Operational integration in country organisations
How have the country based entities evolved?
A high level cognizance of the origins of the current organizational structure is needed to appreciate the potential of operational integration . Some of these factors are explained as follows:
- Automotive lines of business are structured as different legal entities in the parent organization i.e. The OEM. Passenger cars, trucks, buses, value added services like car sharing, captive finance etc. have had their own country based organizations and dealer networks catering to the specific needs of the business
- Many independent large scale country importers or distributors are co-opted as country organisations by leveraging a partnerhip or holding structure model. There are gaps between the OEM central processes, its existing country entities and the new entity.
- Consolidation in the automotive space e.g. Renault and Nissan, Fiat and Chrysler etc. has created parallel retail networks which need to be integrated in the long term
- Country regulations sometimes force OEMs to forge joint venture partnerships with key local players in order to get a foothold in the country market. Later, they may establish their own parallel entities as well.
- OEMs open or acquire completely owned retail oulets in order to further the OEM brand via an enhanced customer experience. However, multiple such retail organizations keep existing as independent entities without process harmonization.
- OEMs may have complex cross-holding structures with different retailers in order to enforce a uniform customer experience and meet the capital needs of retailers to hold large inventories in big markets. These further enhance the diversity of entity structure.
What are the integration opportunities?
With such a diverse and complex structure which has evolved over the years, it is natural that a lot of process redundancies and inefficiencies creep up in business processes which offer multiple optimization opportunities.
- Consolidation of legal entities - Legal entity administration is very effort intensive with respect to statutory reporting, data maintenance, record keeping, communication with business partners as well as management reporting. Consolidation of legal entities provides an opportunity
- to minimize the same tasks which span across multiple entities,
- bundle some of the processes together like payment runs,
- have a uniform communication processes with business partners throughout the country organization
- reduce the organisation wide FTE and effort count
- circumvent the need for a legal entity
- Harmonization of business processes- There is an overarching need for responsiveness to customer needs, legal changes and real-time reporting. Harmonization of business processes across the entities becomes a critical success factor. A harmonized chart of account, approval work-flow, controlling concept etc at a country level would enable a quick roll-out of new changes like SEPA across the entities with minimal turnaround time. Even if the legal entities are not consolidated, common processes offer an opportunity for cost savings and efficiency.
- Shared services- consolidation of legal entities and process harmonization also provide an opportunity to bundle processes across entities which can be managed by a single team. Most of non-customer facing processes can be shared. For instance, a central purchasing organization can negotiate better prices with suppliers based on volume bundling from distinct legal entities. A single controlling team can maintain budgets and retain availability control on expenses and purchases. Shared services further enhance the efficiency and standardization focus and help reduce transaction costs.
- IT consolidation - Different legal entities could be served by dedicated legacy systems which are no longer scalable and increasingly out of strategic fit in the IT landscape. With the same performance and availability, multiple legal entities can be brought on the same hardware / application in order to reduce ownership costs. Legacy systems can have a planned sundown which stops the outgo of expensive license and annual maintenance costs. Investments on functionality upgrade can also pickup again, as the restrictions on fresh development on the new system vis a vis legacy systems are removed. Even if the processes are not harmonized or entities are not consolidated, there are huge cost advantages in the instance consolidation of different systems belonging to legal entities (e.g. if all are SAP systems). A common IT governance can also be ensured. The potential to harmonize business processes also becomes real.
What are the key considerations in operational integration?
Any business initiative which aims to bring about operational integration should aim at creating a solution that delivers immediate benefits, creates minimal business disruption and can be rolled out rapidly in multiple locations. The considerations of such a solution could be:
- Transaction automation:The need for manual intervention in transaction processing for data validation / reconciliation, grows with volumes especially post entity consolidation or integration. It is increasingly possible to execute transactions from one entity on behalf of another entity, or to automatically link a chain of transaction steps in a business process which span across legal entities. The validations and checks are embedded within the automation framework. Errors handling is quite user friendly. It is possible now to tailor business processes like procure to pay, record to report and order to cash in a much leaner fashion with automation. Any operational integration without commensurate automation benefits is probably half done.
- Authorization framework: The criticality of rights and authorization cannot be understated when postings are made across legal entities. With increased business processes under the purview of local shared services, duties are to be segregated between users who execute transactions and those who approve it. Hence an authorization remodelling is quite central to the operational integration solution.
- Migration and cutover strategy: The master data from different legal entities would need to be extended to the parent organization in order to achieve "on behalf" execution or consolidation. The open transactions will be converted and mapped into the new consolidated entity for business continuity reasons. With advanced migration tools, the complexity of migration has decreased by several notches. However, the importance of data cleansing and harmonization should never be lost. Integration initiatives provide an excellent opportunity to do an effective data management.
- Business partner management: The change management around communication strategy is critical, as business partners may start receiving information from the new entity instead of the old one. The address, logos, contact partner details, hot-lines, vital financial and banking information, business documents (orders, invoices, correspondence, protocols etc) may have a substantial change. Importantly, not only the change management within the organization is necessary but the business partners have to be on-boarded with equal importance. More specifically, workarounds and alternatives should be available if the bi-directional business partner communication lands in the old paradigm despite go live.
With advanced technology and features (e.g. SAP Landscape Transformation), operational integration can be accomplished with relative ease as compared to the past. With a strong strategy and opportunity focus the country interface of the automotive organization can be transformed to offer a uniform customer experience and service agility while it is extremely efficient at the same time. In the time to come, entity optimization and integration has the potential to become a critical driver for the automotive CFO in his / her pursuit of operational excellence.