Intercompany accounting is complex. While many business leaders think of it as a left pocket, right pocket thing that shouldn’t be difficult, the reality is that its complexity can lead to real financial leakage if not done right.
In addition, the sheer volume of invoices being processed by shared services centers, 30% of which can come from intercompany transactions, makes automating intercompany accounting seem like a daunting task. Add to this the complication of integrating multiple ERPs and many jurisdictions, and it's easy to see why there is potential paralysis when it comes to intercompany automation.
In a recent webinar, Bjorn Bergabo, Former Chief Operating Officer of GE Operations, explained how his team solved these challenges at GE.
Defining the Requirements of an Intercompany Financial Management Solution
Intercompany was initially centralized within GE’s global business services team, which included multiple shared service centers and employees in over a hundred different countries to help manage things down to the last mile.
GE also had a settlement tool that could manage settlement of intercompany transactions. The tool worked well for single jurisdictions and stand-alone ERPs, but fell short in more complex environments. This drove complex manual work for the shared services organization. A team, headed up by Bjorn, was tasked to address this.
The team looked at ways they could automate and simplify intercompany accounting. This team:
- Evaluated the financial impact of not doing intercompany well and found many causes of financial erosion;
- Examined the probability of inconsistent application of transfer price and tax rules;
- Looked at the complex ERP landscape and determined that an ERP would not improve the situation; and
- Considered the impact of VAT controls or GST controls, with complex rules that are always changing.
The quality of intercompany invoices generated also came up as a key factor. Intercompany invoices need to be formatted correctly, have the right level of information, and be 100% accurate to get the required tax deductibility and avoid financial erosion. Without these features, internal challenges can arise where business units are unable to determine what the billed services are related to. This creates wasteful workarounds and unnecessary workflows.
The team tasked with automating GE’s intercompany financial management scoped the project by looking at intercompany charges in three buckets:
- Cost Recharges - Costs that originate in one place, but which really should be born elsewhere. An example of this is expatriates, whose cost comes through their home country, but which has to go to the entity for whom they are working. Ideally the cost should come through a single source and then be recharged back to where it belongs.
- Reallocation of Costs - Costs that are shared (for example, real estate), centralized HQ functions, and the shared services team itself. These costs are rebilled to the businesses or entities that get the benefit of those services. This is typically done on an allocation basis using a key, based on number of transactions, number of bank accounts etc.
- Ad Hoc Billing - Costs that are a combination of cross border and cross entity transactions, which tend to have a lot of complexity around the tax rules. Examples include royalties and intellectual property that need to pass between entities and tax jurisdictions. Management fees and intercompany loan interest are good examples of this as well.
Bjorn’s team then identified six key elements a solution needed to meet these three requirements. The system had to:
- Integrate contract management including the ability to create simple, standardized intercompany service contracts that clearly defined the type and scope of contracted services.
- Engage with a set of transfer price experts that would review and set the rules for the markup between different countries, or tax jurisdictions, as well as for different services.
- Make sure that invoices would be tax compliant, both from a direct and indirect perspective.
- Have a settlement function that was ERP-agnostic and which could settle everything in cash and by netting.
- Offer end-to-end transparency which allowed one to find the invoice and what was being paid for while including a full backup.
- Manage any form of disputes to help teams quickly resolve objections to put expenses where they should be.
The solution also had to be a long-term solution. It had to go beyond workflows into a more touchless environment and eliminate a lot of exception-based transactions, and/or manual touch points that are typically built into workflow solutions.
In addition, the solution needed a way to route transactions through a set of master data that would be validated. This would kick out invalid invoices to be fixed before they get further into the process.
The solution also needed to gather all related billing data, a capability that ERPs typically don’t have. For example, a lot of travel information comes from a vendor like American Express. All the backup and details from the vendor needed to be included and preserved in the solution so, in the event of any tax or statutory audit or some other form of review, one could easily see what was actually charged and why.
Turning to FourQ for its Intercompany Needs
GE implemented the FourQ solution in three phases. They first defined the services and streamlined technical roadblocks. Then they looked at people-related charges to manage the different payroll systems and types that came through. Finally, they deployed shared services centers own billing, real estate and BPO costs before scaling it further to handle IT expense management.
The solution was integrated with global vendor invoice management so that it could take thousands of lines of items and invoice them out to the right places internally.
This one step saved GE more than $15 million in shared services expenses every year. It also enabled numerous other unquantifiable benefits, such as the additional deflation in sourcing savings, less time spent on business units reviewing and questioning invoices, a faster closing process, and more.
GE also enjoyed improved tax efficiency by improving the deductibility and reducing the multinational’s pure exposure to any anti-tax abuse legislation, which is easy to inadvertently trip if a good automated intercompany process isn’t in place.
The automation also made the entire process more touchless eliminating invalid combinations that historically plagued the final hours of the closing process.
To watch the webinar in its entirety and learn what intercompany financial management can do for your organization, please click here.