Our experience shows that many organizations using on-premise or legacy Microsoft ERP-solutions have issues with managing and performing intercompany accounting. These intercompany issues typically occur in the entire value chain - all the way from managing (master)data and defining transfer pricing strategy until settlement and reconciliation, which can have significant impact not only on daily operations (i.e. lots of manual work required) but also on financial reporting as intercompany revenue is often not correctly recognized and accounted for. In many organizations handling intercompany transactions is a time-consuming and error-prone process that requires employees of different entities to continuously stay aligned and work from different applications using different (master)data.
Complexity within intercompany activities can have a range of reasons and is generally a combination of many factors that are unique to each organization that struggles with intercompany. Nonetheless, several key factors were identified:
Decentralized ERP landscape – Decentralized ERP landscapes increase complexity as multiple applications within multiple entities create difficulties in standardizing intercompany procedures and generating insights to control the processes.
Multinational organizations – Multinational organizations that operate cross-regionally and use global supply chains inherently suffer from a higher level of complexity in managing their intercompany procedures due to different tax structures and legal requirements.
Informal governance – Most organizations lack (global) process owners for intercompany, work according to outdated policies that lack rigidity and have an improper internal control framework that is required to govern intercompany processes throughout the value chain.
Even though upgrading to the latest Microsoft technology might lead to meaningful improvement it should now be clear that intercompany transformation should be tackled from a more holistic end-2-end perspective and not solely focus on the technological side of transformation. KPMG’s Target Operating Model (TOM) – which is part of KPMG’s Powered Enterprise methodology – allows organizations to approach intercompany transformation from a holistic perspective by introducing six TOM Pillars that should all be taken into account while planning and executing intercompany transformation:
Service Delivery Model – Defines through what kind of delivery models intercompany cross-functional processes and services are delivered such as Shared Service Centers (SSC’s) and Centers of Excellence (CoE’s).
People – Defines which role in which entity should take ownership of what intercompany activity within the value chain including definition of responsibilities and periodic deliverables.
Process – The intercompany process should be designed from and end-2-end perspective across all entities within the organization and standard procedures should be established to make the activities less time-consuming, less error-prone and more insightful.
Technology – Application(s) used within the intercompany value chain should be able to fulfil the functional intercompany requirements created in the other five TOM pillars while also supporting integration of adjacent technologies.
Data and Reporting – Definition of intercompany information and (master)data requirements that will allow organizations to generate the insights that are required to perform meaningful financial reports as well as controlling intercompany procedures, while also working with unified masterdata such as pricing.
Governance – Identifies the risks associated with intercompany activities and the associated controls, policies and KPI’s that are necessary to mitigate the identified risks.
By approaching intercompany transformation through the six pillars of the Target Operating Model the transformation will have true meaningful impact across the value chain, rather than creating an unsustainable and low-impact solution that focusses for example solely on technology or defining new procedures. Within the Target Operating Model KPMG has pre-defined leading practices and assets across each pillar, that have been pre-configured within several applications.
Technology Layer – Microsoft Dynamics Finance & Operations
Within the technology layer Microsoft Dynamics for Finance & Operations (F&O) has been identified as one of the key-enablers that drives intercompany transformation. Microsoft F&O offers standard functionality to post bookings in multiple entities with a single entry posted in just one of the entities, meaning organizations can leverage on automation to prevent errors and manual entries. This includes transactions between entities that sell/buy a product or service among each other, which makes it possible to efficiently perform intercompany trade transactions. A common issue within intercompany trading is that the two entities may have different pricing of products. This bottleneck is solved in Microsoft F&O by offering various possibilities to set up a transfer pricing between entities.
On top of this, standard functionality in Microsoft F&O offers tools for reconciliation in order to eliminate the transactions against each other in the end balance. This will reduce time spent on manual activities while preparing month-end balances while also enabling for more accurate financial reporting. Another aspect of intercompany functionality is the integration with the project management module available in Microsoft F&O . For example, time and expense transactions from a project contract that belong to a parent company or subsidiary can be booked easily, while the resources on the project contract are not a part of the same company. Lastly, Microsoft F&O offers many possibilities for integration with other third party applications in the value chain which will reduce the impact of having a decentralized ERP landscape.
To sum up intercompany accounting is something that many organizations struggle with, and transforming intercompany capabilities should be approached from a holistic perspective. KPMG’s Target Operating Model can accelerate intercompany transformation by leveraging on its leading practices embedded in the six pillars, in which Microsoft Dynamics Finance & Operations has been identified as one of the leading ERP-solutions in driving intercompany transformation.
If you need help with intercompany activities or if you are interested in learning more about intercompany transformation enabled by Powered Microsoft, do not hesitate to reach out!