Harmonize systems with financial intelligent solutions
For private equity firms, it’s ideal to retain operating company systems while simultaneously obtaining common corporate reporting. Obtaining relevant data from a wide disparity of enterprise resource planning (ERP) transactional systems throughout the various operating companies in a PE portfolio can be one of the biggest challenges that PE leaders face. Integrating systems to a single ERP is costly, takes time and more importantly does not support a nimble buy-and-sell ROI model.
PE strategies are designed to leverage the value of the operating company and to realize a return on investment as outlined in the acquisition process. In part this means being able to cost-effectively utilize the people and technology that are in place at the operating company level. The challenge, though, is for the corporate finance function to efficiently obtain financial content across various operating companies with the right level of detail with common corporate terms.
Specifically, corporate finance needs common information at the preferred level of detail across all portfolio companies without additional change to the operating company systems. Meanwhile, the operating company requires finance information to include further detail (i.e. product SKU or customer ship-to name), using its own terminology as provided in the operating company-specific systems.
“The ideal solution for PE-type companies that desire this distributed and decentralized management approach is to standardize where you can, but allow differences across the portfolio companies, while having common financial analytics at the corporate level," said Joseph Coniker, Principal, Advisory Services — Technology Modernization for Grant Thornton.
“The ideal solution …is to standardize where you can but allow differences across the portfolio companies, while having common financial analytics at the corporate level.”
Fortunately, there are solutions and leading software applications designed with this PE concept in mind that enable standards for corporate finance departments while allowing differences in the business. “Relying on process definition and system integration is the typical go-to approach for consultants, but it is not enough for optimal success to realize these competing interests,” Coniker said.
When PE leaders consider an acquisition, the compatibility of the target company’s systems with those of the PE firm is not the highest consideration, and systems are typically cobbled together by IT post acquisition. As a result, PE firms often wind up with operating companies consuming energy on providing corporate barely enough information and taking more time do so, which is not ideal for portfolio growth.
Solutions and experiences can be used to address the constraints that PE companies face. Modern technology can address the following financial reporting integration challenges:
- "ERP": Multiple charts of accounts: Lots of systems often are present at the operating company level, each with its own ERP and chart of accounts.
- Data availability and consistency: PE firms often manage multiple funds and portfolio companies, and obtaining consistent and reliable financial data from these sources can be challenging. Additionally, the data may be in different formats, making it difficult to integrate into a unified reporting system.
- Timeliness of data: PE firms require timely and accurate financial information to make informed decisions. However, obtaining financial data from portfolio companies can often be a time-consuming process that can delay reporting and decision-making.
- Complexity of accounting standards: PE firms operate under complex accounting standards, which can vary depending on the jurisdiction and the type of fund. These standards can be difficult to understand and apply, leading to inconsistencies in reporting across different funds and portfolio companies.
- Confidentiality concerns: PE firms may be reluctant to share sensitive financial information with third-party service providers, and this can make it challenging to integrate reporting systems with external parties.
- Limited resources: PE firms may not have the internal resources to dedicate to corporate financial reporting requests, which can make it challenging to develop and maintain robust reporting systems.
- Reporting requirements: PE firms must comply with various regulatory and reporting requirements, which can be time-consuming and complex to navigate. Failure to comply with these requirements can result in significant financial and reputational damage.
Integrating financial reporting with PE firms requires careful planning and execution to overcome these challenges and make accurate and timely financial information available for decision-making.
PE firms typically rely on a system integration approach to streamline operations, whether it be manual or automated. However, integration alone is not a strategy, and does not guarantee successful use of solutions at both the operating unit and corporate level.
Below are some key areas where PE firms can benefit from financial intelligent solutions to harmonize and balance system integration to meet disparate portfolio company needs and common corporate requirements.
- Chart of account management: When a PE firm owns multiple businesses with multiple charts of accounts and ERP systems, modern corporate performance management technology can promote standardization and allow required differences in the operating companies to co-exist with a common corporate solution.
- Accounting and reporting: PE firms need to manage complex accounting and financial reporting requirements. Financial intelligent solutions can enable automation of these processes, allowing firms to quickly generate accurate financial statements, track performance metrics, and comply with regulatory reporting requirements at both the operating unit and corporate levels.
- Operating company detail: Portfolio companies need to continue using their systems until they can spend the time and money to upgrade or switch technology vendors. These distributed companies also have further detail and analytics needs. Financial intelligent solutions can enable operating companies to establish their own consolidation and budgeting capabilities, while simultaneously providing corporate with their required information, all without additional “integration.”
- Portfolio management: PE firms need to manage their portfolio of investments. They need to monitor performance, track key metrics, and make strategic decisions. Financial intelligent solutions can help consolidate data from multiple sources, providing a comprehensive view of the portfolio and enabling faster, data-driven decision-making.
Financial intelligent solutions can help PE firms improve their operational efficiency, reduce costs, and make better-informed investment decisions. By consolidating data from multiple sources and automating key processes while keeping source systems intact in the portfolio businesses, PE firms can gain a competitive advantage and achieve better results for their investors.
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