The increasing complexity of doing business on a global scale presents new challenges for organizations, and having an agile enterprise resource planning (ERP) system is more important than ever.
One of the largest challenges of legacy ERP systems—particularly for multinational enterprises operating in a variety of jurisdictions—lies in meeting country-specific regulations, currencies, and compliance obligations. (Briefly, ERP refers to the management of a suite of software applications necessary to operate a business and might include finance, human resources, supply chain management, customer relationship management, or inventory management in a single system.)
Global ERP strategies fall into one of two broad categories: dispersed or centralized.
Dispersed ERP: Separate Systems
As a result of its evolution, a large multinational organization typically operates with a large corporate general ledger, to which headquarters will expect subsidiaries to submit their financial results. Often, the central office will conduct global planning, account reconciliation, and business analytics from the general ledger, too.
Meanwhile, subsidiaries in other countries are effectively left to procure their own local finance systems, which can leave them operating independently of the parent company until it’s time to report results. Having a local finance system also requires spending time and effort on local compliance and reporting obligations in the jurisdictions where they operate.
The financial data, located in local ERP systems, is then summarized and sent to the parent company. This approach might work on a basic level, but it also begins to limit the overall organization’s operational agility because making changes to their reporting dimensionality isn’t a simple question of tweaking a single ERP system. Rather, it involves coordinating those changes in each country’s specific ERP system. That can mean a company’s goals can’t easily be replicated at the individual country level.
It also means that a self-contained, country-specific finance function carries a high cost due to the need for manual reconciliation of data fed from underlying reporting general ledgers back to the center.
Lastly, dispersed ERP systems can hinder the amount of insight a company is able to produce and can cause delays, due to the lack of a common dataset.
Centralized ERP: A Top-Down Approach
In the reverse scenario, a centralized ERP strategy is one in which enterprises have attempted to roll out a global ERP system. Again, taking the example of a multinational company that operates in various countries around the world, this approach involves a focus on group reporting and allows corporate headquarters to enforce its accounting policies.
As might be expected, the largest challenge is reversed.
What this means is that a corporate reporting model can’t meet local reporting requirements, leading companies to spend additional time trying to configure their global ERP systems to meet the various regulatory obligations in each country, which in turn can lead to a degradation of reporting capability.
Of course, there are some benefits. A centralized ERP system typically simplifies the reporting process at headquarters and allows for economies of scale. Arguably, the control environment is greater because transactions have to be routed to flow through the system, and there’s a greater level of insight into transactions. Organizations can create a core data model that allows for data such as projects, invoices, or suppliers to be captured similarly, but this approach also makes it challenging to meet local reporting needs.
Ultimately, each approach described above presents its own challenges.
How, then, to drive down the cost of finance and ramp up the insight and the efficiency with which global finance functions operate?