Achieving Better Intercompany Business Outcomes

[This blog post draws from “The State of Intercompany,” a survey of more than 260 finance, accounting, tax, and treasury stakeholders from multinational companies. The goal of the survey, which was performed by Dimensional Research and sponsored by BlackLine, was to capture data about respondents’ experiences working in intercompany.]

When intercompany operations are going well, they drive positive business outcomes. This reasoning works in reverse, as well. In a recent survey of intercompany stakeholders, all respondents (100%) stated that intercompany challenges have a direct negative impact on business outcomes including:

• An increase in statutory and tax audits and their associated fees (49%)

• Delays in closing books (35%)

• Uncertainty created by unsettled intercompany balances (35%)

• Eroding margins due to costs of managing intercompany (32%)

Intercompany is arguably the most complex and challenging business to manage. The sheer number of transactions that are processed in one day by one multinational can be in the millions. In the survey, 99% of respondents reported that intercompany volume is greater than outside revenue—27% said it’s more than 10 times revenue. Each transaction is expected to balance for an overall net-zero impact and larger multinationals, with acquisitive tendencies, commonly face systemic disconnects and entity-to-entity disputes that imperil their ability to capitalize on intended synergies.

Given these complexities, it stands to reason that multinationals would carefully examine what aspects of their intercompany business can be improved and optimize strategies to streamline processes. But that isn’t the norm. Rather, many multinationals operate in a white-knuckled fashion, trying to make do with antiquated strategies and processes that are inadequate to efficiently handle the workload.

Holding on to these outdated methodologies not only adds friction to myriad intercompany processes, but it also jeopardizes a multinational’s ability to be resilient against macro-economic dynamics that they have no control over. Examples include the war in Ukraine, fluctuating exchange rates, emerging tax regulations, and supply chain issues (which was most often cited in the survey as an issue that complicates intercompany management).

Are multinationals doing what they can to overcome these challenges, bolster themselves, and develop strategies that give them the best chance to achieve optimal business outcomes? The survey makes clear that that most are not seizing those opportunities but are, instead, falling back on status-quo processes that end up working against their goals to improve business outcomes.

When we look at all the problems related to intercompany, it’s clear that many are self-inflicted, the direct result of multinationals failing to perform intercompany financial management (IFM). In the survey, respondents reported numerous troubles that are within the control of their organizations, such as:

• A failure to have a “company-wide view” of operations (51%)

• C-suite leadership and corporate board “lacking in their understanding of intercompany” (89%)

• Variances, small for each entity, but that add up to significant amounts when viewed across the company (38%)

• Difficulty working with disparate ERP systems operated by different corporate entities

• Unreconciled balances that create ongoing problems, compounding year after year (52% reported having unreconciled balances that were more than five years old)

When a multinational fails to perform intercompany best practices, one of the most detrimental impacts is its inability to retain experienced talent. More than half of the survey’s respondents (55%) reported that more than 1,000 of their company’s employees were directly involved in intercompany. When one considers the fact that about 70% of international trade involves global value chains (GVCs) trying to quantify the number of employees impacted by poor intercompany processes is difficult to fathom.

Shockingly, 34% reported that their teams experienced physical or mental health issues due to the stress of intercompany. Intercompany problems that negatively impact staff morale include stressful close periods, pulling all-nighters, working on menial tasks, and feeling underappreciated. In the survey, nearly all respondents (99%) said they were directly affected by intercompany chaos and most respondents (92%) reported that weak intercompany processes create barriers to hiring and retaining talent.

One of the most concerning personnel findings of the survey was what respondents said about sleep, a key indicator of emotional and physical health. Most intercompany stakeholders (96%) reported that employees regularly lost full nights of sleep trying to manage intercompany transactions. One-third (33%) said that they needed to pull all-nighters every quarter.

Other takeaways in the survey relating to staff morale include the following:

• Demotivation related to negative responses from business stakeholders about allocation and reconciliation inquiries was the top issue (60%)

• Resentments caused by disagreements over transactions between legal entities was experienced by nearly half of respondents (41%)

• Difficulties managing conflicting priorities among functional teams (39%) was problematic

A successful intercompany operation depends on having the best minds working on these vital transactions. Individuals with expertise in global transfer pricing, compliance, regional audit trends, changing tax environments, and inflation-related hedging will choose to work at companies that make them feel valued and offer them the best experience. It’s critical that multinationals improve intercompany processes so that they have the best chance of recruiting and retaining talent.

Technology is an essential component of an optimized intercompany strategy. Leveraging technology and data drives innovation, efficiency, and effectiveness in financial processes and operations, institutes global standardization and automation that can enhance data sharing and insights, and enables process efficiency, talent capacity, better risk management, and increased organizational alignment.

Intercompany stakeholders—many of whom spend too much time working with manual processes (such as spreadsheets) and disparate data locked in siloed operations—see the potential for improvement. All survey respondents (100%) identified areas that technological solutions would benefit, identifying netting and settlement optimization (48%) and indirect taxes and e-invoicing (45%) as the top two.

The problem, however, is that too many multinationals are struggling with outdated technologies, such as disconnected acquired ERP systems that make centralizing data processes and reporting nearly impossible. Technology at the top of respondents’ wish lists were:

• Automated and intelligent intercompany analytics and reporting (50%)

• Standardization and automation of manual processes (41%)

• Improved netting and settlement capabilities (38%)

• Automated cost and tax allocations (35%)

• Centralized dispute management (34%)

• Allocated vendor invoice management (32%)

• End-to-end transactional transparency for all intercompany stakeholders (30%)

When CFOs list their top-level objectives, they typically include supply chain resilience, strategic decision making, faster close, increased growth, and optimal use of working capital. The surveyed stakeholders were in complete agreement; 100% reported that improvements to intercompany would contribute to more effectively meeting those goals.

However, the survey shows that finance leaders lack an understanding of what it takes to achieve those objectives, indicating a need for them to learn more about intercompany processes. One possible reason is that upper-level employees don’t suffer from the same morale problems as low-to-mid-level employees do. While 72% of low-to-mid-level staff said that negative responses from business stakeholders are demotivating, only 46% of executives felt this way.

If corporate leaders don’t focus more on expanding their edification of intercompany operations, they stand to be an impediment to improving business outcomes. The survey reveals other troubling statistics that point to the need for corporate leaders to be better educated on intercompany operations:

• A majority of respondents (89%) said that C-suite leadership and corporate board were lacking in their understanding of intercompany

• Over one-third (38%) said that top leadership lacks basic awareness of how intercompany ties to corporate performance drivers

• Only a small number (11%) characterized their company’s C-suite and corporate board as having enough of an understanding of intercompany to stimulate effective discussions about operating models

Intercompany accounting has tentacles that reach throughout a multinational organization. It includes all regions and legal entities, and touches a wide variety of functions, including indirect tax, transfer pricing, finance, FP&A, controllership, treasury, shared services, and information technology.

It’s critical that intercompany leaders examine the impacts that status-quo operations have on personnel, tax, profitability, and growth and explore opportunities presented by adopting IFM practices. This includes the adoption of technological solutions designed to centralize and automate processes and provide all functions with subledger like visibility, enabling them to manage intercompany life cycle from Creation to Balance and Resolve to Net and Settle.

While making such holistic changes to intercompany operations requires some time and attention, business leaders who embrace these opportunities have a much greater ability to positively impact business outcomes over those who continue to rely on status-quo strategies.

Get your copy of the report The State of Intercompany to learn:

• The types of challenges organizations are facing with intercompany

• How intercompany issues are impacting organizations

• The role of technology in solving critical intercompany problems