COVID-19 has brought back into the foreground a long-debated topic: where should acquisitive organizations draw the line in integrating the newly acquired organization? Should it just integrate at the product and business level, or extend into operational and finance functions to consolidate enterprise-wide platforms and reduce costs? When should it execute on back-office integration? Picking the optimal time to perform this integration is a critical leadership decision, and the pandemic has highlighted its importance.
A recent PWC paper highlighted that 40% of CFOs have changed their M&A strategy since the emergence of COVID-19 (source). This aligns with past trends which show that that after a market disruption, M&A activity surges and negatively impacted companies are swallowed up by those that thrive amidst the crisis looking to increase their footprints.
In some spaces like retail, many companies may apply a ‘fix and sell’ model to the acquisitions they make and may be able to avoid the headaches of systems integration. However, those wanting to absorb acquisitions into a parent company can experience chaos trying to manage back-end systems - especially between finance departments where reporting may suddenly need to be combined, but systems can’t talk to each other.
The COVID-19 crisis has pushed many organizations to leap forward in their digital strategies but for others it has halted spend on forward-looking tech projects. If your M&A strategy post-COVID includes swallowing some harder hit organizations, you may want to think about what you can do now to make the M&A transition easier and more beneficial.
Enter the subledger…
There is a reason subledgers have increased in prominence over the last few years, culminating in a spike in the last 18 months. More complex regulations, expanding data sets, the greater need for data granularity, automation, and analytics have meant subledgers have become a necessity in any finance department. In parallel, subledgers have been accepted as the solution that drives efficiencies in the finance function whilst coping with this set of expanded demands. Making the most of a subledger should be a consideration for any company that is planning M&A activity. Below we outline five compelling reasons for the presence of a subledger in organizations that rely heavily on M&A.
Merging your data sets after a sustained period of acquisitive growth - without losing granularity and separation when needed.
As mentioned above, for portfolio companies that have an M&A strategy of fix and sell, integrating data held within different organizations may not be the ideal approach as you wouldn’t want to fully integrate the financials of those organizations because they would then become harder to sell-on or spin off. But for groups that are looking to acquire, hold, and grow companies as part of a long-term growth strategy, a subledger is a tool that offers exceptional value and allows you to start to consolidate and merge data sets early in the process.
Merging the data for all organizations under the parent or group umbrella results in a single source of financial data and a single source of trusted truth. In a technical environment with multiple data warehouses, data lakes, and multiple general ledgers, this central hub of data becomes invaluable. The data housed in a subledger can be organized and held in an agreed, standardized format which can then become the universal data model for all entities, businesses, branches, countries etc. – however the organization is split.
Having that overarching view of data alongside the ability to drill down into data held under each entity, product line, and country gives both holistic and detailed control and visibility to group CFOs.
Dealing with complexity
It is worth noting that facilitating data consolidation while maintaining granularity helps address the complexity of reporting for a global organization. While the complexity will remain - you will always need to report accounts and comply with multi-jurisdictional regulations - a subledger will enable you to manage multiple charts of accounts for merged and purchaser entity ledgers, handle multiple currencies and multi-GAAP reporting requirements.
Simplify your architecture
Even a single organization, scaled by region, product set, or market can have a complicated back-end systems architecture requiring workarounds and many manual processes. Bring together multiple organizations of similar complexity and you can end up with large tech landscapes which cost a fortune to maintain and are no longer fit for purpose.
A subledger can simplify this for your finance department. Multiple COAs and GLs can be consolidated, pressure can be relieved from GLs and in some cases, organizations can choose to migrate general ledgers to a cloud environment while retaining detailed data in a ‘fat’ subledger.
GLs weren’t created to retain deep and detailed data, whereas a robust subledger architecture is designed for this purpose. Once structured data is contained in a subledger, you can have a consistent application of accounting policy. Rather than attempting to unpick your acquired company’s accounting policy and maintain multiple conflicting views of the business you can receive the raw transactional information and pass it into your existing data path.
In addition to the simplification of your system architecture, you can also simplify your reporting and processes. For example, the same product can be accounted for consistently across the group. Doing this across the board will mean some platforms and processes can be retired altogether, others streamlined and simplified. In one of Aptitude’s Benelux clients an excess of 10 Portfolio Administration Systems and Claims systems are being demised in part or in their entirety as a direct result of Aptitude’s IFRS 17 solution being implemented.
A subledger can also work to automate those processes left, altogether creating a more efficient department. Consolidated reporting means less time spent reporting, which tends to equal smaller or happier teams who have time to devote to more value-added tasks than adjusting and reconciling multiple entities in multiple charts of account each month, quarter, year-end.
Building a strong foundation for future M&A activity
Once you have a subledger in place, with data handling best practices agreed on and implemented, future M&A activity becomes much smoother, allowing you to embed and integrate organizations into your overall architecture more quickly. This can lead to much faster time to benefit for acquisitions as less time is taken on the integration.
For organizations seeking to acquire and integrate future books of business or additional organizations in their entirety, having a flexible finance architecture is key. Acquisitive organizations often leave the back-end architecture untouched, which results in inefficiencies and higher costs. In the IFRS 17 context a subledger can help to accelerate the integration of acquired platforms and their resulting demise. There will be a reduced risk of architecture duplication and the resulting manual controls processes required to align regulatory and management information.