Managing Group Consolidations

In this weeks session, we addressed some of the key observations we identified from the Finance Software Survey. As mentioned last week, we explained how we discovered 64% of the survey responders who operated multiple entities stated that their finance software cannot manage group consolidations.

So we invited Bob Carter, a fellow community member who has 26 years’ experience working for FTSE100 and Fortune20 multi-national Insurance and Financial Services companies leading reporting and consolidation teams and identifying and implementing process improvements.

Recently he shared his thoughts in an article published on the GrowCFO portal based on his background of consolidating 100+ entities most with differing underlying ledgers, 30+ currencies, changing equity etc… Whilst his experience relates more to his background in PLCs, many of the concepts are largely transferable to the wider community.

His article [Read Here] broke the consolidation cycle into 5 elements;

The configuration of the system,
The aggregation of the submissions,
Inter-company eliminations,
Investment in subsidiaries elimination
NCI calculation.

During his career, he has leveraged several software solutions to support his role including Millennium, Oracle, Magnitude, Cognos and more recently Tagetik. They all had their merits and limitations but he noted that key to the effectiveness of all of them was how well they had been implemented especially in regards to the thought behind the processes.

When choosing the right system for you, he highlighted some key things to think about;

the complexity of your structure and eliminations – different systems are better suited to different situations
Future-proofing – how agile and flexible is the system to support your changing needs
What level of support is provided – both to implement correctly as well as during the life of a contract.
Consider a consultant to support the project – find one that is not tied to one product so you get a balanced opinion on the available solutions. Ensure these consultants understand your structure and core process before recommending their solutions. Look at what relatable experience they have to your company type, size and complexity as well as your industry?
Consider what exactly you want your consolidation system to do – Spew out stat reports or just consolidate numbers?
Integration – how easily will it link to your other systems?

Things to think about when setting up your system:

Don’t lift and drop – make use of the project to look at your processes
Validations on submissions (real-time)
How to book eliminations – separate entities (balanced/unbalanced), categories
Engagement by group entities to reconcile intercompany accounts before the submission date
Enforce materiality and late adjustment process. (There will always be those material adjustments that come in after submission, but reducing these to a minimum, and only when material to Group will save a lot of time and frustration for the Group finance teams, not only the consolidation team but also the other teams who will need to re-run their models.)
The one thing, apart from a new system, that made the biggest difference to most of the closes Bob has worked on is introducing effective post-close reviews of the close with all stakeholders. To be effective the outcome of the reviews should be actions, action owners and timelines to resolve for all issues raised. If it’s just a tick box exercise, then it will just demotivate the team even further.

Using Excel for Consolidations

Its clear Bob’s experience is with large PLCs with budgets in excess of £1mil to implement new systems and he appreciates most businesses won’t have access to that level of resource. So whilst his opinion of Excel to support this process is less than favourable, does concede you may have little choice. We identified a few solutions that appear to integrate into SME finance systems such as Xero but it must be noted that no one on the call has had any experience of them and as such we do not know how well they support this requirement. They are; Joiin, Konsolidator and Spotlight. It should also be noted that whilst entry-level finance systems don’t appear to support group consolidations in their core software, most mid sector products do with both Netsuite and Aqilla performing well in the survey. This may be a reason to consider upgrading your software.

When it comes to complex consolidations (like the ones Bob works on) he is against using Excel to manage the process. Reasons include;

Simple human error. Unfortunately, Excel does not have a Word spell check equivalent (although there are features which can be leveraged) and thus erroneous keystrokes can easily go unnoticed.
Transposition of numbers is my biggest failing, (difference divisible by 9 anyone?).
Complexity. Number of worksheets, columns, formulae, manual input / c+p
Security / access. How many involved in the process. Who has write access

After Bobs presentation, we also gave the audience an early look at a Finance Systems Quadrant that has been created off the back of the survey to show how all the systems compare to one another in relation to the level of complexity V time and cost to implement. This will be published on the portal in the coming days so watch this space!

I then spoke in greater depth about another observation from the survey, the miss education of true cloud software V on-premise software made to work remotely. As has been eulogised many times before, ‘Not all clouds are equal’ but I wonder if at this stage anyone really cares? What appears important to people today is that they can access their systems remotely. They don’t appear to be too concerned with the underlying architecture that supports their finance system, as long as it works! I suspect this is a ticking time bomb. Old technology (regardless of whether or not it has had a facelift and been made to work remotely) will find it harder and harder to adapt to the changes in technology and increasingly struggle to adopt the latest innovations. It is no surprise that brands such as Sage, are encouraging their clients to move away from their 50 & 200 (on-premise) products over to Sage Intacct (a true cloud product they acquired in the states and rebranded under their banner).

However, there is more than just ‘remote access’ and your systems ability to innovate to think about. One key consideration is how regularly you get updates? Are they automatic or do you have to pay annual maintenance fees and periodically decide if you want to upgrade to get access to the latest features? If you do choose to upgrade, do you have to run tests and upload patches to your system before it will work? If you do this will likely result in you having a very out of date system that costs a lot to maintain and support. A knock on benefit will also be a reduction in your IT support costs.

Other considerations are the flexibility of your licence costs. Traditional systems lock you in for a fixed-term contract whereas SaaS products work on a month to month basis whereby you pay for the licences you need for that period. This enables you to easily scale up and down based on your changing requirements. It also turns it from a Capex to an Opex expense.

Finally, there is a significant environmental impact on moving your systems to the cloud. A typical large-scale cloud provider achieves approximately 65% server utilization rates versus 15% on-premises, which means when companies move to the cloud, they typically provision fewer than ¼ of the servers than they would on-premises. In addition, a typical on-premises data centre is 29% less efficient in their use of power compared to a typical large-scale cloud provider that uses world-class facility designs, cooling systems, and workload-optimized equipment. Adding these together (fewer servers used plus more power-efficient servers), customers only need 16% of the power as compared to on-premises infrastructure. This represents an 84% reduction in the amount of power required. Combining the fraction of energy required with a less carbon-intense power mix, customers can end up with a reduction in carbon emissions of 88% by moving to the cloud. (Source Amazon)