Do financial modelling standards inhibit innovation?

F1F9 FINANCIAL MODELLING EXPERTS

Author:

Kenny Whitelaw-Jones

Published:

18 Feb 2014

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This is one of several questions that is asked regularly about our adoption of the FAST standard.

We think that standards are more likely to promote innovation than inhibit it.

In his book, “The World is Flat”, Thomas Friedman quotes Joel Cawley, Head of IBM”s strategic planning unit:

“Standards don’t eliminate innovation, they just allow you to focus it. They allow you to focus on where the real value lies, which is usually everything you can add above and around the standard”

In software development the code is never an end in itself. The end point is the application created by the code and the problem it solves. Standardisation in coding facilitates innovation in application development: better software solves more problems.

Spreadsheet models are never an end in themselves. They are created to answer a business question. Knowing what question to ask – and knowing what to do with the answer – is where the real value lies. This is what our clients add above and around the standard.

As one of F1F9’s Private Equity clients puts it:

“Every investment we make starts with a hypothesis. The financial model is the environment in which we conduct experiments to test that hypothesis. Our focus is on formulating the right hypothesis, and then understanding what the experiment tells us. FAST helps us by reducing the time it takes us to understand the spreadsheet itself, so that we have more time to think about and act on what it is telling us”

The greater the level of financial innovation, the greater the requirement for clarity and transparency in the modelling.

Another F1F9 client put it like this:

“The application of standards allows a team based approach to modelling and reduces our risk. This gives people the confidence to try out new and innovative solutions to client problems, knowing that their analysis will be understood by their colleagues and by the client.”

Software standards capture the distilled wisdom of thousands of developers who, through decades of trying things out, have come to understand what works and what fails to work.

As an independent standards body, the FAST Standard Organisation is now doing the same for financial modelling.




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Kenny Whitelaw-Jones
Kenny Whitelaw-Jones is no longer with F1F9 but we really like this blog so we've kept it.