You have to manage your business in a scalable way in order to achieve the growth and value that you and your shareholders want, and enterprise resource planning (ERP) systems from companies like Oracle and SAP are the most robust tools on the market and the best equipped to get the job done.
This is not to say that ERP systems are the best thing since sliced bread – they aren’t perfect, they come with plenty of headaches, and they have a finite lifespan. However, there are strategies that growing global companies can use to manage their ERP systems to derive substantial business value, to maximize system life span, and to establish a foundation for information operations that injects life into the company and provides the strength it needs to be successful.
This article examines some of the challenges a growing company faces with the realization that its current ERP system is not fit to run the current business. We’ll focus on a manufacturing company that implemented E-Business Suite, but the story is applicable to other ERP systems and across all industries.
Our manufacturing company started in 1989 as four college roommates spending their spare time on weekend soldering broken parts – valuables ranging from metal earrings to motorcycle parts – for friends, free of charge of course. Everything was simple – no books to close, no employees to fire, and no earnings to report. After some time, they realized that while they enjoyed working with metal just for the sake of it, the line of customers (who at this point extended beyond immediate friends) would not look so long if they knew they were getting some cash in exchange for the metalwork. In short, the pipeline was solid and the business took off – in 1994 they incorporated after adding 24 employees.
They were running a small industrial manufacturing shop, molding and forging steel and aluminum for the building and construction industry as well as for the United States government. Their information systems included a mash-up of homegrown mainframes, some personal computers, and even some actual ledgers the CFO refused to ditch. That was about to change.
In 1999 they reported strictly domestic revenues of almost USD$500 million. After many discussions of the company’s information infrastructure (or lack thereof), the CIO convinced the CFO that an enterprise grade ERP system was a must if they were to grow any more, and shareholders were pushing for global expansion to take advantage of untapped resources in new markets. The giddy Oracle salesman pushed the enterprise-ready applications of E-Business Suite (EBS) on the firm, and the CXOs bought in. They were up and running on EBS 11i in no time – in actuality, it took a good 16 months to implement 11i and migrate their legacy data to the new system. Not to mention the training. And the headaches.
All kidding aside, EBS and other ERPs are a vital component of the successful modern growing business. They enable companies to track financial transactions, set budgets, generate reports, manage and analyze customer and supplier data and relationships, administer projects, implement logistical operations, and standardize business process. Companies that utilize an ERP system to its full potential create competitive business advantages for themselves in the form of reduced operational costs, faster time to value, and real-time access to intelligence that results in a streamlined ability to capitalize on new opportunities. All of these things are good for the bottom line.
For growing companies, maximizing ERP utilization is extremely difficult due to the nature of growth itself. By 2010, our manufacturing company had expanded to include major operations in the United States, France, Australia, Argentina, the United Kingdom, and China for a combined $4.2 billion in revenue. As the company grew, so did their EBS environment. When they initially installed and configured their applications, they had not prepared for this amount of growth. Users created new legal entities, operating units, and charts of accounts for each of the expanded operations on the international front. They weren’t always created for the right reasons, and relationships between the organization units weren’t always managed properly. After about 5 years of running EBS it was clear that certain configuration setups did not match the current business, and users resulted to workarounds in order to keep operations up and running with the pace of organizational change.
11 years after the implementation, the manufacturing company’s data, infrastructure, and business processes were plagued with problems, and the relatively new release of EBS Release 12 elicited conversations and meetings regarding the lifespan of their current system. The firm had:
- 2 instances
- 5 charts of accounts – each country used its own except for Australia, which was on the US chart of accounts and required a currency conversion for local reporting before going into the consolidated financials. Additionally, the charts were designed so differently in order to comply with local statutory and regulatory requirements that the financial consolidation process was a complete nightmare.
- 6 sets of books – one for each country in which the firm had operations
- 6 legal entities – also one for each country, and there was some confusion between the two that has caused many data entry inconsistencies and faulty transaction processing and reporting
- 13 operating units
- 7 business groups – originally set up by product line but eventually converted to manufacturing plant location
- 19 inventory organizations – spread across the 7 business groups
The financial consolidation and month-end close processes took almost the entire following month to complete. Users were forced to log into and out of different responsibilities upwards of 50 times a day to input transactions relating to different (or multiple) Sets of Books and legal entities. The process for receiving purchase authority required getting permission from two superiors, but due to extensive ongoing business structure reorganizations that were never reflected in EBS, it took more than a week for the Human Resources director to get approval (one of his approvers being the CIO, believe it or not) for ordering new computers for 5 new hires. Business processes were all over the place.
Why the CFO Should Care About R12
The problems created by an overgrown and under-managed ERP system can be more meaningfully analyzed when grouped together with a couple of questions. First, what are you trying to accomplish that is being inhibited by the problem? Second, what are the options and alternatives for resolving the problem? It is critical that the CFO and the business search for answers to these questions – the process of seeking out an answer can be as helpful as the answer itself, as it may open key players in the decision tree to new alternatives. These are business problems fueled by IT complexity. Solutions will stem from projecting a hypothetical, optimized IT environment onto the current business environment, taking note of the gaps between the projection and the current situation, and determining how to fill in the gaps. The section below discusses these common problems and addresses where R12 fits in the picture.
E-Business Suite R12 is equipped with new functionality that empowers an organization to make the necessary business changes to fill the gaps. It’s important that the CFO communicate with the CIO and other stakeholders in order to understand how these features apply to their business.
Problem: Your environment has multiple instances and multiple charts of accounts.
- Different accounting requirements such as currencies, taxes, and local and statutory requirements promoted the adoption of multiple charts of accounts and multiple instances, but they are really a burden for a company striving for growth.
- Corporate financial consolidation is difficult, error-prone, and takes too much time. Localized differences including taxes as well as local and statutory regulations irregularities that must be mapped back together for consolidation.
- Dispersion of resources results from expanding globally. For example, when the company was strictly US-based, there was a single corporate Accounting department – now there is one Accounting department for each country. Employees in different locations end up repeating the same tasks and duplicating responsibility, leading to diseconomies of scale.
Where R12 Fits In
R12 introduces a solution to the problem of multiple instances and multiple charts of accounts that has plagued global companies for decades with the introduction of a Common Accounting Engine with Subledger Accounting. Along with Subledger Accounting comes Ledger Sets, Secondary Ledgers, and Auto-accounting rules, which in short allow transactions to be posted to multiple ledgers (set up for compliance with multiple regional statutory requirements and taxes, for example) based on user-defined accounting rules while only requiring the user to enter a transaction a single time.
The ability to manage business processes in such a way that they retain their original purpose and functionality but also exhibit the flexibility to change along with changes to the business is vital to the success of a growing business. R12’s features strengthen this ability through the creation of centralized business functions that increase finance operational efficiency. Data governance is built in to Subledger Accounting, enforcing standardized accounting policies and ensuring that all users adhere to the same set of rules. Sets of Books in 11i have become Ledgers and Ledger Sets in R12.
Ledger Sets enable processing and reporting to be performed on multiple ledgers at the same time and also provide visibility across all ledgers that belong to a particular Ledger Set. All that is required to group multiple ledgers together in a Ledger Set is that they share the same Chart of accounts, Calendar, and Period Type. Accordingly, ledgers in the same Ledger Set can have different transaction currencies and tax rules, facilitating the adoption of multiple ledgers for differences in corporate geographical operations. Additionally, this feature provides a major incentive to move to a single, global Chart of accounts to achieve user productivity, reporting efficiencies, and streamlined financial consolidation efforts.
The addition of Secondary Ledgers, as discussed above, allows for a streamlined period-end close process that can take days instead of weeks or months to complete. A Secondary Ledger is different from “a second ledger in a Ledger Set” in that Secondary Ledgers are permitted to use a different Chart of accounts, Calendar, and Accounting Method than the Primary Ledger to which it is related, enabling compliance with local reporting requirements and future localized accounting requirements that may be difficult to achieve through Ledger Sets that require use of the same Chart of accounts. Financial reporting and consolidation across ledgers in R12 is incomparably more streamlined than reporting and consolidation across Sets of Books in 11i. This is invaluable to any CFO.
Problem: If we could start all over and set up the 11i configuration again, we would do it completely differently.
- Legal entities, sets of books, business units, and inventory organizations were set up according to how the business operated when they first implemented. New operating units have been added to compensate for business changes, but they were workarounds. Relationships between entities are becoming abstract.
- Ongoing corporate reorganizations have resulted in employees having to log into and out of different responsibilities an average of 50 times a day to enter financial transactions. People in new departments are still performing functions that should logically be transferred back to the users in the department they originated from.
- Different employees across the organization are dedicated to performing the same or similar tasks for different areas of the business. Redundancy in processing is the norm rather than the exception.
Where R12 Fits In
Multi-org Access Control (MOAC) in R12 introduces the concept of a single application responsibility that can be used to access multiple operating units. Users are no longer forced to log into and out of different responsibilities to enter financial transactions into, process invoices from, perform collections for, or report on multiple operating units. The business will see major user productivity improvements since users can access, process, and report on not just the operating units within a Ledger that is accessible by the user, but also any operating units that belong to the user’s security profile. The Accounting Setup Manager is the hub for creating and maintaining defined relationships between ledgers, legal entities, and operating units. When users define a legal entity and its associated chart of accounts, calendar, currency, and accounting method in the Accounting Setup Manager, they also specify the ledgers that are assigned to contain the financial transactions for said legal entity. Users define the relationships between operating units and ledgers. They also link each operating unit to the legal entity that will provide the default legal context during transaction processing.
What this means to a CFO is that R12 provides a substantial amount of flexibility not previously available in 11i that allows business processes to evolve natively at the source of the ERP system. Natively, in this context, means that “business process evolution” is in fact a defined business process in itself. R12 allows the business to anticipate a variety of changes and provides the tools to plan and execute accordingly.
MOAC, in addition to the advantages described above, also facilitates increased efficiencies of shared service centers by enabling shared service personnel to enter transactions, process data, view information, and run reports on behalf of other operating units within the enterprise. The single application responsibility in R12 mentioned previously is invaluable to the productivity of a shared service center. Our manufacturing firm could benefit by implementing a shared service center in R12 to eliminate the duplicated accounting efforts. There are a variety of other advantages if R12 as it relates to running a shared service center, but they are beyond the scope of this article.
The centralized framework of the Accounting Setup Manager is R12’s answer to the deterioration and abstraction of relationships that our manufacturing company experienced. It is a common problem, and R12 simplifies the creation and maintenance of relationships between legal entities, operating units, and their accounting contexts such that it provides a clear and consistent picture of accounting workflows and relationships across the enterprise. The streamlined processing and simplified maintenance gleaned from this facet of R12 is part of the foundation that will enable you to minimize the Total Cost of Ownership (TCO) of E-Business Suite.
Although we have just touched on the idea of the TCO of EBS, the ability to achieve a low TCO of any ERP system should be one of the major decision factors that a CFO should consider when faced with the decision of adopting a new ERP system. Companies used to purchase ERP systems just because they thought they had to, without going through the analysis of breaking down the features of a variety of systems and determining which one was the best fit for their current (and future) business. Based on what we have discussed in this article, Oracle makes a convincing argument that Release 12 of E-Business Suite is an ERP system that comes loaded with tools and features that are designed for globally expanding businesses and multi-national corporations that have geographically-specific requirements to fulfill that the vast majority of businesses never even have to think about. R12 is designed to reduce TCO. You can’t just implement and run wild without the right business processes in place, but R12 enables you to design and implement the processes correctly the first time, and it provides you with the capability of ingraining change-ability in your processes at design time.
Though the manufacturing firm in this article is fictional, there are enough real companies with very similar problems and challenges that cost hundreds of millions of dollars in unnecessary maintenance, duplicated processing, and failure to achieve awareness. It would not be a waste of time for their CFOs to take ample time to meet with their CIOs and seek out the additional details of E-Business Suite Release 12. If R12 features provide answers to the majority of a company’s problems, the CFO should care.