Business Technology Innovation

Continuing from earlier posting, ABC chooses dual ERP and implements with 30% reduction in cost and time for execution.

How to achieve a cost and time reduction:

Project Team: The Integration / Migration Project is handled by a team which has experience in both QAD and SAP. This knowledge enables them to understand the requirements of both ERP’s and to map the requirement of the customer

Stage 1 – Master Data and Modeling: A focused Implementation / Migration Approach is adopted for execution. Key workshop is held onsite for key functional requirements and master data management. Models are built on QAD and SAP based on existing schema, processes and key functional requirements with revised master data and key reports. Both master data and system models are done from offsite. This considerably reduced the time taken and the model is identifiable readily by the business.

Stage 2 – Migration and Integration: Pre build connectors and utilities are used for migration and integration. For example, in P2P (Procure to Pay) process, PO is raised in SAP, Receipt is made in QAD, Matching and Payment is done in SAP. Prebuilt connectors are used for integrating PO (SAP), Inventory (QAD) and Payables (SAP) modules. This significantly reduces the time and effort taken for migration, integration and Go Live.

Stage 3 – Roll Out: Roll Out is handled through identification and handling of repeatable tasks through separate teams. Tasks like User security management, Data conversion & Migration and Configuration Management are handled offsite through specific teams with SLA.

Results: Company ABC achieved a 30% reduction in the overall time and cost in moving over to a structured dual ERP. It also achieves common Shared Services, Master Data Management, streamlined processes and elimination of BI for financial consolidation.

Lets now make a case for single ERP in ABC Inc using the same hypothetical situation…….. (to be continued)

Continuing on the earlier discussion on what path a company can takes when it grapples with dual ERP…

Decision: Go for Option-A – Retain both QAD and SAP but leverage them in an effective way.

What is the business case for existence of dual ERP here?

ABC Inc has inherited QAD and SAP across plants and divisions. Both the ERP’s are in different states in terms of maturity and life cycle.

ABC Inc, after due analysis of (1) Cost & Time and (2) Optimum TCO, presents the following compelling arguments.

1.    Take advantage of the inherent strength of QAD and SAP to meet company’s long term requirements.

2.    Realign the current model to provide best of breed business process solution across the enterprise

3.    The cost of realigning the solution in their case is more effective than complete replacement.

4.    Incorporate and implement Shared Services, Master Data Management and Best of Breed processes.

Dual ERP architecture

However, ABC will have to address the following issues:

1. Since BI / DW will be receiving data from 2 ERPs – e.g. GL coming from SAP and operational data coming from QAD, it will have to eliminate any possible reconciliation issues.
2. Introduce a MDM system which will interface with QAD and SAP to effectively address data model issues. This will address data duplication, data integrity and data enrichment requirements.

ABC Inc arrives at a revised IT ecology of

QAD for Manufacturing, Inventory, Sales and Distribution and

SAP for Purchasing and Financial incl consolidation.

ABC achieves the dual structure with 30% reduction in cost and time for execution. But how does ABC plan to achieve 30% reduction in cost & optimum TCO in this approach? It has to contend with implementation of both QAD & SAP and yet attain cost balance.

One of the key aspects to IFRS adaption is determining the key changes to Information systems and identifying the appropriate level for consolidation system changes.

Changes to information systems may be made at different levels in an organization’s financial reporting process—for example, at the group level or at the company level. To determine the appropriate level, management must consider various factors affecting the reporting and roll up of financial information.

Option-1: Group Level

Individual entities prepare financial reporting based on local GAAP. This financial reporting is converted to IFRS during the group consolidation process.

IFRS - Integration - Group Level

Organization Suitability

• Individual entities in certain countries do not have to report separately.
• Only a few simple adjustments are required and are made at the top level during the consolidation.
• Information to make conversion adjustments is readily available.

Option-1: Unit Level

Individual entities prepare financial reporting based on local GAAP and then convert that information to IFRS before sending the reporting to the group level for consolidation.

IFRS - Integration - Unit Level

Organization Suitability

• Individual entities in each country are required to report separately.
• Group structures are complex.
• Consolidated entities are numerous.
• All required source data is readily available.

Internal Control framework has been in existence for a very long time and much before Sarbanes Oxley made it mandatory. COSO (Committee of Sponsoring Organization of the Treadway Commission) issued its first framework way back in 1992.

While Section 404 of SOx has made to mandatory for companies to annually assess and report on the effectiveness of internal controls over financial reporting. Financial reporting is directly influenced by multiple factors including the industry in which the company is working, local statutory requirements i.e., US GAAP and size of the company. From an internal controls perspective, it is entirely influenced by Risk. And this risk is entirely influenced by business and IT processes in place.

To an extent SOX has made Internal Controls to be looked at not as a one time exercise. For successful compliance the controls have to be existent, controls have to operational and continuously operational.

Complying with internal control requirements carry certain cost. This cost will be both one time and recurring. By making internal controls tightly integrated with operational components, companies can look at both increasing the efficiencies & predictability of their operations as well as reduce the ongoing cost of maintaining controls. Potentially, a company is also saved the cost and embarrassment of any misstatements, malfeasance and financial frauds.

Let’s look at some of the key influencers:

Financial Reporting: Financial Reporting is primarily influenced by the industry and statutory regulations. More so for companies in regulated domains like Insurance, Banking etc. Local Statutory reporting and disclosure requirements are another key factor. If a company is operating in multiple geographies and have to report in different formats i.e., US GAAP, IFRS etc. each of these will have a bearing on how financial information is processed for final statement and disclosure

Business Process: Addressing Risk through internal controls will strongly influence and be influenced by business process. Here business process could mean revenue recognition, special purpose vehicles, capitalization / amortization etc. Evaluation and mitigation of risk will include assessment of policies & procedures guided by financial reporting objectives and aided by financial reporting competencies.

IT Process: Information Technology is perhaps the biggest area for internal controls both in terms of impact and in terms of coverage. Risk assessment in this area is directly related to the complexity of IT ecology. With multiple systems, silos of information processing and complex integration strategies, assessment ranges from access control to change control, data integrity to data protection. In many of the internal control review assignments audit that Thirdware has executed, much of the leakages emanate around these four areas:

1. i.        Generic ids and access control
2. ii.        Segregation of duties
3. iii.        Audit trail
4. iv.        Data integration and integrity

Internal controls, like any other key management process, must revolve around these 5 key processes. COSO Framework on Internal Controls elaborates these areas extensively.

1. Control Environment: Setting the overall control environment including buy in from top management, organizational structure, financial reporting competencies, authority & responsibility and human resources.
2. Risk Assessment: Establishment of financial reporting objectives, assessment of financial reporting & fraud risks
3. Control Activities: Address risks, selection & development of control activities incl policies & procedures and IT controls
4. Information and Communication: Address information relating to financial reporting & internal control both for internal and external consumption
5. Monitoring: Ongoing evaluation and corrective actions.
   

More to follow

AIAG-Automotive Industry Action Group recently conducted an event on cutting supply chain communication costs. EDI, as one of the key component of supply chain communication, figured in the initiative.

Automotive industry is perhaps one of the largest adapters of EDI in the world. Multiple tiers of suppliers, movement towards assembled components and control of inventory through JIT, have made supply chain communication a key requirement. However, with the ever increasing pressure to reduce cost, supply chain communication has become a focus area.

Ironically, EDI has been an enabler of cost reduction. It has changed the landscape of business and redefined the supply chain operations. EDI saved considerable amount of money through streamlined operations by enabling consistent information flow with reduced errors.

Why is the traditional EDI under fire now?

Typical EDI implementation primarily consists of –

• Business Documents from Transaction System (ERP or Legacy).
• EDI Data formatting Standards like ANSI X12, EDIFACT.
• EDI Translators that converts Business Document Data into EDI Standards Format.
• Communication Channel to send/receive EDI Messages like Direct Link Networks, Private or Propriety Networks, Third-party Value-Added Network.

Traditional EDI

The Cost of procuring and setting up EDI Translator and enabling the Transaction System is mostly one-time. While there could be maintenance cost in the form of setting up / enabling new trading partners, new documents etc.

Communication Channel used in Traditional EDI is mostly closed networks which are protected from outside world. Most widely used communication channel is Third-party Value-Added Networks (VANs). VAN Services typically consists of installation fee, recurring per-transaction fee, monthly subscription and maintenance fee for mailbox/accounts. Given, Monthly maintenance charge and per-document transaction fees of VAN, can accumulate to huge amount of cost. This cost forms substantial part of the EDI cost of ownership. High cost of ownerships prevents small automotive suppliers to embrace EDI and thereby reduces the supplier base for OEMs.

In the next blogs, let look at:

1. Cost aspects of traditional EDI
2. Emergence of Web EDI
3. Using Internet as a communication channel
4. Comparison and conclusion

Moving on in the IFRS reporting process, let’s take a brief look at the process flow. The logical starting point is the Statement as per Local GAAP and ending with Statement as per IFRS. The transformation in between would consist of Measurement, Recognition and Reclassification.

IFRS Process Flow

Lets look at each of these in a simple manner.

Measure as per IFRS:

IFRS - Measurement of Difference

Recognition / De-recognition of certain financial entries:

Finally Re-classification under IFRS:

IFRS - Reclassification

This this not intended to be an exhaustive list but more to represent the kind of changes that will be required to be made.

In Aberdeen’s study on the total cost of ERP ownership, they acknowledge that many of the survey participants have indicated that 2 or more ERP’s were implemented across their enterprise. This is a clear acknowledgment that it is not uncommon to find companies ending with more than one ERP. Most common reason is mergers and acquisitions resulting in divisions/plants operating on different ERP’s. Except perhaps the large companies who have their own reasons to adapt a multi ERP architecture.

Does a multi ERP environment make sense in an SME? Or should companies move to a single ERP only?  There are pro’s and con’s to both the approaches and much of it would depend on the business strategy of the company.

Lets first take a case of living with dual ERP’s with a hypothetical case study?

ABC Inc has eight plants: Plants 1 to 5 are on QAD and Plants 5 to 8, which were recently acquired, operates on SAP (Figure-1 below). Financial Consolidation is achieved through Hyperion.

Dual ERP

The issues facing the company are (1) ability to scale to future requirements (2) cost of multiple support (3) disparate master data and (4) disparate processes. All these anomalies are (1) increasing the total TCO and (2) questioning the ability to handle future growth.

ABC Inc has two options. Option-A leverage the current dual ERP i.e., QAD and SAP or Option-B move to a single ERP i.e., either QAD or SAP.

Lets make a business case for both the options. In a real life scenario other factors like availability of budget, extent of implementation complexity etc may make the decision more individual and unique. For our purposes, let see the pro’s and con’s of both the options.

(To continue)

Considering the impact areas, IFRS convergence has considerable challenges.  Especially for companies with multiple operations, multiple sites and multiple system.  It is the internal complexities that companies have built over a period of time, that makes IFRS adoption difficult.

Traditional Architecture and financial reporting

Let’s consider the traditional architecture of financial reporting and the complexities that stand in the way of IFRS Implementation.

GL - Traditional Architecture

The traditional architecture revolves around sub-ledgers, ledger and extraction of reports. This architecture and more so, from IFRS perspective, creates the following hurdles.

• Difficulty in integrating structural changes  (e.g. new acquisition, business unit, product, etc.)
• User confusion on where to go for final financial information
• Large/complex Chart-of-Accounts
• Inconsistent definitions and concatenated fields
• Large amount of redundancy between financial systems (e.g. sub-ledger, ledger, CPM, etc.)
• Data latency challenges
• High number and complexity of data extracts and loads between Financial systems
• Onerous maintenance requirements
• Elongated process cycle times (Close to Report, Analyze to React, Planning & Budgeting)

Architecture for IFRS Implementation and complex financial reporting:

To address complexities, including IFRS, companies will have to look for a modular approach to how financial information is stored and processed. Companies will have to put in place a process oriented architecture to address financial data aggregation, in order to enable complex reporting in a seamless manner.

GL-New Architecture

What is the basis of this architecture and what does it provide?

• Move from “Complex GL” to “Thin GL” with streamlined CoA
• Leverage Performance Management Applications to bring together GL, Sub Ledger and Project details.
• Ad-hoc and User defined reporting with more analytical / reporting power
• Streamlined process with increased flexibility and control

Compliance to Sarbanes-Oxley (SOx) and other Internal Control requirement is a business compulsion now. Ongoing compliance is essential to maintain financial certification, making SOx a daily part of transaction processing. If not for SOx, for companies coming under IFRS Convergence, will have to address the same for financial reporting purposes.

Based on the numerous engagements Thirdware was involved in helping companies meet Internal Control requirements, this blog series should help explain the overall approach and execution. While many of the software vendors have provided patches or modules inside their application, unless the overall control process (both business and IT) is understood and addressed in unison, it is never complete.

Coming to the subject:

Internal Controls, for audit and certification purposes, must meet three essential conditions:

1.      Compliance and Controls must be documented

2.      Controls must be implemented and complied on an ongoing basis. It should be made part of the business process.

3.      Evidence must be available to prove compliance with the documented processes

If anyone of these elements is missing, the basic tenet of compliance is not fulfilled.

The foundation of these 3 conditions lies in the following approach

• Understanding and documenting Business and IT controls and their relationship to the financial reporting process
• Identifying risks and designing/implementing controls to mitigate risks and continuously monitoring them
• Ensure the controls are updated (Ongoing) and correspond to business process changes or the financial reporting changes impacting operations

The entire controls process lie both inside and outside the application. While, most companies have completed their initial phase in compliance, the requirement is to change SOx compliance from a project (audit compliance) based approach to that of a business process based approach.  Adopting a process-based approach to SOx compliance helps companies maintain strong internal control over financial reporting and saves money in the long-term and ensures a sustainable controls environment.

At a broad level, Internal Controls and Compliance must address the following:

IFRS Implementation will have wide ranging impact for an organization. Impact will be felt on business, technology and stake holders. Considerable preparation will be required internally in terms of gap analysis, guidelines, controls, training etc. Depending on the size, maturity and complexity of IT ecology, changes to transaction and analytical system could be significant. Finally, IFRS will have an impact (negatively or positively) on the way financial performance is reported.

Here is a summary of implications reported in Europe:

For an organization moving to IFRS convergence, impact can be summed up in the following areas:

In the coming posts, lets look at (1) Challenges to adoption from an IT perspective (2) Impact on Financial Consolidation process and (3) Options available to companies