- Companies that run a highly automated intercompany accounting process have 75% fewer full-time equivalent (FTE) staff
- There is approximately $1 to $2 million of potential annual cost savings in a typical $10-billion revenue business that runs a poorly controlled intercompany accounting process
- A badly controlled intercompany accounting process can lead to unwelcome scrutiny from revenue-hungry tax authorities and absorbs a great deal of costly managerial time
- The Hackett Group® has developed an understanding of what the best do well and have created techniques to tackle the multiheaded Hydra, the many-headed monster in Greek mythology where each head, when cut off, was replaced by two others, that is the intercompany accounting process
Intercompany accounting is a process that every multinational corporation needs to manage. It might appear to be a straightforward process, but in practice, the process is quite complex. This is due to different scenario variants, and technology and organization disparities. And when power dynamics are sprinkled on top, all this creates a process that is, in in most organizations, poorly managed.
To better understand how multinational organizations operate their global intercompany accounting processes, we conducted a survey of our advisory members. This revealed that only a small group of leading companies consistently execute highly automated intercompany accounting processes that are secure, accurate, efficient, and don’t suffer from disputes and intercompany accounting balance reconciliation challenges.
We have found five factors that differentiate leading organizations. These leading companies:
- Assert end-to-end control over the process
- Drive superior automation of intercompany accounting invoice processes and approvals
- Have a higher degree of automation in reconciliations
- Create a more transparent and consistent process
- Pay to terms consistently and avoid undue tax scrutiny
To better understand the differences between leading organizations and other organizations, we gathered insights into the major pain points and areas in need of improvements.
The top-five pain points identified by a typical organization are:
- Disparate ERP systems not connecting together
- Timing issues between AR and AP entry creations
- Absence of a dedicated intercompany accounting platform tool
- Reoccurrence of disputed root causes, especially if they are not being corrected
- Inconsistent materiality level for intercompany accounting transactions
We observed this trend across all the intercompany accounting scenarios we polled – intercompany trade, recharges, corporate allocations and financing flows.
Based on the survey findings, and following a series of discussions with our advisory members, we recommend a comprehensive strategic approach to the intercompany accounting process.
There are four specific challenges that need to be fully faced if you wish to create the right environment to drive meaningful change to the intercompany accounting process.
- First, there is generally insufficient acknowledgment or publicity given to the critical importance of the intercompany accounting process in driving the flow of profitability across international borders for a global organization. Simply put, intercompany accounting processes are driving some of the most important numbers on the income statement and balance sheet of most global organizations. Given this impact on legal accounts in an area that is sensitive to tax scrutiny, intercompany accounting strategy, the processing, and the associated accounting must be accurate, and fail-safe.
- Our advice: Acknowledge that this is an important process that deserves attention. Wake up to that or let revenue-hungry tax authorities with new analytical powers become your alarm clock.
- How we help: We have created techniques to map out scenarios and support an exercise to target attention on where there is most value and risk in the process.
- Second, the people tasked with transforming and executing the process often do not have the cultural and operational power to secure a new process and drive policy adherence. This is especially galling when well-written policy exists but it is not being followed. This situation can lead to smart people, with great skill sets, tinkering, wasting valuable time, hitting root cause resolution dead ends and building frustration.
- Our advice: Create a mandate to transform the intercompany accounting process via finance leadership and sponsorship.
- How we help: We have best practice-led perspectives and example policy templates, responsible, accountable, consulted and informed (RACI) models, and approaches to execute a strong intercompany accounting process.
- Third, there are many parts of the organization with an interest in intercompany accounting, ranging from tax and treasury, to corporate finance, to operationally and commercially focused business unit leaders. The balances created by intercompany accounting processes can often be the root cause of delays in the enterprise consolidation process, which is a big deal. There are many executive-level stakeholders that are interested in the process from business unit heads of finance with an interest in the bottom line impacts to tax and treasury who have to consider the strategic issues of tax compliance and group liquidity respectively. These groups need to be properly aligned and engaged in the process without creating resistance or damaging unintended consequences.
- Our advice: Win over the hearts and minds of this diverse range of stakeholders to ensure there is the right broad coalition of support.
- How we help: We have data to show what good looks like and have research and templates to support building out what a target state operating model should look like.
- Finally, the intercompany accounting process operates deep inside the anatomy of the group organism with several upstream and enabling processes that impact the process. The individuals who own and execute these processes are usually in different parts of the organization. Additionally, they are often not resourced fully or motivated to fix endemic problems impacting the intercompany accounting process. To achieve real change, each key party must be identified, involved and motivated into solving for root causes.
- Our advice: Call out the root causes that are beyond the intercompany accounting process owners remit and ensure there is consistent focus on these by the right people that have the mandate to make a difference.
- How we help: We have guidance on how to approach stakeholders and process actors to gain buy-in, and drive a better process.
Intercompany accounting should not be viewed narrowly, as a one-size-fits-all process change or a technology automation project. Instead it is wiser to see it as a larger, more complex program that will impact some significant cultural dynamics in the organization that have grown from traditional non-centralized ways of working.
Furthermore, we see the importance of carefully considering the data, technology and organization characteristics of your organization as they relate to the different intercompany accounting scenarios that have very different characteristics and, thus, rely on different tactics to resolve root causes.
With the right power behind the right accountability, and with eyes open to the sophistication of the process, organization and technology environments, scenario specifics, and the cultural and contextual challenges unique to each organization, projects to deliver tangible improvements in the intercompany accounting process are relatively obvious and have a significantly higher chance of success.