This error message occurs when you open an older Data Model (created in Excel 2010 using the 2008 R2 or 2012 version of the Power Pivot add-in) in Excel 2013 or later.
The message asks you to upgrade to the newer model format.
More about this error
There is only one thing that is not obvious about this message, and that is that upgrade is one-way. A Data Model in Excel 2013 or later looks for internal storage that Excel provides. Once you upgrade the Data Model, it no longer recognizes the previous storage engine provided by the Power Pivot for Excel add-in.
All your colleagues who share this workbook will need to have Excel 2013 or later to work with it moving forward.
Before upgrading, backup your .xlsx file in case you need it later, and read the following link in its entirety to avoid potential pitfalls along the way: http://office.microsoft.com/en-us/excel-help/upgrade-powerpivot-data-models-to-excel-2013-HA103356104.aspx