Why ERP Systems Inherently Fail to Address Intercompany

Your ERP system won’t save you from intercompany issues. Tax leakage and liability, reputational risk, inefficient manual processes, restatement, and delayed financial closes are just a few of the challenges to traditional ERPs. The dynamic and turbulent nature of the global economy further fuels the complexity of intercompany which ERPs are just not designed to solve.

For some time, executives held the belief that the next generation of ERPs would finally solve intercompany challenges. That’s now recognized as a fallacy.

This misjudgment invites questions about the shortcomings of ERPs like:

• What’s the fundamental failure of ERPs to address intercompany issues?

• How does ERP architecture limit intercompany capabilities?

• How can organizations complement their ERP systems with intercompany solutions instead of exhausting manual processes?

One structural cause of the failure of ERPs to handle today’s intercompany challenges is the scale and specificity of the intercompany challenge. Intercompany transactions represent an estimated 80% of global trade. Large multinationals spread across multiple national, regional, and local markets, divisions, and tax jurisdictions have intercompany requirements that are too narrowly defined and/or underestimated.

Intercompany complexity requires dedicated attention to scale and performance.

Multinationals in continuous growth mode are constantly required to incorporate new and disparate ecosystems. With acquisitions come the hope of seamless system interoperability without efficiency or performance loss, despite dealing with different ERPs. Even mid-sized multinationals can find themselves dealing with dozens of ERPs.

IT teams struggle to make these ERPs interoperable for managing external sales of goods, let alone seamlessly tracking the esoteric needs of intercompany such as shared services across countries and corporate entities. With constant change, and without an overarching intercompany governance layer, it is rarely possible to completely standardize an end-to-end intercompany process.

ERPs were originally designed for manufacturing resource planning. Over time, these systems have evolved and been reimagined to handle new processes, complex data structures, and novel use cases. ERP systems are excellent at tracking business resources—cash, raw materials, production capacity—and they define data well regarding outside purchase orders, sales orders, and tracking goods through their value chain. But for initiating, processing, and closing non-trade overhead and services, ERPs are ill-equipped. If they do try to address intercompany-related topics early-on with planning and design rigor, they have done so in a very limited and insufficient way.

Countries worldwide are implementing new requirements for invoicing and substantiation related to tax collection. Countries are on various timelines with different portals, different currencies, and different objectives. The ERPs have scrambled to accommodate new processes and iterations to meet these emerging requirements with a focus on trade-related transactions.

However, intercompany transactions are not excluded from these new requirements. When it comes to intercompany issues, what's being mandated by tax authorities is essentially treating intercompany with the same control, diligence, and governance as true third-party transactions. Tax authorities typically ignore whether the revenue came from inside or outside a multinational.

Historically, invoices are often never even created for intercompany transactions but are instead handled through internal accounting entries. This is insufficient to satisfy emerging local government substantiation requirements. Therefore, this demands an entirely new system and process for intercompany invoice creation and tracking that are inherent in purpose-built intercompany solutions like BlackLine Intercompany, but largely absent from other ERP systems.

The basic intercompany functionality that may exist in ERPs was designed and developed under the premise that the enterprise would be operating on a single consistent framework, whereas in reality, multinationals have multiple instances that aren’t fully compatible or interoperable.

Master data that is essential to intercompany financial management, like unit pricing, markups, and transfer pricing can often conflict. A common example of intercompany data conflict is tracking the volume of goods delivered.

One side may be doing a more accurate job of tracking volume than the other side, so that after a certain threshold of activity, a lower unit price should kick in. It does kick in on one side—but not the other. This results in a mismatch between the unit price and markup on the receivables side to the corresponding unit price and markup on the payables side.

In this case, a unit price and the markup on the intercompany receivable side can fail to match the unit price and the markup on the intercompany payable side. ERP data structures are not set up to identify or resolve even such common intercompany discrepancies resulting in large tax leakage and other liabilities and inefficiencies already mentioned.

By adding an intercompany solution, you gain a consolidated view of intercompany activity across a disparate ERP ecosystem. This streamlines processes, optimizes working capital, and strengthens governance while providing a single source for all intercompany substantiation, documentation, and audit support. Think of it as a virtual intercompany subledger. As your ERP continues to do what it does best, a dedicated intercompany solution provides master data structures and automated solutions to alleviate intercompany issues.

Moreover, having a dedicated and comprehensive intercompany solution that works in harmony with your ERP allows you to ensure invoices are booked into the right accounts and on time, reduce data errors, stop closing delays, prevent tax leakage, and minimize audits for which you’re unprepared.

Blackline helps companies centralize the management of intercompany processes, technology, and master data to automate intercompany accounting, so that intercompany efforts are well-managed. Instead of costly and tedious manual processes and workarounds, you get compliant invoices and documentation, real-time views with any level of granularity, improved transaction transparency, and reduced operational costs.

To get a better understanding of the state of intercompany at multinationals, get your copy of a commissioned global survey research report that provides insights to common pain points, current system shortcomings, and the outlook of intercompany.