Wednesday Jul 09, 2014

Highly Visible Cost Allocations at a Global, Multi-Disciplined Bank

Being able to allocate costs with high visibility throughout a large, global, multi-disciplined bank may seem impossible, but that’s precisely what Qubix did very successfully. I had the great fortune to interview Roger Cressey, a Group Director and founder of Qubix - and find out how he and his team were able to automate, standardize, and make visible, complex cost allocations throughout the bank.

Qubix is a Platinum partner of Oracle’s, with offices in the US, UK, Australia, Dubai and, most recently, Japan. They deliver Oracle Enterprise Performance Management and Business Intelligence solutions to quite a range of customers, including those in film, airlines, banks, insurance houses, consumer products; pretty much anyone that has horrible numbers to crunch. 

In this interview, Roger talked about a large, global, multi-disciplined bank that they had been helping with various challenges for about three years. Originally, Roger was introduced to the Bank through an acquaintance that had become an employee of the bank, and then wanted to upgrade the bank from Essbase version 5 to release 11.1.2.1.  Qubix was able to perform the upgrade in just three days and had time  to build an additional prototype Essbase model to enhance their ability to collate financial data, and then distribute their information from a single “version of the truth”. 

“We helped the Bank build monthly and daily Essbase models, and as the platform grew, they could now see data that they had not seen before!” said Roger. The Bank used to do a lot of analysis in spreadsheets, very LARGE spreadsheets – but could now do it more efficiently in Essbase. Allocations were still a challenge as they were still trying to do large, complex allocations in spreadsheets. One of the Qubix team found out what they were trying to do and introduced them to Oracle Hyperion Profitability and Cost Management (HPCM).  HPCM is an application which leverages Essbase as a very powerful calculation tool, with an extremely user-centric front end. Non-technical users can create allocation calculations and methods. One of the strongest features of the product is the ability to trace allocations.After a demonstration, the Bank was very enthusiastic to implement HPCM and had Qubix create a proof of concept for one of the divisions very quickly. 

 So, what were the Bank’s key challenges? According to Roger, they included:
A manual cost allocation process – error prone
Had to re-verify numbers because often the data available to the different entities was inconsistent, largely due to timing / information availability.
Difficult to show where the numbers were derived from, or how they had been  allocated (black box to the members of the Bank)
Multiple errors in their huge spreadsheets (due to human error, formula maintenance, etc)
Their review process was very difficult and time consuming – if they wanted to use a different driver to reallocate costs or revenues – or if they added new entities, they had to change these massive spreadsheets and hope to catch all the changes.
No single source of cost allocation data

Rollout to all the divisions of the bank was done in an interesting way. Roger explained that it was implemented with a rolling prototype built in partnership with the Bank. This meant that in the end, the Bank gained the expertise and owned the solution themselves rather than relying heavily on Qubix. “Rather than trying to automate the massive spreadsheets broken down across the divisions, we rolled out the Essbase and Hyperion Profitability and Cost Management solutions to the different divisions,” said Roger. The initial HPCM rollout across the world took approximately nine months and the Bank have additional plans to do even more.

What kind of benefits is the Bank experiencing? According to Roger, plenty! They include:
Largely automated allocations
Feeds directly from source systems, so there is very little room for error
Data is consistently sourced from the same Essbase sources
Bank now knows how the costs are broken down at a very granular level, and (most importantly) quickly
Accuracy is improved because it is from one source
When making changes – such as a driver or allocation algorithm -  it is a matter of minutes to make a change rather than days of work
Now have standardized calculation and allocation methodologies, and a clear data dictionary
“Recipients” of allocated costs can now see for themselves where costs have come from and how they were allocated. This has reduced the amount of time spent in cyclical reviews

As for lessons learned, Roger had some interesting ideas here too. “Process is very important,” he said. “Develop a long term relationship with your partner. A good partner will give you good advice – they should be able to say ‘no’ to a bad idea and not just say ‘yes’ to anything you ask them to do”. In addition, Roger suggested that when you go forward with an implementation, get internal ownership of the project and the solution. Get it and maintain it. The consultant should not own your solution, but you can and should ask for help for unusual circumstances (someone leaves your company and takes the expertise with them, new things you want to do, etc.). Lastly, Roger felt strongly that there is not enough education and training around Enterprise Performance Management solutions. What is his idea to resolve this dilemma? “When someone is inducted into the company, they should learn where to park their car, health and safety procedures, and then how to use Hyperion solutions.”

To listen to the entire podcast, click here.
To learn more about Oracle Hyperion Profitability and Cost Management, click here.

Tuesday May 27, 2014

Bring Efficiency and Sanity Back to the Operational Transfer Pricing Process!

Does your company spend too much time on Operational Transfer Pricing? Is the process efficient and transparent? Or is too much time spent in low-value activity like gathering data and manipulating it in spreadsheets. If you are like most companies, the transfer pricing process has a lot of room for improvement. With the ever increasing scrutiny on corporate taxation, many companies are looking to improve the transfer process to ensure it has all the proper controls and efficiency necessary for today’s multinational companies.

Marc Seewald, Senior Director of Product Management for EPM Applications specializing in the tax domain and Product Manager for Oracle Hyperion Tax Provisioning, and Bart Stoehr, Senior Director of Product Strategy for Oracle Hyperion Profitability and Cost Management joined me for a discussion/podcast on this interesting subject.

So what exactly is “Operational transfer pricing”? Marc defined it this way. “Transfer pricing is a profit allocation methodology required to be used by multinational corporations. Specifically, the ultimate goal of transfer pricing is to ensure that intercompany allocations result in true economic profitability by legal entity. According to Marc, in today’s global economy, profitability can be significantly impacted by goods and services exchanged between the related divisions within a single multinational company.

Today, most companies manage the operational transfer pricing in a very manual process – typically relying heavily on Excel or custom-built solutions such as MS Access. A significant amount of time is spent on collecting, manipulating, and aggregating data. However, the collection of the data to support the intercompany allocations is only half of the battle. Once the data has been properly collected, companies then need to apply transfer pricing assumptions. This, too, likely takes place in Excel. Many companies spend weeks, or even months, preparing for a single transfer pricing calculation.

The effort associated with a manual transfer pricing process is not the only problem. Excel-based processes often lack the proper controls and transparency necessary for such material financial reporting activity. This can result in material mistakes during the reporting process. Additionally, the lack of transparency can cause headaches later on during audits.

What are the repercussions of improper operational transfer pricing? How important is it? Because of its potential impact on taxes paid by a company, revenue agencies like the IRS, and international regulatory bodies like the Organization for Economic Cooperation and Development (OECD) are pushing to reform and clarify reporting for tax transfer pricing. Most recently the OECD announced an “Action Plan for Base Erosion and Profit Shifting”. As Marc explained, the times are changing and companies need to be responsive to this issue. It’s imperative that companies have a clear and auditable operational transfer pricing process that enables them to clearly document intercompany profitability and avoid steep penalties and bad publicity.

Transparency and efficiency are what is needed when it comes to the operational transfer pricing process. Bart explained that transfer pricing is driving a deeper inspection of profit recognition specifically focused on the tax element of profit. However, allocations needed to support tax profitability are nearly identical in process to allocations taking place in other parts of the finance organization. For example, the methods and processes necessary to arrive at tax profitability by legal entity are no different than those used to arrive at fully loaded profitability for a product line. In fact, there is a great opportunity for alignment across these two different functions.

So it seems that operational transfer pricing should be reflected in profitability in general. Bart agreed and told us more about some of the critical sub-processes within the Oracle solution for operational transfer pricing. “First, there is a ton of data preparation, enrichment and pre-allocation data analysis that is managed in the Oracle Hyperion solution. This serves as the “data staging” to the next, critical sub-processes. From here, we leverage the Oracle EPM platform’s ability to re-use dimensions and legal entity driver data and financial data with Oracle Hyperion Profitability and Cost Management (HPCM). Within HPCM, we manage the driver data, define the legal entity to legal entity allocation rules (like cost plus), and have the option to test out multiple, simultaneous operational transfer pricing what-if scenarios. Once processed, a tax expert can evaluate the effectiveness of any one scenario result versus another via a variance analysis configured with HPCM’s pre-packaged reporting capability known as Oracle Hyperion SmartView for Office.”   





Further, Bart explained that the ability to visibly demonstrate how a cost or revenue has been allocated is really helpful and auditable. “HPCM’s Traceability Maps are that visual representation of all allocation flows that have been executed and is the operational transfer analyst’s best friend in maintaining clear documentation for operational transfer pricing audits. Simply click and drill as you inspect the chain of allocation definitions and results. Once final, the post-allocated tax data can be compared to the GL to create invoices and journal entries for posting to your GL system of choice. Of course, there is a framework for overall governance of the journal entries, allocation percentages, and reporting to include necessary approvals.”

Lastly, Marc explained that the key value in using HPCM for operational transfer pricing is that it keeps everything in alignment in one single place. Specifically, Oracle Hyperion effectively becomes the single book of record for the GAAP, management, and the tax set of books. There are many benefits to having one source of the truth. These include EFFICIENCY, CONTROLS and TRANSPARENCY.

So, is there room for improvement? Why not automate the operational transfer pricing process!

To listen to the entire podcast, click here.
To learn more about Oracle Hyperion Profitability and Cost Management (HPCM), click here.


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This blog will highlight key EPM market trends, recent events and other news of interest to our field, customers and partners.

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