For those organizations that have subsidiaries, financial consolidation can be an important and time-consuming process at period and year-end. Errors or delays in reporting can be very costly.
Financial consolidation software is specifically designed to deliver an efficient and effective consolidation process. And yet many organizations are using solutions that are manually intensive or technically or functionally no longer suited to their needs.
When it comes to searching for and selecting a new financial consolidation solution, how do you differentiate between the various vendors and their offerings and find the one best suited to your organization?
Finding the right technology partner can be a difficult process for even the most experienced person. Vendors will inevitably provide a glitzy presentation and demonstration of their solution, hopefully tailored to your requirements. The million-dollar question is where do you go from there?
The purpose of this blog is to provide you with guidance and advice on four attributes that will help you differentiate between the vendors and significantly improve your chances of success; functionality, cultural fit, scalability and cost.
1. Functionality
Before you embark on any selection process, it is essential that you have understood and defined your functional requirements. This sounds so obvious, and yet is often neglected. Below we highlight the common processes and tasks that will help you to identify what functionality applies to you and assign a level of criticality to each.
Integration
As technical platforms develop, integration has become less of an issue and can be taken for granted in many cases. Confirm this with the vendor that connections can be made with underlying ERPs and finance systems and data can be loaded automatically to the solution. Of course, this should include the ability to ‘map’ and ‘transform’ data on loading.
Whilst ERPs are common data sources, what can be more of an issue is integration with other software solutions that use the information created in the consolidation solution. This could include reporting solutions, business intelligence (BI) software, or data warehouses.
The final integration question is one of control. It is preferable and desirable that as much control as possible remains within finance. Therefore, once connections are made to other systems, finance should be able to control data movements and mapping.
Foreign Exchange (FX) capability
If you have foreign subsidiaries, the ability of a solution to deal automatically with FX is critical. You may have requirements that extend beyond the traditional translation at closing, monthly or year-to-date average rate. This includes FX implications around investments, cash flow and movement accounts (see below) which may require historic and opening rates. If you want a completely automated consolidation process avoiding manual adjustments, the solution will need to deal with all of these.
Ownership and investments
For those organizations who have subsidiaries, there can be various ownership types. Is there functionality to automatically eliminate based on full consolidation, proportionate consolidation and the equity method? Does the solution automatically calculate the investment adjustments and/or perform joint venture accounting? In addition, does the automatic elimination also include the notes to the accounts (see below) to ensure they remain in line on consolidation?
Another important question is how does the solution deal with a change in ownership or ownership percentage mid-way through a year? If you are a fast-moving organization, you will not want to be making manual adjustments each time there is an acquisition or a divestment.
Intercompany
In a group scenario, there is inevitably a level of intercompany activity to account for. The solution will need to provide functionality to account for intercompany trading in the P&L account and the balance sheet. When eliminating across multiple currencies, you may want to calculate real differences and those caused by FX and make automated postings accordingly.
Most consolidation solutions work on the basis of agreement of intercompany at a summary balance level. The reality is that reconciliation agreement is at a transaction level. You may want the capability to work at a transaction level integrated within the solution, otherwise it is likely to become a disconnected process.
For those groups in the manufacturing sector, you may also require automated elimination of ‘profit in stock’ which can be a complex calculation.
Cash flow
The indirect cash flow statement is a requirement for statutory reporting at a holding company and consolidated level. It is a high priority for many organizations that cash flow is calculated automatically at all levels of the organization. This can be complicated as it may need to allow for non-operational adjustments as well as FX translation at the correct rates.
Note to the accounts
The notes to the accounts are an important and integral part of the statutory reporting. In some cases, they are also driver in the calculation of cash flow. Notes include movement accounts (e.g., fixed and intangible assets, and reserves), and others such as debtors and creditors.
If the notes to the accounts are not dealt with inside the consolidation solution, this will inevitably end up as a spreadsheet exercise. This creates a significant amount of manual work and reconciliation. The ideal is that the solution includes notes to the accounts, their consolidation and elimination.
Data validation
It is important for the integrity of the consolidation model that data is checked and validated as the close process proceeds. Examples of this would include the TB balancing to zero and movement accounts closing balances reconciling to the TB. To do this, the solution will need to allow data validation rules to be defined by the user. Once met, you may also want the ability to lock data to ensure that it does not change or can only be changed by certain individuals.
Workflow and process control
If you have multiple subsidiaries in various locations, it may be important for the group finance team to proactively track the close process through a workflow module. This would show the progress of each subsidiary from data load, adjustment, and validation and then the various levels of consolidation.
Security
As you would expect of any finance system, securitization is critical. You will want to ensure you can securitize access rights and capabilities across a matrix of group and subsidiary users with different needs.
Audit trail
There are two aspects to audit trails. The first is related to the data within the system. You should have complete visibility of all data loads and postings made during the consolidation process. This is necessary for internal control as well as external auditors.
The second aspect of audit trails is to ensure the integrity of the consolidation solution. All changes to the model are recorded and made available for scrutiny.
The level of detail of the audit trails may be internally set or defined by legislation such as Sarbanes Oxley.
2. Cultural fit
A factor often overlooked by those looking for new software is the cultural fit to your organization. This can manifest itself in three ways:
The vendor
What is the vendor approach to the implementation? Are they an organization you can partner with in the long term and who will be able to support you in the future? Remember, you are likely to be working with a software partner for several years, so it is important you understand each other.
Ease of use
The ease of use of a solution can is a differentiating factor. Does the solution have a user-friendly interface that is easy to navigate and understand? Will the solution fit into the technology stack that you already have? How does the size of the finance team influence the type of solution? For example, if you have a small team then you may not be able to devote the time to manage the solution and therefore require something easy to maintain.
Ability to transform and change
Do you have a finance team who embraces change or are you likely to encounter internal resistance? This could dictate whether you try to leverage the internal skillset available to you (e.g., Excel) or are confident that the team can acquire new skills.
3. Scalability
If you are a high growth organization, your financial consolidation needs will evolve, and it is important to have a software solution that can scale with your business. This can impact two key areas: user licenses, and the configuration of the solution.
Since the evolution of true SaaS solutions, licensing options have made it far easier to flex user numbers either up or down. In addition, there is no issue with hardware limitations as the cloud has unlimited storage. In respect of configuring software for acquisitions or divestments, look for a solution that has out-of-the-box functionality that can be managed within the finance team without the need for consultancy assistance.
4. Cost
Finally, as you would expect, cost will always be a differentiating factor. Most modern solutions are offered on a monthly subscription basis, whether they are true SaaS solutions or managed platforms. This has replaced the previous on-premises deployment method that entailed a high upfront cost for licenses with an accompanying annual support contract.
And then, of course, you need to factor in the cost of implementation, training, and ongoing support. The more out-of-the-box features that are available, the less it is likely to cost to implement and maintain as you will be able to be self-sufficient to a greater extent. Also, if the solution is true SaaS, upgrades will take place without any need for you to be involved.
*BONUS* Single Platform versus Best-of-Breed
At this point, we should look at the single platform versus best-of-breed debate. This is a debate that has grown louder in recent years due to the considerable investment in and evolution of Corporate Performance Management (CPM) solutions. Many CPM vendors are now widening their capabilities beyond the core FP&A activities to offer other related functionality around the close process. Financial consolidation falls into this category.
The way that most CPM vendors have approached financial consolidation is to create a model that has built-in capability. For some organisations this model may align well with their needs and requirements. However, it may not, whether through lack of functionality in more complex areas such as foreign exchange or accounting for acquisitions. When it does not, these built-in models may not be flexible to change without significant work. Therefore, the benefits that may accrue from adopting the single platform route can soon dissipate.
Where best-of-breed financial consolidation solutions have the edge is that they have more functionality and, as a result, are far more configurable without the need for external assistance. As changes occur in your organization, a best-of-breed solution is more likely to be able to evolve with it. In terms of linking in with the other software solutions that may be of use within finance, the integration of modern technology is no longer a barrier.
As is often the case, we come back to a question of the ability of the solution to meet your current and future needs and the compromises you are willing to make.
In terms of the finance team's operation, do you want a financial consolidation process that is highly reliant on staff, thus adding pressure to the team and impacting their well-being? Or do you want a functionally rich solution that automates financial consolidation and takes a huge amount of pressure away from individuals? In addition, the world of regulatory reporting is a harsh one and errors can be costly in terms of reputational damage and a loss of confidence. Therefore, any functional compromise needs to be carefully considered.
Conclusion
If financial consolidation is an important process for your organization, it needs to be given the required care and attention. The ability of a solution to deal with your unique needs and requirements will be a significant factor in differentiating between vendors and varies across all businesses.
To learn if Fluence could be a good fit for your organization, contact our team today.
