THE BLOG
01/30/2013 12:45 pm ET Updated Apr 01, 2013

Here's What Every Business Can Learn From JPMorgan's $6.2 billion Mistake

Recently, JPMorgan published a 129-page internal report detailing the issues that led to $6.2 billion in trading losses at its chief investment office in 2012. The findings point the finger at the following five concerns:

    1. Key executives' poor judgment and failure to escalate trading-related concerns and risks
    2. Ineffective and outdated financial and risk-related controls
    3. Lack of personnel and structure required for effective risk mitigation
    4. Risk limits that were too high-level
    5. A flawed approval and review process

In fact, many of the issues come back to one theme: JPMorgan's methods did not evolve in step with the increased complexity and risk of its business. In fact, a key culprit cited throughout the report is the complex, error-prone spreadsheets on which JPMorgan relied to manage its finance functions. Data was uploaded manually, without sufficient quality control. On top of this, the spreadsheet-based calculations were made with frequent formula and code changes.

One way to get around this is with a little help from the IT department. But unfortunately JPMorgan failed to devote adequate IT resources to the process.

And it's not just JPMorgan. The problem exists in most organizations. Many companies have watched their product portfolio size explode, thanks to the combination of internal innovation and ongoing acquisitions. But when these portfolios are married with the varied routes to market (direct, web, distributors, resellers, OEMs), the complexity of the business skyrockets. Yet, many organizations still manage their revenue like they did 20 years ago, when times were much simpler.

Using outdated tools and processes for revenue management creates several critical problems:

    1. Increased risk of material weakness. The inability to show evidence of documented processes for effectively managing revenue, accurately accruing costs, and managing supplier and channel relationships puts an organization on a collision course with its Sarbanes-Oxley auditors.
    1. Lack of agility and resilience. Virtually every industry analyst and consulting organization agrees that manufacturing companies need to move quickly and anticipate shifts in trends and demand. And basing your internal operations on error-prone spreadsheets simply doesn't provide the foundation for an agile, market-ready organization.
    1. Lack of insight. Market insight is the key behind an effective value chain. Suppliers, manufacturers, and the entire distribution network depend on accurate, timely insight into market demand, performance of channel incentives and promotions, and the reconciliation of pricing and chargebacks against underlying agreements. But by using outdated tools, companies cannot correctly look ahead to gain the insight they need.

If there is a single, important lesson we can take away from the JPMorgan fiasco, it's this: Old approaches are out, and automation is in. The old approach of controlling and analyzing a business via spreadsheet-driven tools and processes is over. Today's businesses, and not just Fortune 1,000 companies, need a modern, integrated way to manage revenue, achieve operational efficiency, and reduce corporate exposure. Don't wait until you're the next JPMorgan to take action. If your business still handles its finances through out-of-control spreadsheets, it's time to find a solution that automates revenue management and ensures compliance.