Consolidation - All for one.

Consolidation exercises across a large group of companies can either be a tedious way to meet statutory requirements or they can yield vital management information. They can be a stumbling block in the way of the group closing its books, or they can expedite the process by making a ‘virtual close’ possible.

According to Nigel Youell, MD at systems house Hyperion, companies such as Motorola and Cisco Systems are able to close their books within hours of a period-end because vital information is on a single chart of accounts and compiled centrally all the time. This ability to carry out a virtual close (getting a consolidated view of its results at will) is difficult to achieve.

The major problems large groups have with consolidation is the time it takes to complete the exercise using older methods of consolidation, and the fact that they often have incompatible charts of accounts at subsidiaries around the world. Massaging the numbers into a form that is acceptable for group reporting then becomes a time-consuming exercise.

“Subsidiaries send their numbers to head office, often by post. Any further iterations and validations (that are requested of them) take time,” he says. By using the internet and email to gather data from subsidiaries around the world, the key numbers can be stored centrally. With the right systems in place, much of the consolidation exercise can be done as things progress through the period. “Technology helps drive this process forward and shortens the whole reporting cycle,” he says.

Youell makes the point that many companies still see consolidation as a statutory reporting obligation and therefore fail to turn the exercise into a powerful performance-measurement tool. “Traditionally, it was difficult to collect all the numbers from subsidiaries, so groups tended to collect only data that was vital for statutory reporting purposes,” he says. Now companies can gather a whole range of numbers, including performance statistics and real operations numbers. Comparisons can be made and variances reported on. This adds a huge amount of value to the consolidation process and offers management a chance to improve their control of the business.

Deloitte & Touche has just completed its CFO Survey 2003, to get a sense of where companies are when it comes to consolidation and reporting across a major group. The results show that the approaches companies choose split into equal thirds.

One-third use spreadsheets, one-third use the consolidation and reporting systems that come with their enterprise resource planning (ERP) systems and the remaining third use specialist reporting packages such as Comshare or Hyperion. “Spreadsheets are the worst option of all,” says Marcus Boyle, a partner at Deloitte & Touche. “They are hideously complicated to maintain. If your reporting requirements change, the ripple effect through a collection of spreadsheets can be horrendous,” he says.

Of course, getting to an exercise that is driven by a specialist reporting tool involves a large implementation cycle. “With a global implementation, you are going to want to have a reporting lead for each module. On top of this, you are going to need a legacy team that looks at the integration issues at each site and you are going to need a programme management office in charge of the project,” Boyle says.

In virtually all instances, companies putting in a consolidation package will find they have different subsidiaries using different charts of accounts. Someone will need to be in charge of data migration so that everyone is consolidating to the same format. “Companies really go wrong at this point – where they overlook migration issues,” claims Boyle.

Another major issue is how the information being consolidated is turned into useful information. “Multinationals tend to have a lot of in-house expertise they can call on as this is not their first major implementation exercise.

Mid-range companies, however, can have a number of units to include in their consolidated results, but have very little in-house skills. A company like this is always better off buying in consultancy expertise,” according to Boyle.

Deloitte is often called in because a client has tried to implement a major consolidation exercise and failed. “What usually happens is they start the exercise full of good intentions, but they run into complications.

Then, since everyone involved is doing a day job at the same time, the project grinds to a halt,” explains Boyle. This is particularly likely where an organisation has gone through a ‘right-sizing’ exercise and simply does not have enough spare bodies to make the project viable.

According to Boyle, 60% of the organisations in Deloitte’s survey say they do not have the time to implement specialist financial reporting and consolidation systems. At the same time, 47% of CFOs say that budgeting, planning and consolidation is not as good as they would like it to be.

“Without good consolidation systems that are also performance-orientated, companies find it difficult to get an organisation-wide view of the issues,” Boyle comments.

One of the biggest drivers for implementing a proper financial reporting and consolidation system is to respond to market and investor pressure for faster period-end information. “Companies are getting their month-end closing a bit quicker now than they were two years ago. Some 26% of top companies, in our estimation, are now able to close their books at month-end in less than five days, against just 20% two years ago. This is world-class performance, so you would not expect every company to be there,” says Boyle. “However, 40% of the companies we surveyed say they need to be able to improve their month-end closing speed.”

Sara Conway, a project manager at corporate performance and consolidation systems house Comshare, reckons plenty of companies still have not yet taken what she calls “a strategic viewpoint on consolidation”. The fact that there are efficiencies still to be achieved means those companies with a significant reporting burden that have not yet implemented a satisfactory system will find themselves under pressure to do so.

“The major driver behind a consolidation exercise is generally management concerns over the accuracy of the group’s financial data for both statutory and management accounts. Other drivers are cost-savings through being able to identify specific cost heads down to unit level, and the search for efficiencies, which include faster month-end closure,” she says.

For her, the lead for a consolidation exercise can come either from the finance function or from the IT department. “The most successful implementations are those where finance dominates,” she says. In her experience, there exists a trend for finance to take ownership of these kinds of implementation.

“Today, we find finance appointing the project team and taking the lead,” she comments.

“Our consolidation system is heavily tailored. It has built-in financial intelligence in that it understands what a balance sheet is, what cash flow is, etc. But users have to construct their own database structures.

This can only be done if whoever is building the system knows what the key performance indicators are for each user group, and what numbers are going to be most useful to them from a management reporting and performance-analysis standpoint. So user department involvement, right across the company, is an essential prerequisite of a successful implementation,” says Conway.

The Sarbanes-Oxley Act in the US, Youell says, has had a major impact on US groups.

“In the UK, directors have always had to sign off accounts. In the US, there was not the same sense of responsibility for the numbers. Since the act, CEOs and FDs on both sides of the Atlantic are now personally responsible for the numbers, so there is an incentive to ensure the systems are in place to get these right,” he concludes.

A VESTY GOOD IDEA

With 40 global subsidiary reporting units, Vesty Group’s monthly reporting exercise is substantial. For years, Vesty used Excel spreadsheets as the basis for its consolidation, but it was becoming more difficult to maintain the macros, according to Neil Thornton, group financial controller.

The decision to implement a specialist reporting tool was triggered by Vesty’s biggest ever acquisition. “We moved, at a stroke, from a £280m turnover company to one turning over £500m, and acquired 10 new reporting entities.”

Thornton wanted a reporting system that could replicate what he was doing with Excel, and had good links between Excel and its own database. Comshare met his needs best and the system has now been implemented. The rollout worldwide was straightforward. There were no users to take account of, other than Thornton and his colleagues in group finance. “We gained a more stable system. In the past, we had trouble with some subsidiaries changing numbers on the spreadsheet to make their variances look better.

With the new system, we can lock down the numbers so the whole thing is more accurate.” In his view, the chief gain has come from the fact that the process of reviewing final numbers before submitting statutory accounts is now much swifter.

“All in all, it has been a worthwhile move.”