A Smarter Approach to Intercompany
⇨ Intercompany can be a challenging process, coordinating complex processes across business sectors and jurisdictions.
⇨ Organizations need standardized practices and a global subledger acting as a single source of truth.
⇨ Before enacting a financial transformation, companies should lay out a roadmap to identify challenges and opportunities.
Global Intercompany Landscape
In 2021, more than 60,000 mergers and acquisitions took place around the world, accounting for over $5 trillion in publicly disclosed deal values—a record for both the total number of deals and their combined value. The growth of companies adds additional layers of complexity to the organization, from integrating different technologies to increased trade among related business units and legal entities. Finance teams are now tasked with ensuring that all new parts of the organization fit together seamlessly. That is much easier said than done.
Intercompany is a complex, multifaceted practice. Finance and accounting teams must coordinate transactions among various parts of the business, which often span a variety of geographic locations. Each of these geographies has its own tax laws and regulatory bodies to appease, which may be in flux.
Roughly 80% of all global trade runs through the value chains of large, multinational corporations. Avoiding the challenges inherent in intercompany is no longer an option. Organizations must find best practices that allow them to do business around the world and ensure that the finance teams can zero out their balances, minimize the risk of an audit, and achieve financial close goals in as little time as possible.
A survey of global businesses from Dimensional Research found that 96% of companies say they struggle with intercompany. As organizations look for the best ways to manage their intercompany finances, they must first identify the pain points that can make it difficult for different parts of the business to communicate and work together.
When companies acquire other organizations, they can have difficulty aligning the technology systems they used previously, according to Chad Soltman, General Manager for Strategic Solutions at BlackLine.
“A lot of large multinationals have a disparate ecosystem of technology and intercompany. That is something that is often five to 10 times the actual volume of revenue or external third-party transactions. That disparate technology ecosystem is one thing that certainly needs to be addressed. You want to get it right the first time. You want to book them synchronously so your consolidation systems and other systems are not out of whack,” said Soltman.
Even for organizations running or migrating to a single instance of SAP S/4HANA, there are intercompany challenges that persist. In SAPinsider’s SAP S/4HANA Finance and Central Finance Report, respondents identified group reporting and intercompany reconciliation as one of the top pain points for organizations. Some of the other pain points include the following:
- Companies struggling to keep up with accounting from merger and acquisition activity
- Evolving regulations all over the world
- The need for better data quality and transparency
- Manual processes that require excessive effort and have risk inaccuracies
- Uneven tax structures in different jurisdictions
Go Beyond Zero
When it comes to intercompany, zero balance often features as finance teams’ top-line goal. While that is important, it should not be the only consideration. Organizations can save time and avoid mishaps if they look beyond getting to zero and merely getting the books to balance.
It is important to remember that the close should be an ongoing process. Companies that are not proactive risk a nightmare scenario—the consolidation teams find an imbalance with no idea where it came from, resulting in unnecessary re-work or reporting delays.
“Lots of companies are just trying to get to zero and looking at a lump sum of data, making sure this ball of data matches this ball. What about the line items in between? If a government comes and questions you on that, are you going to be able to produce the data they need so you don’t have to change anything or take any write-offs or, in the worst case, restatements? There are a lot of serious concerns there that need to be,” said James Tilk, BlackLine’s Director of Solution Strategy and Marketing for Intercompany Financial Management.
Mishaps with a balance sheet as it pertains to intercompany finances can quickly generate negative news stories. They can inflict severe reputational damage that can hamstring a company far beyond the cost of a financial penalty.
To address these issues, organizations can take a proactive approach to intercompany with SAP Intercompany Matching and Reconciliation (ICMR) and SAP Intercompany Governance by BlackLine.
Piece of the Puzzle
Together, SAP ICMR and SAP Intercompany Governance by BlackLine give organizations a framework for intercompany operations excellence. SAP ICMR addresses trade transactions that happen within the SAP S/4HANA ERP. SAP Intercompany Governance by BlackLine addresses non-trade and multi-ERP intercompany transactions.
“You are already covering a lot of the global processes that you are going to be looking at anyway. You are already looking at how your transactions flow and how intercompany touches everything such as treasury, tax, and shared service centers. It is already a part of everything you do. Fitting this into a broader movement of transformation and what you are trying to do, it’s not hard. It’s easy to do and fit it in there when you’re looking at it,” said Tilk.
Organizations should take the opportunity to ensure that they have a holistic operating model that includes the following:
- Shared services
- Center of excellence with cross-functional representation
- Global process standardization
- Global intercompany subledger
Organizations can streamline intercompany by installing common processes and common technologies across all geographic locations. With SAP ICMR and SAP Intercompany Governance by BlackLine, organizations can centralize their end-to-end intercompany processes.
“All these jurisdictions have their own accounting, tax, finance, and treasury tasks. They should talk, but that’s not always necessarily the case. Without a common piece out of data, without a common process and approach, you can’t validate them. With common sets, they talk more, they share more, they realize that they’re all going for the same thing,” said Tilk.
Having an idea upfront of what to expect when updating intercompany practices can save time on the back end. Organizations may start down the road of financial transformation before evaluating how many people are involved in intercompany. Doing some due diligence ahead of the transformation allows companies to focus on the highest-value activities in order to build a business case for this financial overhaul.
“By having that roadmap, you can prioritize what is going to make the biggest monetary impact internally. You can get some momentum and prove that there is value here. And in some cases, these projects can become self-funding. For many companies, trade transactions may make up a large volume of intercompany transactions, but non-trade transactions are highly manual and take up valuable time and resources,” said Soltman.
Addressing Non-Trade Transactions with a Global View
One of the key strategies to alleviate the burden on finance teams is to rely on automation. Automation not only eliminates the time it takes to manually execute certain functions but also eliminates many of the mistakes that come from those manual functions.
“There is so much effort required in intercompany. Without automation, organizations are trying to manually match up what was recorded over here and what the currency was. It is a lot to do. When you have a process that can take that data and completely align it and have it already preconfigured with rules, not only are you cutting the time with it, but you are also giving a complete picture to all the parties involved in the process,” said Tilk.
To achieve automation in non-trade intercompany transactions, SAP Intercompany Governance by BlackLine offers the global intercompany subledger. This allows all intercompany activity to be centralized for a single source of truth and enables business leaders to enhance decision-making through better information and to be better prepared for audits. In addition, the subledger provides greater confidence in information through automation, allowing companies to minimize their tax burdens.
“When you don’t have that automation and that comfort, a lot of companies not only put themselves at risk but also end up taking more conservative stances on taxes. Organizations end up with tax leakage because they do not have the data support for a filing that would allow them to optimize their tax position. With SAP Intercompany Governance by BlackLine, you can actually submit your transactional details with confidence and know that you’ve minimized any tax leakage,” said Soltman.
This global intercompany subledger allows organizations to recognize the smart transfer pricing and global operating model they have adopted. With that layer on top, it can even make it easier for companies to realize synergies with organizations they acquire or merge with.
SAP Intercompany Governance by BlackLine is not just about avoiding the issues that come with financial irregularities. It also frees up finance teams to work on other pressing issues such as the following:
- Helping the company with strategic decisions
- Gaining faster insights
- Spending time forecasting in a shifting global financial landscape
When taking a holistic approach to finance, organizations should focus on three key areas—people, process, and technology. If these three areas are aligned, the whole business operates better. When finance and accounting teams spend less time on the close, they can work on more proactive forecasting activities. That can boost team morale since they get to spend more time adding value to the business rather than executing manual functions.
“If you address intercompany within the close as it is, it just adds time. You’re manually trying to tie out these bounces because you have to get there as best you can. With a proactive approach, you free up all this extra time. Maybe you can spend it on something as simple as I can go home today. I can see my family, I can see my kids. That’s the practical part,” said Tilk.
End-to-End Intercompany Accounting with SAP and BlackLine
SAP users need to ensure that their intercompany solution can integrate seamlessly with the rest of their ERP landscape. BlackLine is an SAP platinum partner offering cloud solution extensions for the financial close. SAP Intercompany Governance by BlackLine is designed to complement and extend SAP solutions, like SAP S/4HANA and SAP ICMR to accelerate and maximize investment value.
“We are very proud to be a solution extension for SAP. We have connectors that can save a lot of time on the integration. It’s plug and play,” said Soltman.
Solution extensions work in tandem with SAP to deliver functionality and help businesses achieve holistic transformation in order to meet even the most ambitious business goals. Leveraging the combined power of SAP and its Solution Extensions helps organizations get the most out of their technology suite.
“Whether it’s GL balances, transactions, purchase orders, or invoices, we work hand in hand with SAP on this so all customers get a good experience,” said Tilk.
BlackLine also leverages external partners to ensure a seamless end-to-end process for SAP Intercompany Governance by BlackLine.
“We partner very closely with the largest and most respected advisory firms in the world. We’re talking Deloitte, EY, and more. They help with change management, the policies, and the process design; we deliver the technology,” said Soltman.
Partnership should flow both ways since organizations often need a helping hand to identify problems as well as address them. Without insight into the full range of options available to help solidify intercompany processes, finance teams may struggle to solve issues and fix bottlenecks.
“We help our customers by sitting down with them and looking at their process. A lot of times they don’t know what they don’t know. They don’t know that something is a problem until we start sharing and say, ‘Have you considered this? Have you looked at this?’ And then they go, ‘Oh, well that is a problem.’ We deliver the technology, but we also help them— whether through us or with a partner—with this process to realize the efficiency and the savings that can be delivered,” said Tilk.
A Holistic View
SAP Intercompany Governance by BlackLine is the financial glue that binds multinational organizations together. With so many different financial priorities, it is vital to ensure that all facets of the organization are pulling in the same direction with standardized practices and a global intercompany subledger acting as a single source of truth.
“A lot of companies want to close more quickly. They want to enable a resilient supply chain, stay out of trouble from a tax perspective, and minimize leakage. Without effective and proactive intercompany processes in place, you’re really going to struggle,” said Soltman.
Emerging regulations, disparate technology ecosystems, foreign exchange rates, audit concerns, and many other challenges highlight the need for SAP Intercompany Governance by Blackline. Laying out a roadmap with trusted partners like SAP and BlackLine can help identify issues in this process and alleviate any associated pain points. That way, organizations can have an end-to-end view—from the start to the finish, from creation all the way to netting and settlement— and ensure that they are meeting all stakeholder needs throughout that process.