsibility receives advice from their team. But at the end of the day, only one person should have the absolute discretion to say what’s to be done in a project.
This may sound counterintuitive to many of you, since modern management theories, as well as real-world organizational structure call for flat teams as this is perceived to increase employee engagement and creativity. The problem that I have noticed in real life with many clients however, is that increased engagement and creativity materialize very rarely. And the reason is that for these to materialize, a carrot is needed at the end of the road, which is often not there, as bonuses, even to this day, are given on an individual and not on a team basis! Similarly, in flat teams, because exactly of the clear lack of leadership and accountabilities, people tend to feel safer than normal and may not feel as motivated to contribute. And why should they? If they contribute their absolute best, it will be difficult for their work to shine. This will be the output of the team. And because the leaders will be outside of the team and bonuses are given out on a personal and not on a team basis, the wrong people may even end up getting higher bonuses than the real heroes, depending on the perceptions of the management! Conversely, because greater contribution means greater risk of personal failure, but while in a flat team no one’s specifically responsible for the failure of the project in general, people will naturally try to hold back, as the risk/reward ratio of individual contributions in flat teams, is generally not attractive enough for high-flyers. I don’t think flat teams will go away any time soon, neither am I claiming that they cannot work. What I am saying, is that if they are to work, their reward structure has to change, so that the entire team’s decisions are considered as one input by management and all members are compensated under the same standards. (Which doesn’t necessarily mean compensated equally.) This is also the reason why teams should have the absolute minimum number of members, as the chances of opinion discrepancy increase exponentially with each new member. If these preconditions are not possible to achieve in your firm, then assigning clear responsibility (and the associated managerial powers) to just one individual, will take you much farther.