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SAP White Paper
Enterprise Performance Management




IMPROVING INTERCOMPANY
RECONCILIATION FOR A FASTER CLOSE
DRIVING FINANCIAL EXCELLENCE
Improving Intercompany Reconciliation for a Faster Close
CONTENT




 4   Executive Summary       13   Building a Business
                                  Case for Improved
 5   The Fast Close – Not         Intercompany
     an Elusive Goal              Reconciliation

 6   The Problem             15   Will a Consolidation
                                  Solution Do the Same
 8   The Way Forward              Thing?
                             15   Setup Phase
 9   Applying Technology     16   Reconciliation Phase
     to the Reconciliation
     Problem                 17   Achieving the
                                  Fast Close
11   Unique Process
     Innovation with         18   SAP Solutions for
     BusinessObjects              Enterprise Perfor-
     Intercompany                 mance Management
11   Setup Phase             18   For More Information
12   Reconciliation Phase
12   Completion Phase
EXECUTIVE SUMMARY
REMOVING THE SINGLE GREATEST BARRIER
TO THE FAST CLOSE




Companies are moving beyond the ini-             However, as evidenced by a growing      removing this process from the finan-
tial need to comply with legislation like        number of case studies, some compa-     cial close’s critical path and improving
the Sarbanes-Oxley Act and are focus-            nies endeavor to deal with the inter-   the quality of data. The use of software
ing instead on driving sustainability and        company reconciliation challenge by     for intercompany reconciliation projects
control into their corporate processes.          employing technology to enable peer-    provides a quick win for companies
Of the various initiatives supporting this       to-peer processes and dramatically      who adopt such solutions – resulting in
shift, the fast close – a concept used to        save time in their financial close      dramatic time savings with compara-
describe a company’s ability to com-             process.                                tively little effort.
plete its accounting cycles and close
its books quickly – is perhaps one of                                                    This paper examines the issues behind
the best documented.                             What’s arguably the single              intercompany reconciliation and out-
                                                                                         lines how companies can make impres-
Predating the compliance revolution,
                                                 greatest barrier to the fast            sive progress when they employ soft-
the fast close forms a finance trans-            close has remained con-                 ware solutions such as those from SAP
formation project that has a clear                                                       and Business Objects, an SAP
structure and well-defined methodolo-
                                                 stant – the completion of               company.
gy, providing huge benefits to those             the intercompany reconcilia-
companies that take on the challenge.
However, what’s arguably the single
                                                 tion process.
greatest barrier to the fast close has
remained constant – the completion of            Companies have implemented solu-
the intercompany reconciliation pro-             tions such as the BusinessObjects™
cess. Surprisingly, this challenge con-          Intercompany application to improve
tinues to provide a bottleneck that              the flow of communication during the
many companies have yet to tackle                intercompany reconciliation process,
effectively.




4   SAP White Paper – Improving Intercompany Reconciliation
THE FAST CLOSE – NOT AN ELUSIVE GOAL
REMOVE THE RECONCILIATION BOTTLENECK




In today’s business environment, where    However, by and large, close times are         of intercompany reconciliation. As a
compliance and competitiveness are        increasing – particularly in the United        result, virtually every fast-close project
paramount, companies recognize the        States, due the rigor of the Sarbanes-         during the past five years in which
importance of the financial close and
its role as one of the most essential
characteristics of a successful global    BPM International notes that 72% of all companies
enterprise – and they are under more
pressure than ever to shorten their       surveyed spend significant time clearing intercompany
reporting cycles.                         differences, and 31% of survey participants identified
Driven by new regulations that mandate    the process as a significant barrier to their close.
greater financial confidence and trans-
parency, companies are forced to deal
with heightened investor expectations     Oxley Act – resulting in time-                 significant improvements have been
for accurate and timely financial com-    consuming, labor-intensive efforts to          made has included a project stream
munications. The fast and high-quality    ensure the quality of financial data. It’s     specifically tasked with examining and
close has now become synonymous           no wonder that companies once again            addressing this issue.
with allowing more time for value-added   are focused on speeding up the com-
activities, creating more timely access   pletion of their accounting cycles.            Automation and process support for
to financial and nonfinancial data for                                                   the intercompany matching and recon-
decision making, and improving the        To achieve a faster close, you must            ciliation process via software is under-
work-life balance of key accounting       scrutinize every step in the reporting         utilized, and the employment of a suit-
staff during the close process.           process to figure out where your com-          able software solution would make a
                                          pany can save time and how it can opti-        significant advance in alleviating this
Significant steps have already been       mize the process. Based on our experi-         major cause of delay in the reporting
made to shorten the reporting cycle via   ence working with some of the world’s          process. In this paper we examine the
a combination of people, process, and     leading companies, we’ve determined            challenges and, as part of a fast-close
technology, and many companies have       that one of the most significant bottle-       action plan, we provide a framework to
achieved noteworthy improvements.         necks in the close cycle is the process        tackle this important issue.




                                                                            SAP White Paper – Improving Intercompany Reconciliation   5
THE PROBLEM
INTERCOMPANY RECONCILIATION




Over the past five years, numerous                  function. On top of these problems,                 on corporate headquarters. Generally
research projects have examined the                 system deficiencies around intercompa-              this means that staff members in the
interplay between the close and the                 ny processing and the lack of process               central finance function are involved in
intercompany reconciliation process in              automation are found to contribute to               checking balances, correcting errors,
great detail. Intercompany reconciliation           delays in the reporting process.                    and contacting reporting units to
and elimination are consistently identi-                                                                resolve issues and intervene in dis-
fied as two of the most common non-                 The BPM International study suggests                putes. This process results in an ineffi-
value-added tasks slowing down the                  that the worst-performing companies                 cient vertical flow of information
reporting cycle. In its 2007 report on              are taking upward of ten days to                    between headquarters and reporting
reporting processes and systems,                    resolve the intercompany process dur-               units and back again, as shown in Fig-
BPM International notes that 72% of all             ing a year-end close, while the best in             ure 1, rather than a more efficient later-
companies surveyed spend significant                class report an average of four days,               al flow of information between the
time clearing intercompany differences,             with ambitions to reduce it to three                reporting units involved in the original
and 31% of survey participants identi-              days.2                                              counterparty transactions.
fied the process as a significant barrier
to their close.1                                    The reason this remains such a prob-                The process is also hindered by the
                                                    lem is perhaps bewildering at first, but            means of communication employed:
Little or no improvement has been                   closer examination uncovers the exis-               telephone calls, e-mail, and fax. These
made in this area since 2002 when sim-              tence of significant process and tech-              technologies are time consuming to
ilar studies were conducted. Compa-                 nology issues. In the traditional inter-            employ, and they rely on the response
nies wrestle with a number of low-                  company matching and reconciliation                 time of the reporting units involved.
value-added supporting activities,                  process employed by most companies,                 The process is very procedure driven,
including correcting errors, rekeying               the responsibility for resolving discrep-           often involving filling out forms and
data, and following up issues with                  ancies in the intercompany balances                 strictly adhering to escalation
reporting units by the central finance              declared by reporting units often falls             procedures.


                                            Traditional


                                          Intercompany
             Close books                                               Consolidation
                                          reconciliation
    Day –5                     Day +0                         Day +5                    Day +10


              Reporting
               unit A                   Phone, fax, e-mail,
                                                                             HQ
                                           regular mail
              Reporting
               unit B




Figure 1: Inefficient Flow of Information in Traditional Intercompany Processes




1. Consolidation, Reporting and Planning Functions in European Multinational Enterprises 2006 (BPM International, February 2007).
2. Ibid.


6    SAP White Paper – Improving Intercompany Reconciliation
It’s clear that companies could save                  The bottleneck slowing down the
time if their reporting units adopted a               reporting process is the time taken at
peer-to-peer reconciliation process to                headquarters to participate in the rec-
communicate and resolve differences                   onciliation process. If reporting units
directly with one another, thereby mov-               could deal directly with one another in a
ing the responsibility for getting things             peer-to-peer fashion, this obstacle
right from the central finance function               would be eliminated, and the intercom-
to the reporting units themselves. At                 pany process would fall away from the
the same time, the units could use any                close’s critical path. Such an achieve-
improvements in process automation                    ment would free central finance staff
as a catalyst to eliminate errors from                from time spent on non-value-added
the process, thus improving the accura-               tasks, enabling far more time to analyze
cy of reported figures as well.                       data rather than just gathering and
                                                      reconciling it, as illustrated in Figure 2.

                                              Peer-to-Peer

     Intercompany        Close                                              Uses for
                                             Consolidation
     reconciliation      books                                             saved time
  Day –5                         Day +0                      Day +5                               Day +10
             Reporting
              unit A
                                                                                    No value

                                                                   Cost reduction          8%
                      Agree/disagree                                                   10%
                                         Reconciled                Work fewer
         Intercompany matching
                                       intercompany
                                                        HQ           hours          13%

                      Agree/disagree      balances                      Meet          7%
                                                                                                62%
                                                                      deadlines


                                                                             Redeploy staff/resources
             Reporting
              unit B




Figure 2: Accelerated Close with Peer-to-Peer Processing Between Reporting Units3




3. Source: Fast-close survey conducted by Business Objects and BPM Magazine, May 2006.

                                                                                                      SAP White Paper – Improving Intercompany Reconciliation   7
THE WAY FORWARD
FAST-CLOSE ACTION PLAN FOR
INTERCOMPANY RECONCILIATION




          Stage 1                      Stage 2                                                                            Stage 3                                    Stage 4
    Vision, benchmark,           Implement quick wins                                                                Implement big wins                     Conduct postimplementation
        and review                                                                                                                                                    review
                                Create close                    Close processing, monitoring, and scheduling   Corporate close
    Perform“as-is”
                                scorecard to coach                                                             • Enterprise performance
    review                                                                                                                                                     Establish framework
                                best and worst                                                                   management
                                performers                                                                     • Consolidation applications                    for continuous
                                                                                                                                                               improvement
                                Conduct peer-to-peer
    Define vision               intercompany
    and benefits                                                                                               • Business intelligence                         Extend financial ex-
                                reconciliation                                                                 • Ad hoc analysis and reporting
                                process                                                                                                                        cellence to planning,
                                                                                                               • Financial information                         budgeting, and
                                                                                                                 management                                    forecasting
                                Leverage data
    Obtain executive            integration tools, vali-
                                                                                                               • Governance, risk, and
    sponsorship                 dations, and controls for
                                                                                                                 compliance
                                right-first-time close
                                                                                                               • Automated internal control
                                                                                                                 processes
                                                                                                               • Access controls
                                                                                                                Local close/enterprise resource
                                                                                                                            planning
                                                                                                                 SAP® and non-SAP software
                                                                                                                         environments


                                                      Milestone 2           Change management
                   Milestone 1                                                                                                                      Milestone 3
               Completed project plan         Immediate timetable reduction                                                                       Vision achieved

Figure 3: A Fast-Close Action Plan
                                                   a positive and determined frame of                                                         with intercompany reconciliation should
A fast-close project, like any other cor-          mind for delivering the bigger wins as                                                     consider employing workshops to look
porate initiative, requires a structured           part of a broader fast-close project.                                                      at the process and search for opportu-
approach with a methodology that’s                                                                                                            nities to automate manual data entry or
supported by people, process, and                  As with the broader fast-close project,                                                    correction processes, as well as pro-
technology. These projects must be                 when your company assesses its exist-                                                      cesses that involve duplicated effort or
manageable, have clear but realistic               ing intercompany reconciliation process                                                    unnecessary steps in the resolution of
objectives, and, as we’ve already seen,            and how it can be improved, the first                                                      disputes.
almost certainly include an intercompa-            step it takes should be to gather infor-
ny project stream. Figure 3 depicts a              mation on the current process and                                                          Companies need to identify and elimi-
fast-close action plan,4 in which the              determine how long it actually takes in                                                    nate the causes of unnecessary com-
BusinessObjects Intercompany applica-              practice. You should review all financial                                                  plexity and cost (measured in staff
tion can play a key role as one of the             processes associated with intercompa-                                                      days) in the existing reconciliation pro-
highest value-added quick wins for                 ny matching and reconciliation, togeth-                                                    cess. In so doing, companies should
cycle-time reduction in stage 2. Such              er with the existing software and tech-                                                    aim to employ current best practices in
quick wins serve to produce almost                 nical architecture. In conducting this                                                     the form of peer-to-peer reconciliation,
immediate timetable reductions with                preliminary review, you should identify                                                    which ultimately offers the greatest
very few required resources. Quick                 any gaps between current processes                                                         improvement in reconciliation times
wins also demonstrate that time sav-               and best practices. Companies serious                                                      with the least amount of required effort
ings are achievable, putting people into           about resolving the issues associated                                                      and resource.


4. The Financial Close: Optimizing Performance and Driving Financial Excellence (SAP AG, August 2008).


8    SAP White Paper – Improving Intercompany Reconciliation
APPLYING TECHNOLOGY TO
THE RECONCILIATION PROBLEM
REDUCING RELIANCE ON MANUAL METHODS




An examination of fast-close projects        It’s also important to consider the point    Any software solution should aim to
and additional quantitative research evi-    at which a software solution can be          eliminate time delays. One key way to
dence indicates that technology has          applied to the process. By allowing          do this is to use a solution that enables
been underutilized with respect to sup-      your reporting units to reconcile balanc-    real-time reconciliation views. One of
porting the intercompany reconciliation      es and transactions directly away from       the best options is Internet technology,
process. In most cases, existing con-        the close’s critical path, you avoid try-    where submitting data over the Web to
solidation and reporting tools report on     ing to fix the problem after the event       a central server offers an immediate
the process when it’s too late, thus trig-   and thereby free up more time for val-       overview of the intercompany reconcili-
gering the manual process to resolve         ue-added activity, ultimately shortening     ation process, irrespective of location,
mismatched balances and transactions         the reporting cycle. To do this, it’s        time zone, or language. In today’s glob-
(often using traditional time-consuming      important that you are able to see           al economy, your solution should be
tools such as telephone, fax, and            instantaneously your intercompany            available 24x7 and support multiple lan-
e-mail). Companies can overcome              position and the difference between          guages and currencies.
these challenges by defining a tech-         what your company has declared and
nology solution, such as the one pre-        that of your counterparty. Visual indica-    Central to making your process more
sented below.                                tors and filters to identify problem         efficient is getting the right people exe-
                                             areas are equally desirable.                 cuting the right processes at the right
The first step in any software solution                                                   time with the right tools. This means
is to create an electronic information       To assist reconciliation, your company       devolving a certain level of responsibili-
flow, minimizing the use of manual pro-      should employ a central intercompany         ty – completing the reconciliation –
cesses as much as possible. You can’t        reconciliation database. The advantage       from headquarters to the reporting
completely eliminate manual processes        of such a database is that it creates        units. However, the central finance
– you usually encounter situations           one version of the financial “truth.”        function should recognize that, ulti-
requiring direct communication. Still, in    Once balances are declared and recon-        mately, responsibility and control must
implementing a solution, your company        ciled, they remain that way.                 remain at headquarters.
should aim to reduce reliance on manu-
al methods as much as possible. As           Automating previously manual process-        Therefore, for engagement and user
needed, an alert mechanism should            es minimizes the incidence of unneces-       acceptance, it’s vital that you maintain a
prompt employees to undertake                sary errors. It also reduces time delays     common set of processes and tools
actions within the solution. However, at     by employing software to process,            that satisfy the needs of both the
the same time your solution must sup-        compute, and report, thereby dramati-        reporting units and headquarters. If you
port direct communication between            cally decreasing the reconciliation time     choose a Web-based approach, you
users by storing and making contact          frame. However, it’s important to avoid      can disseminate information via the
details of other users readily available     automating processes that are inher-         Web, regardless of whether reconciliation-
(telephone, e-mail, and fax details).        ently flawed. In fact, the complete          deadline and time-frame data or
                                             redesign of processes to meet best           important process and instructional
                                             practices is preferable to eliminate         information needs to be communicated
                                             inefficiencies through automation.           to all involved in the reconciliation
                                                                                          process.




                                                                             SAP White Paper – Improving Intercompany Reconciliation   9
Centrally, your staff needs to relinquish         which aren’t necessarily bad if they fol-    • Does the solution support the
the day-to-day operational aspects of             low industry standards. But they also          desired level of matching (balances,
completing the reconciliation and move            require careful management and                 transactions, or both)?
to more of an overseer role – monitor-            implementation.                              • How easily does the solution allow
ing and controlling the process and                                                              the identification of problem data
intervening only where necessary. To              Any new solution you choose should             (does it support materiality and have
do this, headquarters must have the               be able to fit seamlessly into your exist-     filters or rules)?
confidence necessary to fully integrate           ing technology and infrastructure. Fur-      • How easy is it to add supporting
its technology, processes, and people.            thermore, it should complement                 information into the solution (file
Your technology should support this by            desired business processes.                    attachments and comments or addi-
providing a centralized view of the rec-                                                         tional and configurable data fields),
onciliation progress as well as the prog-         You should ask the following questions,        and is this functionality available at
ress of individual reporting units. It also       among others:                                  both the balance and transactional
should provide a mechanism for the                • How easy is it to interface with             level?
central finance function to intervene,              source systems and with the eventual
arbitrate, adjust, and comment on the               consolidation system (metadata and         In addition, will your employees easily
reconciliation. Effective change man-               data)?                                     adopt and use the solution? Intercom-
agement is another integral factor in             • Does the solution meet your organi-        pany reconciliation is a simple but pain-
ensuring the success of a new                       zation’s technology and platform           ful process. Any solution must be sim-
solution.                                           requirements (operating systems and        ple to use and must not be perceived
                                                    hardware)?                                 as overly complicated.
When choosing a technological solu-
tion, an interesting question is whether
to build or buy. Building is attractive as        It’s clear that companies could save time if their reporting
it results in a customized solution for
your business processes, but support,             units adopted a peer-to-peer reconciliation process to
maintenance, and development are fac-             communicate and resolve differences directly with one an-
tors that must be considered carefully.
Buying, on the other hand, provides the           other, thereby moving the responsibility for getting things
security of a tried-and-tested solution           right from the central finance function to the reporting
that is continuously supported and
improved upon. This benefit must be               units themselves.
weighed against the fact that buying
may require the adoption of new con-
cepts, processes, and workflows,




10   SAP White Paper – Improving Intercompany Reconciliation
UNIQUE PROCESS INNOVATION WITH
BUSINESSOBJECTS INTERCOMPANY
PEER-TO-PEER SOLUTION – INDEPENDENT OF
CONSOLIDATION SYSTEM




Business Objects, an SAP company,
offers a unique peer-to-peer intercom-
pany solution that can work with con-                                                                                     Reporting
                                                                                                                           unit A
solidation applications from SAP and
Business Objects as well as other soft-                                                                         ch
                                                                                                                  ing                      M
                                                                                                                                            at
                                                                                                              at                              ch
ware vendors. BusinessObjects Inter-                                       Intercompany
                                                                                                             M                                  ing

company, now one of the world’s lead-           Headquarters               process
                                                BusinessObjects™           monitoring         Reporting                                               Reporting
ing peer-to-peer intercompany                   Financial Consolidation,                       unit B                       Matching                   unit C
reconciliation applications, enables            SAP® Business Planning
                                                and Consolidation, or      Reconciled
business units to reconcile intercompa-




                                                                                                                                        Mat
                                                any other consolidation    intercompany




                                                                                                  Ma




                                                                                                                                                           ing
ny balances in real time via the Web,           application




                                                                                                                                           chin
                                                                           balances




                                                                                                    tch




                                                                                                                                                        tch
                                                                                                                        Ma
                                                                                                                          tch




                                                                                                       ing




                                                                                                                                               g



                                                                                                                                                      Ma
                                                                                                                             ing
which, in turn, helps companies to
close faster. Using BusinessObjects
                                                                                                       Reporting                            Reporting
Intercompany, your company can                                                                          unit C               Matching        unit D
reduce time and effort from the report-
ing process by delegating intercompany                                                                                  BusinessObjects
                                                                                                                         Intercompany
reconciliation to its reporting units and
managing the flow of intercompany
information between them.                     Figure 4: Faster Intercompany Reconciliation with BusinessObjects Intercompany


BusinessObjects Intercompany pro-             BusinessObjects Intercompany gives                   cess you use may be more complex
vides the tools for your business units       you the tools to enable peer-to-peer                 and, as indicated above, is determined
to debate and reconcile invoices and          reconciliation of intercompany balanc-               by your company’s own working
balances directly with one other, elimi-      es. Your employees can choose wheth-                 practices.
nating extra work and delays at the cor-      er to load their balances or go one step
porate and divisional levels. In the tradi-   further and provide detail down to the               Setup Phase
tional process, divisions were required       invoice level. This allows a flexible                Before using the solution, an adminis-
to act as intermediaries, resolving dis-      approach to data collection and recon-               trator needs to prepare it for data pro-
putes that weren’t apparent until after       ciliation, ensuring that the right level of          cessing. This involves updating any
the submission of reporting packs.            data is captured, reconciled, and                    changes in metadata or reference data
BusinessObjects Intercompany                  reported.                                            that may have occurred since the end
removes intercompany reconciliation                                                                of the last reconciliation period. The
from the critical path, shifting the focus    The process of reconciling invoices and              administrator maintains:
so that the reconciliation process            balances using BusinessObjects Inter-                • Reconciliation periods by opening a
becomes an integral part of the closing       company has three phases: setup, rec-                  new reconciliation period and setting
process of the business units and             onciliation, and completion. The follow-               the time frame for reconciliation
improves both the speed and accuracy          ing describes a typical intercompany                 • Metadata by updating companies,
of the closing process (see Figure 4).        reconciliation process. The actual pro-                accounts, and currencies to take into




                                                                                      SAP White Paper – Improving Intercompany Reconciliation                     11
account any changes; for example,                 generate reports to follow the inter-     have been reconciled, the administrator
  adding new companies or deactivat-                company reconciliation process as         “closes” the current period, ensuring
  ing accounts that are no longer used              well as determine how much work is        that the solution is ready for the next
• Users by adding new users, giving                 outstanding and where they should         reconciliation period.
  access to companies, and removing                 focus their attention.
  users who should no longer have                 • Invoice-level matching. Where users       The administrator can perform the fol-
  access to the solution                            have chosen to load balances and          lowing operations:
• Central data by updating information              invoices, an additional level of recon-   • Freezing. All users are prevented
  such as exchange rates and materiali-             ciliation is possible. During invoice-      from making further updates to inter-
  ty levels to ensure data consistency              level matching, the software automat-       company data. Once the data in the
  for all users

Reconciliation Phase                              By applying technology for intercompany reconciliation,
During the reconciliation phase, users            you can make radical process change with little effort and
load the solution with data by importing
or entering data manually and then exe-           potentially achieve significant gains in efficiency. These
cute the intercompany reconciliation              gains aren’t all financial in nature and can include alleviat-
process. The solution provides the fol-
lowing features:                                  ing the burden on the central finance function and trans-
• Matching engine. A key part of the              forming its role into that of overseer rather than executor
  functionality, the matching engine
  allows companies to automatically               of the process.
  compare balances that have been
  entered or loaded and calculate dif-
  ferences in the headquarters’ report-             ically compares counterparties’             database has been “frozen,” all users
  ing currency.                                     invoices and allows easy identifica-        are able to export their intercompany
• State software. The highly developed              tion of unmatched data. Since bal-          balances.
  state software manages the status of              ance and invoice data loaded into the     • Archiving and backup. Any closed-
  balances. Some simple states include              database can originate from different       period data can be archived. This
  open, reconciled, and unmatched, but              sources, the software also compares         improves the performance of the
  more complex states are also han-                 the balance to invoice data to ensure       database during the reconciliation
  dled. Whenever a change in state                  synchronization.                            period. Performing a backup of the
  occurs, the state software sends out                                                          database further safeguards the con-
  e-mail alerts automatically.                    Completion Phase                              tents of the database.
• Data entry and review. Icons provide            At the end of the reconciliation phase,
  users with a visual summary of                  when the majority (if not all) of the
  invoices and balances. Users can                intercompany invoices and balances




12   SAP White Paper – Improving Intercompany Reconciliation
BUILDING A BUSINESS CASE FOR IMPROVED
INTERCOMPANY RECONCILIATION
RAPID RETURN ON INVESTMENT




A unique characteristic of corporate ini-    Calculating Payback to Assess Potential Savings
tiatives that seek to improve the inter-     Average cost of finance staff                                              US$65,000
company process is the ability to easily
                                             Average daily cost                                                       US$295
quantify rapid ROI. ROI can be mea-
                                             Number of reporting units                                                100
sured in terms of the quality of the
                                             License fee                                                              US$125,000
information provided and the resulting
reduction in errors, the amount of time      Setup cost                                                               US$10,000
saved in terms of staff days by operat-
ing units, and the time saved at the         Some assumptions can be made to
head office during the close, thereby        provide input to the equation, shown in
reducing the close cycle.                    the table above. Clearly these vary by
                                             size of the company, infrastructure
Based on the expected or actual num-         costs, and average finance staff costs.
ber of days saved, an ROI time frame         However, they are useful in providing
can be calculated easily for users of        an indication of likely or potential
the application. A conservative target is    savings.
in the region of a half-day’s worth of
saved work per reporting unit, with this     A key assumption here is that it is more
reduction being a measure of effort          risky and costly to build a custom appli-
saved across the organization rather         cation than to purchase and use an off-
than elapsed time saved.                     the-shelf application. If you build a cus-
                                             tom application, the equation is still
The ROI equation can be stated as            applicable; however, the cost is likely to
follows:                                     be greater and ROI is likely to be lower.
  Payback is achieved when [cost of          Some further considerations are that
  0.5 staff day] x [number of reporting      best-practice intercompany reconcilia-
  units] x [number of reporting cycles]      tion may not be supported, and there is
  is less than [license fee or build cost]   likely to be higher maintenance
  + [setup cost].                            overhead.




                                                                              SAP White Paper – Improving Intercompany Reconciliation   13
Business Objects, an SAP company, offers a unique
 peer-to-peer intercompany solution that can work with
 consolidation applications from SAP and Business
 Objects as well as other software vendors.



Using these assumptions, it’s possible            ket. The time freed can be applied to
to do a simple cost/benefit calculation.          value-added activities to increase reve-
In the following table, you can see that          nue or lower costs. Through improve-
full ROI is achieved within just over nine        ments to the close process it should
months. This also shows that the bene-            also be possible to achieve savings on
fit depends heavily on the number of              annual tax payments and reductions in
reporting cycles performed. In general,           audit fees.
companies reporting monthly derive a
far greater benefit than those reporting
quarterly.

A business case should also consider
that any calculation being performed
doesn’t take into account the immea-
surable benefits to the business of get-
ting faster, more accurate information
to the people who need it immediately:
that is, decision makers and the mar-


Nine-Month Model for Return on Investment
Number of reporting cycles                                               12
Savings                                                                  US$177,000
Breakeven (years)                                                        0.76




14   SAP White Paper – Improving Intercompany Reconciliation
WILL A CONSOLIDATION SOLUTION
DO THE SAME THING?
THE BENEFITS OF A PURPOSE-BUILT SOLUTION




Many of the consolidation and corpo-           Financial consolidation and reporting         solidating data, which then is part of
rate reporting solutions on the market         solutions cover the breadth of function-      the close’s critical path.
have established intercompany recon-           ality necessary for statutory consolida-
ciliation and elimination modules. Com-        tion and management reporting, provid-        On the other hand, BusinessObjects
panies thinking of reengineering their         ing a basis for financial control and         Intercompany is a product specifically
intercompany processes often look to           compliance. These solutions also              designed to match intercompany data
these modules as the cure for all ills.        include functions to match intercompa-        interactively in a peer-to-peer fashion
Are they correct to do this?                   ny accounts within the consolidation          over the Web. It deals not only with
                                               process, as is necessary for global           intercompany balances but offers a
To answer this question, it’s instructive      consolidation and reporting processes.        detailed level of reconciliation down to
to compare and contrast the processes          The intercompany balance-matching             the invoice level.
required to perform an intercompany            process is either included in the con-
reconciliation in typical financial consol-    solidation category of reporting or is a      The table below compares the process
idation and reporting solutions with a         category in itself. However, as men-          and the individual steps that need to be
purpose-built intercompany reconcilia-         tioned earlier, consolidation solutions       performed to complete the intercom-
tion solution.                                 provide value only when you start con-        pany reconciliation. Note the number of
                                                                                             steps and the complexity of each.
The Setup Phase
Financial Consolidation and                   BusinessObjects™ Intercompany                  The Setup Phase
Reporting Solutions                                                                          In comparing the two setup phases, it’s
                                               1   Set up interfacing (define templates       clear that more steps are required in
                                                   for metadata, balances, and invoices)     the case of a financial consolidation
 1    Set up metadata (companies,              2   Import metadata (companies,               and reporting solution. Although some
      accounts, currencies, and users)             accounts, currencies, and users)          of these steps are complex, they serve
 2    Build the category (sets of accounts,                                                  the dual purpose of helping to prepare
      analysis hierarchies, and translation                                                  for the consolidation.
      rules)
 3    Design specific data-entry
      schedules
 4    Design specific matching and
      analysis reports
 5    Set up the matching rules                3   Set up matching rules (define
                                                   matching accounts, match on local
                                                   or transaction currency amounts, and
                                                   define materiality rules)
 6    Roll out data entry and normal           4   Set period and start the
      monthly data-collection and                  reconciliation process
      reporting processes




                                                                                SAP White Paper – Improving Intercompany Reconciliation   15
Reconciliation Phase

The Reconciliation Phase                        BusinessObjects™ Intercompany
Financial Consolidation and Reporting
Solutions
1      Reporting unit – link to Web site or  1         Reporting unit – link to Web site
       client-server application to begin
       monthly data collection processes
 2     Reporting unit – enter or import      2         Reporting unit – enter or import
       intercompany data                               intercompany data
 3     Reporting unit – run controls and
       publish data to central finance office
 4     Central – integrate the reporting
       unit data
 5     Central – define and run consolidation
       processes
 6     Reporting unit – run analysis reports 3         Reporting unit – adjust balances
                                                       manually and reconcile interactively
                                                       with counterpart
 7     Reporting unit – go back to data entry
       and adjust balances
 8     Central – run analysis reports         4        Central – run progress/analysis
                                                       reports
                                                  5    Central – freeze all reporting units
 9     Reporting unit – finalize and submit to     6    Reporting unit – export to consolida-
       consolidation system                            tion system


Again, it’s interesting to note the sig-
nificant requirements imposed on the
central finance function by a financial
consolidation and reporting solution –
something that’s almost absent in
BusinessObjects Intercompany
(see the table above).




16   SAP White Paper – Improving Intercompany Reconciliation
ACHIEVING THE FAST CLOSE
USING TECHNOLOGY FOR INTERCOMPANY
RECONCILIATION




                                                                                        are achievable. Gains can include allevi-
    By allowing your reporting units to reconcile balanc-                               ating the burden on the central finance
                                                                                        function and transforming its role into
    es and transactions directly away from the close’s                                  that of overseer rather than executor of
    critical path, you avoid trying to fix the problem                                  the process. Empowering reporting
                                                                                        units to solve their own issues rather
    after the event and thereby free up more time for                                   than being directed by headquarters is
    value-added activity, ultimately shortening the report-                             a key improvement resulting in a better-
                                                                                        quality close. And taking the intercom-
    ing cycle.                                                                          pany reconciliation process out of the
                                                                                        critical path results in a faster close;
                                                                                        resolving this issue makes it the
                                                                                        number-one fast-close quick win.
The fast high-quality close is as impor-   intervene and get heavily involved in
tant today as ever, and the ability to     order to complete the traditional hierar-
resolve your intercompany bottlenecks      chical reconciliation process.
is a key factor in achieving your fast-
close ambitions. Because consolidation     By applying technology for intercompa-
solutions are inadequate at managing       ny reconciliation, you can make radical
both the depth and interactivity neces-    process change with little effort and
sary for the intercompany reconciliation   potentially achieve significant gains in
process, central finance departments       efficiency. These gains aren’t all finan-
of companies worldwide are forced to       cial in nature, although attractive ROIs




                                                                           SAP White Paper – Improving Intercompany Reconciliation   17
SAP® SOLUTIONS FOR ENTERPRISE
PERFORMANCE MANAGEMENT
COMPREHENSIVE FUNCTIONALITY TO IMPROVE
EFFECTIVENESS AND PERFORMANCE CONTROL




BusinessObjects Intercompany is part              For More Information
of the SAP® solutions for enterprise              For more information about how the
performance management – a compre-                BusinessObjects Intercompany
hensive set of solutions that help your           application can improve your financial
company capitalize on the value of your           performance, call your SAP represen-
existing data assets. With these solu-            tative today or visit us on the Web at
tions, your organization becomes more             www.sap.com/solutions
agile, gaining organizational alignment,          /enterprise-performance-management
visibility, and greater confidence that           /intercompany-reconciliation/index.epx.
give you optimal control and competi-
tive advantage. These solutions can               For additional information about
integrate with SAP Business Suite                 financial consolidation, go to
applications; SAP solutions for gover-            www.sap.com/solutions
nance, risk, and compliance; and the              /enterprise-performance-management
business intelligence platform from               /fincons/index.epx.
SAP and Business Objects. As a result
you can maximize business profitability,
manage risk and compliance, and opti-
mize corporate systems, people, and
processes.




18   SAP White Paper – Improving Intercompany Reconciliation
SAP White Paper – Improving Intercompany Reconciliation   19
50 090 407 (08/08)
©2008 by SAP AG.
All rights reserved. SAP, R/3, xApps, xApp, SAP NetWeaver,
Duet, PartnerEdge, ByDesign, SAP Business ByDesign, and other
SAP products and services mentioned herein as well as their
respective logos are trademarks or registered trademarks of SAP AG
in Germany and in several other countries all over the world.

Business Objects and the Business Objects logo, BusinessObjects,
and Crystal Reports are trademarks or registered trademarks of
Business Objects S.A. or its affiliated companies in the United States
and other countries.

All other product and service names mentioned are the trademarks of their
respective companies. Data contained in this document serves informational
purposes only. National product specifications may vary.

These materials are subject to change without notice. These materials
are provided by SAP AG and its affiliated companies (“SAP Group”) for
informational purposes only, without representation or warranty of any kind,
and SAP Group shall not be liable for errors or omissions with respect to
the materials. The only warranties for SAP Group products and services are
those that are set forth in the express warranty statements accompanying
such products and services, if any. Nothing herein should be construed as
constituting an additional warranty.




   www.sap.com /contactsap

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Improving Intercompany Reconciliation for a Faster Close

  • 1. SAP White Paper Enterprise Performance Management IMPROVING INTERCOMPANY RECONCILIATION FOR A FASTER CLOSE DRIVING FINANCIAL EXCELLENCE
  • 3. CONTENT 4 Executive Summary 13 Building a Business Case for Improved 5 The Fast Close – Not Intercompany an Elusive Goal Reconciliation 6 The Problem 15 Will a Consolidation Solution Do the Same 8 The Way Forward Thing? 15 Setup Phase 9 Applying Technology 16 Reconciliation Phase to the Reconciliation Problem 17 Achieving the Fast Close 11 Unique Process Innovation with 18 SAP Solutions for BusinessObjects Enterprise Perfor- Intercompany mance Management 11 Setup Phase 18 For More Information 12 Reconciliation Phase 12 Completion Phase
  • 4. EXECUTIVE SUMMARY REMOVING THE SINGLE GREATEST BARRIER TO THE FAST CLOSE Companies are moving beyond the ini- However, as evidenced by a growing removing this process from the finan- tial need to comply with legislation like number of case studies, some compa- cial close’s critical path and improving the Sarbanes-Oxley Act and are focus- nies endeavor to deal with the inter- the quality of data. The use of software ing instead on driving sustainability and company reconciliation challenge by for intercompany reconciliation projects control into their corporate processes. employing technology to enable peer- provides a quick win for companies Of the various initiatives supporting this to-peer processes and dramatically who adopt such solutions – resulting in shift, the fast close – a concept used to save time in their financial close dramatic time savings with compara- describe a company’s ability to com- process. tively little effort. plete its accounting cycles and close its books quickly – is perhaps one of This paper examines the issues behind the best documented. What’s arguably the single intercompany reconciliation and out- lines how companies can make impres- Predating the compliance revolution, greatest barrier to the fast sive progress when they employ soft- the fast close forms a finance trans- close has remained con- ware solutions such as those from SAP formation project that has a clear and Business Objects, an SAP structure and well-defined methodolo- stant – the completion of company. gy, providing huge benefits to those the intercompany reconcilia- companies that take on the challenge. However, what’s arguably the single tion process. greatest barrier to the fast close has remained constant – the completion of Companies have implemented solu- the intercompany reconciliation pro- tions such as the BusinessObjects™ cess. Surprisingly, this challenge con- Intercompany application to improve tinues to provide a bottleneck that the flow of communication during the many companies have yet to tackle intercompany reconciliation process, effectively. 4 SAP White Paper – Improving Intercompany Reconciliation
  • 5. THE FAST CLOSE – NOT AN ELUSIVE GOAL REMOVE THE RECONCILIATION BOTTLENECK In today’s business environment, where However, by and large, close times are of intercompany reconciliation. As a compliance and competitiveness are increasing – particularly in the United result, virtually every fast-close project paramount, companies recognize the States, due the rigor of the Sarbanes- during the past five years in which importance of the financial close and its role as one of the most essential characteristics of a successful global BPM International notes that 72% of all companies enterprise – and they are under more pressure than ever to shorten their surveyed spend significant time clearing intercompany reporting cycles. differences, and 31% of survey participants identified Driven by new regulations that mandate the process as a significant barrier to their close. greater financial confidence and trans- parency, companies are forced to deal with heightened investor expectations Oxley Act – resulting in time- significant improvements have been for accurate and timely financial com- consuming, labor-intensive efforts to made has included a project stream munications. The fast and high-quality ensure the quality of financial data. It’s specifically tasked with examining and close has now become synonymous no wonder that companies once again addressing this issue. with allowing more time for value-added are focused on speeding up the com- activities, creating more timely access pletion of their accounting cycles. Automation and process support for to financial and nonfinancial data for the intercompany matching and recon- decision making, and improving the To achieve a faster close, you must ciliation process via software is under- work-life balance of key accounting scrutinize every step in the reporting utilized, and the employment of a suit- staff during the close process. process to figure out where your com- able software solution would make a pany can save time and how it can opti- significant advance in alleviating this Significant steps have already been mize the process. Based on our experi- major cause of delay in the reporting made to shorten the reporting cycle via ence working with some of the world’s process. In this paper we examine the a combination of people, process, and leading companies, we’ve determined challenges and, as part of a fast-close technology, and many companies have that one of the most significant bottle- action plan, we provide a framework to achieved noteworthy improvements. necks in the close cycle is the process tackle this important issue. SAP White Paper – Improving Intercompany Reconciliation 5
  • 6. THE PROBLEM INTERCOMPANY RECONCILIATION Over the past five years, numerous function. On top of these problems, on corporate headquarters. Generally research projects have examined the system deficiencies around intercompa- this means that staff members in the interplay between the close and the ny processing and the lack of process central finance function are involved in intercompany reconciliation process in automation are found to contribute to checking balances, correcting errors, great detail. Intercompany reconciliation delays in the reporting process. and contacting reporting units to and elimination are consistently identi- resolve issues and intervene in dis- fied as two of the most common non- The BPM International study suggests putes. This process results in an ineffi- value-added tasks slowing down the that the worst-performing companies cient vertical flow of information reporting cycle. In its 2007 report on are taking upward of ten days to between headquarters and reporting reporting processes and systems, resolve the intercompany process dur- units and back again, as shown in Fig- BPM International notes that 72% of all ing a year-end close, while the best in ure 1, rather than a more efficient later- companies surveyed spend significant class report an average of four days, al flow of information between the time clearing intercompany differences, with ambitions to reduce it to three reporting units involved in the original and 31% of survey participants identi- days.2 counterparty transactions. fied the process as a significant barrier to their close.1 The reason this remains such a prob- The process is also hindered by the lem is perhaps bewildering at first, but means of communication employed: Little or no improvement has been closer examination uncovers the exis- telephone calls, e-mail, and fax. These made in this area since 2002 when sim- tence of significant process and tech- technologies are time consuming to ilar studies were conducted. Compa- nology issues. In the traditional inter- employ, and they rely on the response nies wrestle with a number of low- company matching and reconciliation time of the reporting units involved. value-added supporting activities, process employed by most companies, The process is very procedure driven, including correcting errors, rekeying the responsibility for resolving discrep- often involving filling out forms and data, and following up issues with ancies in the intercompany balances strictly adhering to escalation reporting units by the central finance declared by reporting units often falls procedures. Traditional Intercompany Close books Consolidation reconciliation Day –5 Day +0 Day +5 Day +10 Reporting unit A Phone, fax, e-mail, HQ regular mail Reporting unit B Figure 1: Inefficient Flow of Information in Traditional Intercompany Processes 1. Consolidation, Reporting and Planning Functions in European Multinational Enterprises 2006 (BPM International, February 2007). 2. Ibid. 6 SAP White Paper – Improving Intercompany Reconciliation
  • 7. It’s clear that companies could save The bottleneck slowing down the time if their reporting units adopted a reporting process is the time taken at peer-to-peer reconciliation process to headquarters to participate in the rec- communicate and resolve differences onciliation process. If reporting units directly with one another, thereby mov- could deal directly with one another in a ing the responsibility for getting things peer-to-peer fashion, this obstacle right from the central finance function would be eliminated, and the intercom- to the reporting units themselves. At pany process would fall away from the the same time, the units could use any close’s critical path. Such an achieve- improvements in process automation ment would free central finance staff as a catalyst to eliminate errors from from time spent on non-value-added the process, thus improving the accura- tasks, enabling far more time to analyze cy of reported figures as well. data rather than just gathering and reconciling it, as illustrated in Figure 2. Peer-to-Peer Intercompany Close Uses for Consolidation reconciliation books saved time Day –5 Day +0 Day +5 Day +10 Reporting unit A No value Cost reduction 8% Agree/disagree 10% Reconciled Work fewer Intercompany matching intercompany HQ hours 13% Agree/disagree balances Meet 7% 62% deadlines Redeploy staff/resources Reporting unit B Figure 2: Accelerated Close with Peer-to-Peer Processing Between Reporting Units3 3. Source: Fast-close survey conducted by Business Objects and BPM Magazine, May 2006. SAP White Paper – Improving Intercompany Reconciliation 7
  • 8. THE WAY FORWARD FAST-CLOSE ACTION PLAN FOR INTERCOMPANY RECONCILIATION Stage 1 Stage 2 Stage 3 Stage 4 Vision, benchmark, Implement quick wins Implement big wins Conduct postimplementation and review review Create close Close processing, monitoring, and scheduling Corporate close Perform“as-is” scorecard to coach • Enterprise performance review Establish framework best and worst management performers • Consolidation applications for continuous improvement Conduct peer-to-peer Define vision intercompany and benefits • Business intelligence Extend financial ex- reconciliation • Ad hoc analysis and reporting process cellence to planning, • Financial information budgeting, and management forecasting Leverage data Obtain executive integration tools, vali- • Governance, risk, and sponsorship dations, and controls for compliance right-first-time close • Automated internal control processes • Access controls Local close/enterprise resource planning SAP® and non-SAP software environments Milestone 2 Change management Milestone 1 Milestone 3 Completed project plan Immediate timetable reduction Vision achieved Figure 3: A Fast-Close Action Plan a positive and determined frame of with intercompany reconciliation should A fast-close project, like any other cor- mind for delivering the bigger wins as consider employing workshops to look porate initiative, requires a structured part of a broader fast-close project. at the process and search for opportu- approach with a methodology that’s nities to automate manual data entry or supported by people, process, and As with the broader fast-close project, correction processes, as well as pro- technology. These projects must be when your company assesses its exist- cesses that involve duplicated effort or manageable, have clear but realistic ing intercompany reconciliation process unnecessary steps in the resolution of objectives, and, as we’ve already seen, and how it can be improved, the first disputes. almost certainly include an intercompa- step it takes should be to gather infor- ny project stream. Figure 3 depicts a mation on the current process and Companies need to identify and elimi- fast-close action plan,4 in which the determine how long it actually takes in nate the causes of unnecessary com- BusinessObjects Intercompany applica- practice. You should review all financial plexity and cost (measured in staff tion can play a key role as one of the processes associated with intercompa- days) in the existing reconciliation pro- highest value-added quick wins for ny matching and reconciliation, togeth- cess. In so doing, companies should cycle-time reduction in stage 2. Such er with the existing software and tech- aim to employ current best practices in quick wins serve to produce almost nical architecture. In conducting this the form of peer-to-peer reconciliation, immediate timetable reductions with preliminary review, you should identify which ultimately offers the greatest very few required resources. Quick any gaps between current processes improvement in reconciliation times wins also demonstrate that time sav- and best practices. Companies serious with the least amount of required effort ings are achievable, putting people into about resolving the issues associated and resource. 4. The Financial Close: Optimizing Performance and Driving Financial Excellence (SAP AG, August 2008). 8 SAP White Paper – Improving Intercompany Reconciliation
  • 9. APPLYING TECHNOLOGY TO THE RECONCILIATION PROBLEM REDUCING RELIANCE ON MANUAL METHODS An examination of fast-close projects It’s also important to consider the point Any software solution should aim to and additional quantitative research evi- at which a software solution can be eliminate time delays. One key way to dence indicates that technology has applied to the process. By allowing do this is to use a solution that enables been underutilized with respect to sup- your reporting units to reconcile balanc- real-time reconciliation views. One of porting the intercompany reconciliation es and transactions directly away from the best options is Internet technology, process. In most cases, existing con- the close’s critical path, you avoid try- where submitting data over the Web to solidation and reporting tools report on ing to fix the problem after the event a central server offers an immediate the process when it’s too late, thus trig- and thereby free up more time for val- overview of the intercompany reconcili- gering the manual process to resolve ue-added activity, ultimately shortening ation process, irrespective of location, mismatched balances and transactions the reporting cycle. To do this, it’s time zone, or language. In today’s glob- (often using traditional time-consuming important that you are able to see al economy, your solution should be tools such as telephone, fax, and instantaneously your intercompany available 24x7 and support multiple lan- e-mail). Companies can overcome position and the difference between guages and currencies. these challenges by defining a tech- what your company has declared and nology solution, such as the one pre- that of your counterparty. Visual indica- Central to making your process more sented below. tors and filters to identify problem efficient is getting the right people exe- areas are equally desirable. cuting the right processes at the right The first step in any software solution time with the right tools. This means is to create an electronic information To assist reconciliation, your company devolving a certain level of responsibili- flow, minimizing the use of manual pro- should employ a central intercompany ty – completing the reconciliation – cesses as much as possible. You can’t reconciliation database. The advantage from headquarters to the reporting completely eliminate manual processes of such a database is that it creates units. However, the central finance – you usually encounter situations one version of the financial “truth.” function should recognize that, ulti- requiring direct communication. Still, in Once balances are declared and recon- mately, responsibility and control must implementing a solution, your company ciled, they remain that way. remain at headquarters. should aim to reduce reliance on manu- al methods as much as possible. As Automating previously manual process- Therefore, for engagement and user needed, an alert mechanism should es minimizes the incidence of unneces- acceptance, it’s vital that you maintain a prompt employees to undertake sary errors. It also reduces time delays common set of processes and tools actions within the solution. However, at by employing software to process, that satisfy the needs of both the the same time your solution must sup- compute, and report, thereby dramati- reporting units and headquarters. If you port direct communication between cally decreasing the reconciliation time choose a Web-based approach, you users by storing and making contact frame. However, it’s important to avoid can disseminate information via the details of other users readily available automating processes that are inher- Web, regardless of whether reconciliation- (telephone, e-mail, and fax details). ently flawed. In fact, the complete deadline and time-frame data or redesign of processes to meet best important process and instructional practices is preferable to eliminate information needs to be communicated inefficiencies through automation. to all involved in the reconciliation process. SAP White Paper – Improving Intercompany Reconciliation 9
  • 10. Centrally, your staff needs to relinquish which aren’t necessarily bad if they fol- • Does the solution support the the day-to-day operational aspects of low industry standards. But they also desired level of matching (balances, completing the reconciliation and move require careful management and transactions, or both)? to more of an overseer role – monitor- implementation. • How easily does the solution allow ing and controlling the process and the identification of problem data intervening only where necessary. To Any new solution you choose should (does it support materiality and have do this, headquarters must have the be able to fit seamlessly into your exist- filters or rules)? confidence necessary to fully integrate ing technology and infrastructure. Fur- • How easy is it to add supporting its technology, processes, and people. thermore, it should complement information into the solution (file Your technology should support this by desired business processes. attachments and comments or addi- providing a centralized view of the rec- tional and configurable data fields), onciliation progress as well as the prog- You should ask the following questions, and is this functionality available at ress of individual reporting units. It also among others: both the balance and transactional should provide a mechanism for the • How easy is it to interface with level? central finance function to intervene, source systems and with the eventual arbitrate, adjust, and comment on the consolidation system (metadata and In addition, will your employees easily reconciliation. Effective change man- data)? adopt and use the solution? Intercom- agement is another integral factor in • Does the solution meet your organi- pany reconciliation is a simple but pain- ensuring the success of a new zation’s technology and platform ful process. Any solution must be sim- solution. requirements (operating systems and ple to use and must not be perceived hardware)? as overly complicated. When choosing a technological solu- tion, an interesting question is whether to build or buy. Building is attractive as It’s clear that companies could save time if their reporting it results in a customized solution for your business processes, but support, units adopted a peer-to-peer reconciliation process to maintenance, and development are fac- communicate and resolve differences directly with one an- tors that must be considered carefully. Buying, on the other hand, provides the other, thereby moving the responsibility for getting things security of a tried-and-tested solution right from the central finance function to the reporting that is continuously supported and improved upon. This benefit must be units themselves. weighed against the fact that buying may require the adoption of new con- cepts, processes, and workflows, 10 SAP White Paper – Improving Intercompany Reconciliation
  • 11. UNIQUE PROCESS INNOVATION WITH BUSINESSOBJECTS INTERCOMPANY PEER-TO-PEER SOLUTION – INDEPENDENT OF CONSOLIDATION SYSTEM Business Objects, an SAP company, offers a unique peer-to-peer intercom- pany solution that can work with con- Reporting unit A solidation applications from SAP and Business Objects as well as other soft- ch ing M at at ch ware vendors. BusinessObjects Inter- Intercompany M ing company, now one of the world’s lead- Headquarters process BusinessObjects™ monitoring Reporting Reporting ing peer-to-peer intercompany Financial Consolidation, unit B Matching unit C reconciliation applications, enables SAP® Business Planning and Consolidation, or Reconciled business units to reconcile intercompa- Mat any other consolidation intercompany Ma ing ny balances in real time via the Web, application chin balances tch tch Ma tch ing g Ma ing which, in turn, helps companies to close faster. Using BusinessObjects Reporting Reporting Intercompany, your company can unit C Matching unit D reduce time and effort from the report- ing process by delegating intercompany BusinessObjects Intercompany reconciliation to its reporting units and managing the flow of intercompany information between them. Figure 4: Faster Intercompany Reconciliation with BusinessObjects Intercompany BusinessObjects Intercompany pro- BusinessObjects Intercompany gives cess you use may be more complex vides the tools for your business units you the tools to enable peer-to-peer and, as indicated above, is determined to debate and reconcile invoices and reconciliation of intercompany balanc- by your company’s own working balances directly with one other, elimi- es. Your employees can choose wheth- practices. nating extra work and delays at the cor- er to load their balances or go one step porate and divisional levels. In the tradi- further and provide detail down to the Setup Phase tional process, divisions were required invoice level. This allows a flexible Before using the solution, an adminis- to act as intermediaries, resolving dis- approach to data collection and recon- trator needs to prepare it for data pro- putes that weren’t apparent until after ciliation, ensuring that the right level of cessing. This involves updating any the submission of reporting packs. data is captured, reconciled, and changes in metadata or reference data BusinessObjects Intercompany reported. that may have occurred since the end removes intercompany reconciliation of the last reconciliation period. The from the critical path, shifting the focus The process of reconciling invoices and administrator maintains: so that the reconciliation process balances using BusinessObjects Inter- • Reconciliation periods by opening a becomes an integral part of the closing company has three phases: setup, rec- new reconciliation period and setting process of the business units and onciliation, and completion. The follow- the time frame for reconciliation improves both the speed and accuracy ing describes a typical intercompany • Metadata by updating companies, of the closing process (see Figure 4). reconciliation process. The actual pro- accounts, and currencies to take into SAP White Paper – Improving Intercompany Reconciliation 11
  • 12. account any changes; for example, generate reports to follow the inter- have been reconciled, the administrator adding new companies or deactivat- company reconciliation process as “closes” the current period, ensuring ing accounts that are no longer used well as determine how much work is that the solution is ready for the next • Users by adding new users, giving outstanding and where they should reconciliation period. access to companies, and removing focus their attention. users who should no longer have • Invoice-level matching. Where users The administrator can perform the fol- access to the solution have chosen to load balances and lowing operations: • Central data by updating information invoices, an additional level of recon- • Freezing. All users are prevented such as exchange rates and materiali- ciliation is possible. During invoice- from making further updates to inter- ty levels to ensure data consistency level matching, the software automat- company data. Once the data in the for all users Reconciliation Phase By applying technology for intercompany reconciliation, During the reconciliation phase, users you can make radical process change with little effort and load the solution with data by importing or entering data manually and then exe- potentially achieve significant gains in efficiency. These cute the intercompany reconciliation gains aren’t all financial in nature and can include alleviat- process. The solution provides the fol- lowing features: ing the burden on the central finance function and trans- • Matching engine. A key part of the forming its role into that of overseer rather than executor functionality, the matching engine allows companies to automatically of the process. compare balances that have been entered or loaded and calculate dif- ferences in the headquarters’ report- ically compares counterparties’ database has been “frozen,” all users ing currency. invoices and allows easy identifica- are able to export their intercompany • State software. The highly developed tion of unmatched data. Since bal- balances. state software manages the status of ance and invoice data loaded into the • Archiving and backup. Any closed- balances. Some simple states include database can originate from different period data can be archived. This open, reconciled, and unmatched, but sources, the software also compares improves the performance of the more complex states are also han- the balance to invoice data to ensure database during the reconciliation dled. Whenever a change in state synchronization. period. Performing a backup of the occurs, the state software sends out database further safeguards the con- e-mail alerts automatically. Completion Phase tents of the database. • Data entry and review. Icons provide At the end of the reconciliation phase, users with a visual summary of when the majority (if not all) of the invoices and balances. Users can intercompany invoices and balances 12 SAP White Paper – Improving Intercompany Reconciliation
  • 13. BUILDING A BUSINESS CASE FOR IMPROVED INTERCOMPANY RECONCILIATION RAPID RETURN ON INVESTMENT A unique characteristic of corporate ini- Calculating Payback to Assess Potential Savings tiatives that seek to improve the inter- Average cost of finance staff US$65,000 company process is the ability to easily Average daily cost US$295 quantify rapid ROI. ROI can be mea- Number of reporting units 100 sured in terms of the quality of the License fee US$125,000 information provided and the resulting reduction in errors, the amount of time Setup cost US$10,000 saved in terms of staff days by operat- ing units, and the time saved at the Some assumptions can be made to head office during the close, thereby provide input to the equation, shown in reducing the close cycle. the table above. Clearly these vary by size of the company, infrastructure Based on the expected or actual num- costs, and average finance staff costs. ber of days saved, an ROI time frame However, they are useful in providing can be calculated easily for users of an indication of likely or potential the application. A conservative target is savings. in the region of a half-day’s worth of saved work per reporting unit, with this A key assumption here is that it is more reduction being a measure of effort risky and costly to build a custom appli- saved across the organization rather cation than to purchase and use an off- than elapsed time saved. the-shelf application. If you build a cus- tom application, the equation is still The ROI equation can be stated as applicable; however, the cost is likely to follows: be greater and ROI is likely to be lower. Payback is achieved when [cost of Some further considerations are that 0.5 staff day] x [number of reporting best-practice intercompany reconcilia- units] x [number of reporting cycles] tion may not be supported, and there is is less than [license fee or build cost] likely to be higher maintenance + [setup cost]. overhead. SAP White Paper – Improving Intercompany Reconciliation 13
  • 14. Business Objects, an SAP company, offers a unique peer-to-peer intercompany solution that can work with consolidation applications from SAP and Business Objects as well as other software vendors. Using these assumptions, it’s possible ket. The time freed can be applied to to do a simple cost/benefit calculation. value-added activities to increase reve- In the following table, you can see that nue or lower costs. Through improve- full ROI is achieved within just over nine ments to the close process it should months. This also shows that the bene- also be possible to achieve savings on fit depends heavily on the number of annual tax payments and reductions in reporting cycles performed. In general, audit fees. companies reporting monthly derive a far greater benefit than those reporting quarterly. A business case should also consider that any calculation being performed doesn’t take into account the immea- surable benefits to the business of get- ting faster, more accurate information to the people who need it immediately: that is, decision makers and the mar- Nine-Month Model for Return on Investment Number of reporting cycles 12 Savings US$177,000 Breakeven (years) 0.76 14 SAP White Paper – Improving Intercompany Reconciliation
  • 15. WILL A CONSOLIDATION SOLUTION DO THE SAME THING? THE BENEFITS OF A PURPOSE-BUILT SOLUTION Many of the consolidation and corpo- Financial consolidation and reporting solidating data, which then is part of rate reporting solutions on the market solutions cover the breadth of function- the close’s critical path. have established intercompany recon- ality necessary for statutory consolida- ciliation and elimination modules. Com- tion and management reporting, provid- On the other hand, BusinessObjects panies thinking of reengineering their ing a basis for financial control and Intercompany is a product specifically intercompany processes often look to compliance. These solutions also designed to match intercompany data these modules as the cure for all ills. include functions to match intercompa- interactively in a peer-to-peer fashion Are they correct to do this? ny accounts within the consolidation over the Web. It deals not only with process, as is necessary for global intercompany balances but offers a To answer this question, it’s instructive consolidation and reporting processes. detailed level of reconciliation down to to compare and contrast the processes The intercompany balance-matching the invoice level. required to perform an intercompany process is either included in the con- reconciliation in typical financial consol- solidation category of reporting or is a The table below compares the process idation and reporting solutions with a category in itself. However, as men- and the individual steps that need to be purpose-built intercompany reconcilia- tioned earlier, consolidation solutions performed to complete the intercom- tion solution. provide value only when you start con- pany reconciliation. Note the number of steps and the complexity of each. The Setup Phase Financial Consolidation and BusinessObjects™ Intercompany The Setup Phase Reporting Solutions In comparing the two setup phases, it’s 1 Set up interfacing (define templates clear that more steps are required in for metadata, balances, and invoices) the case of a financial consolidation 1 Set up metadata (companies, 2 Import metadata (companies, and reporting solution. Although some accounts, currencies, and users) accounts, currencies, and users) of these steps are complex, they serve 2 Build the category (sets of accounts, the dual purpose of helping to prepare analysis hierarchies, and translation for the consolidation. rules) 3 Design specific data-entry schedules 4 Design specific matching and analysis reports 5 Set up the matching rules 3 Set up matching rules (define matching accounts, match on local or transaction currency amounts, and define materiality rules) 6 Roll out data entry and normal 4 Set period and start the monthly data-collection and reconciliation process reporting processes SAP White Paper – Improving Intercompany Reconciliation 15
  • 16. Reconciliation Phase The Reconciliation Phase BusinessObjects™ Intercompany Financial Consolidation and Reporting Solutions 1 Reporting unit – link to Web site or 1 Reporting unit – link to Web site client-server application to begin monthly data collection processes 2 Reporting unit – enter or import 2 Reporting unit – enter or import intercompany data intercompany data 3 Reporting unit – run controls and publish data to central finance office 4 Central – integrate the reporting unit data 5 Central – define and run consolidation processes 6 Reporting unit – run analysis reports 3 Reporting unit – adjust balances manually and reconcile interactively with counterpart 7 Reporting unit – go back to data entry and adjust balances 8 Central – run analysis reports 4 Central – run progress/analysis reports 5 Central – freeze all reporting units 9 Reporting unit – finalize and submit to 6 Reporting unit – export to consolida- consolidation system tion system Again, it’s interesting to note the sig- nificant requirements imposed on the central finance function by a financial consolidation and reporting solution – something that’s almost absent in BusinessObjects Intercompany (see the table above). 16 SAP White Paper – Improving Intercompany Reconciliation
  • 17. ACHIEVING THE FAST CLOSE USING TECHNOLOGY FOR INTERCOMPANY RECONCILIATION are achievable. Gains can include allevi- By allowing your reporting units to reconcile balanc- ating the burden on the central finance function and transforming its role into es and transactions directly away from the close’s that of overseer rather than executor of critical path, you avoid trying to fix the problem the process. Empowering reporting units to solve their own issues rather after the event and thereby free up more time for than being directed by headquarters is value-added activity, ultimately shortening the report- a key improvement resulting in a better- quality close. And taking the intercom- ing cycle. pany reconciliation process out of the critical path results in a faster close; resolving this issue makes it the number-one fast-close quick win. The fast high-quality close is as impor- intervene and get heavily involved in tant today as ever, and the ability to order to complete the traditional hierar- resolve your intercompany bottlenecks chical reconciliation process. is a key factor in achieving your fast- close ambitions. Because consolidation By applying technology for intercompa- solutions are inadequate at managing ny reconciliation, you can make radical both the depth and interactivity neces- process change with little effort and sary for the intercompany reconciliation potentially achieve significant gains in process, central finance departments efficiency. These gains aren’t all finan- of companies worldwide are forced to cial in nature, although attractive ROIs SAP White Paper – Improving Intercompany Reconciliation 17
  • 18. SAP® SOLUTIONS FOR ENTERPRISE PERFORMANCE MANAGEMENT COMPREHENSIVE FUNCTIONALITY TO IMPROVE EFFECTIVENESS AND PERFORMANCE CONTROL BusinessObjects Intercompany is part For More Information of the SAP® solutions for enterprise For more information about how the performance management – a compre- BusinessObjects Intercompany hensive set of solutions that help your application can improve your financial company capitalize on the value of your performance, call your SAP represen- existing data assets. With these solu- tative today or visit us on the Web at tions, your organization becomes more www.sap.com/solutions agile, gaining organizational alignment, /enterprise-performance-management visibility, and greater confidence that /intercompany-reconciliation/index.epx. give you optimal control and competi- tive advantage. These solutions can For additional information about integrate with SAP Business Suite financial consolidation, go to applications; SAP solutions for gover- www.sap.com/solutions nance, risk, and compliance; and the /enterprise-performance-management business intelligence platform from /fincons/index.epx. SAP and Business Objects. As a result you can maximize business profitability, manage risk and compliance, and opti- mize corporate systems, people, and processes. 18 SAP White Paper – Improving Intercompany Reconciliation
  • 19. SAP White Paper – Improving Intercompany Reconciliation 19
  • 20. 50 090 407 (08/08) ©2008 by SAP AG. All rights reserved. SAP, R/3, xApps, xApp, SAP NetWeaver, Duet, PartnerEdge, ByDesign, SAP Business ByDesign, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. Business Objects and the Business Objects logo, BusinessObjects, and Crystal Reports are trademarks or registered trademarks of Business Objects S.A. or its affiliated companies in the United States and other countries. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies (“SAP Group”) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty. www.sap.com /contactsap