Listen to the latest episode of Bramasol’s Insights to Action Podcast Series. In this episode, SAP’s Birgit Starmanns provides an overview of issues surrounding strategies for centralization vs. decentralization, with a discussion of how regional and country-specific regulations impact global companies. She also drills down to look at tactics for managing the balance of these sometimes competing goals, including key tools such as shared services and SAP Central Finance.

Also, below is a transcript of the podcast episode:

Jim Hunt: Hello, this is Jim Hunt for Bramasol’s Insights to Action podcast series. I’m really pleased today to have Birgit Starmanns back with us. Birgit is the global head of Office of the CFO Center of Excellence Thought Leadership Strategy and Programs in the SAP Global Center of Excellence for Finance and Risk. Today we’re going to talk about a really interesting high level issue with some drill down to it. We’re going to talk about centralization versus decentralization in the finance and risk space. So, Birgit, it’s really great to have you. Welcome.

Birgit Starmanns: Thank you so much, Jim. It’s great to be here.

Jim Hunt: Maybe we can just start off if you can give us an overview of the kinds of issues surrounding finance, centralization and decentralization.

Birgit Starmanns: Oh, sure. I feel like centralization and decentralization are almost conflicting priorities when it comes to finance and risk. So you do want consistent processes and if you have multiple locations, especially a lot of companies are going global, that’s really supported by a more centralized way of working. So that’s really the centralization aspect. The thing is there are a lot of local regulations that are in place down to various jurisdictions, whether it be country, county, state, city, et cetera. So sometimes those regulations are very specific and they’re not global. So that’s something that’s supported by decentralized processes because you wouldn’t want to take a regulation that you have in Germany, for example, and apply that into the U S and vice versa. So finance really needs to strike a balance between those two different priorities.

Jim Hunt: So maybe we can drill down a little bit into the local and regional country-specific regulations. And what sorts of things companies might run into that have to be tailored to regions?

Birgit Starmanns: Definitely, because there are regulators for each jurisdiction, so we have financial statements and disclosures, we have tax filings, we have privacy laws. Companies that are across the globe really need to meet every regulation. It doesn’t really matter where they are headquartered, but it matters where they’re actually doing business, whether that business is with customers or with suppliers. And sometimes it’s even down to the city level. So for example, if you look at Pennsylvania, our SAP America headquarters, there are taxes that are associated, not just federal, not just state, but also County and also the City of Philadelphia. (But of course, we’re in Newtown Square now,) But each of those has different levels of regulations and different levels of disclosures and actually different additional tax rates that pile on top of one another, and each country has different rules as well.

Birgit Starmanns: If you look at Brazil, which is the poster child for when it comes to their tax regulations and their tax laws, so that’s actually extremely difficult and that really requires very specific experience. And those regulations are not widespread. They’re really only specific to Brazil. And then when you look at privacy, there are a lot of different rules all over the place. So we have GDPR, the general data protection regulation. So that’s really in the European union or the EU countries. And it has specific regulations about where data can be stored and who has access to the data and how quickly anyone needs to be informed about any kind of a breach. And there are some hefty fines associated with not being able to meet that. Also, if any one of your business partners wants their data deleted, you need to also do that within that specific timeframe. And that means that a person as defined by GDPR could be an employee. It could be a customer, it could be a vendor, it could be a consumer. So there are a lot of different rules associated with that.

Birgit Starmanns: And that right now is specific to obviously EU countries, also any company that does business in the EU, regardless of where their headquarters sits. And actually even if they are not doing business, for example, with a an EU customer or a vendor, if you even have an employee that has a nationality of the EU, they also have rights to those protections that are available under GDPR. So this is where it becomes extremely complex and not a lot of other countries right now have that in place, but we’re starting to see that. And another example of us looking at a state specific rule, that’s not really us specific yet. We have the California consumer privacy act of 2020 related to the consumer aspect of it, but still it’s very similar privacy laws that are already in place for California. And we expect that that will expand into just beyond consumers as well, and also different States being able to put that in place. So we’re really seeing a push towards privacy, especially as we’re seeing a lot of risk mitigation that we need to do with a lot of fishing and scams and frauds. So we’re really being inundated with that. So I would say companies as well as individuals are more and more concerned about privacy,

Jim Hunt: You know, that’s interesting. If I were giving this talk and it’s a good thing I’m not, I would have thought that the issue is, do I have a facility in a particular country or do I have operations there, but it’s not as clear cut as that by any means.

Birgit Starmanns: It’s not as clear cut because they’re all of these different scenarios that played out. Say you have a loyalty card and you live in the U S but you’re not a U S citizen. If you go in and want your data deleted, the company has to do it. And that’s really an extension. I don’t think we’ve gotten that granular in a lot of our conversations, but it’s not just the facilities, if you’re getting supplies, so one of your vendors is sitting in one of the EU countries. Then it also applies because you’re doing business there, even though you might not have a physical location there. And I would say right now, especially with the pandemic, then those lines become very blurred as to where do you physically sit versus where you’re doing business and what are the alliances, so to speak, whether it’s citizenship, whether it’s doing business with an entity that is located in a European country.

So all of those things apply when it comes to GDPR, which is why it’s very complex. And by not abiding by those, going back to the financial impact, there are some very stringent fines that are associated with that. Not to say that people aren’t taking advantage of it. I think right after it went into effect, there were a couple of individual lawyers that were trying to sue everybody, even though there was a clause that says that, okay, we just put it into effect. But if you’re in the process of working on it and can show us a timeline that doesn’t apply, but you do have to meet that eventually, even though it might not be on day one – but day one is not 2020. I mean, there’s the California consumer privacy act, which, you know, day one was 2020, but GDPR has been around for longer than that.

Jim Hunt: Right. So let’s look at the flip side then. Centralization is probably more efficient from an enterprise perspective. So companies would probably have a bias toward that centralization, now let’s talk a little bit about that particular aspect.

Birgit Starmanns: Well, there’s definitely centralization when it comes to consistency. That being said, even though a process might be centralized, you still can’t ignore the rules that are applying to different jurisdictions, where you do business. You still have to take advantage of that. But centralization also means that a lot of your processes are consistent. I used to joke how many ways is it possible to clear an open item – – there’s a ton and they may be influenced by the way that your different local systems are set up. And that’s sometimes the problem of having a lot of different backend systems that might be configured just a little bit differently. So there are maybe nuances that don’t really need to be there, and that aren’t as efficient. So when you’re centralizing certain processes, it is more consistency in terms of dealing with your customers in terms of dealing with your vendors. I mean, if you’ve got a customer that’s also doing business in all of the different jurisdictions that you’re doing business in at that point, you may want to be able to handle it differently. One of my jokes is also back in consulting. We would have different partners from different counties and different States that are approaching the same customer with different offerings, which makes absolutely no sense. So when a company is selling something to a customer, you don’t want to have different rules in place, fundamentally, just because you’re doing business in a different country,

Jim Hunt: Especially if within your own company, entities start competing with each other and discounting, that’s not good for you.

Birgit Starmanns: No, it’s not good. It’s not to take away the ability to discount in certain situations, but you don’t want to make it a habit in one country versus another one, because that really doesn’t make sense. And it makes everybody jump through hoops on both sides. So you want to make sure that customers or vendors are being treated consistently. Also employees being treated consistently, of course. There are some things that you can expense in one jurisdiction, maybe not in another, because of legalities, but in general, you don’t want to have one country known as being more lenient than another. When it comes to approving certain things, everything from expenses to vacations, to how anything is handled, you want to be very consistent when it comes to that. And from a financial perspective, you have to be very consistent because you don’t want to be using different ways to convert your currency, because ultimately you can do a local close, which might be in one currency, but as your roll up through the different groups within a corporation, all the way up to headquarters, you don’t want to be converting currency in a different way, because that becomes very complex to solve just at the headquarters level.

If you’re using here’s the average or here’s what the daily currency conversion is on the day, the transaction actually transpired, you might have different ways that that can be done. SAP as a system supports all of them, but you need to be consistent in the way that you do it as you roll up and consolidate so that you can have those financial disclosures, especially when you get up to the corporate level. So it’s very important that that is solved and that is really more efficient on a corporate level or a centralized level.

Jim Hunt: Yeah. I was going to ask about disclosures and right along with that, management analytics and visibility. You want to have certain amount of data consistency across the entire enterprise so that you can run reports and drill down and see what’s going on and make comparisons.

Birgit Starmanns: Yeah, I would say consistency is extremely important because you want to compare apples with apples, not apples with oranges. And yeah, the other thing is analytics is super important for how you drill down and, you know, you can get back down to the transactional level for example, but here’s a great example. There’s one company in my last day of one of my last projects in consulting before I joined SAP as a non consultant, there is a company that made the decision that they actually want to have three separate instances for their three different business units. And it made sense from manufacturing point of view, but there was a concern in that company that things would not be consistent from a financial standpoint. And these are the days before we had a BW. So we explained to them, there’s not going to be one button that gives you a consolidated view of everything. And they said, they understood multiple times. Of course, as soon as we go live, they said, where’s that one button.

But the other thing of course, this was the days before we had BW or BI. And it was interesting because they wanted to make sure that their financial and management accounting processes were similar. So the project was actually called commonality project. So we had almost a pre project to the different business unit implementations, where we came up with what is the standard way to do things from a financial and controlling standpoint. And that got rolled out to the three different implementations. Then the different business units would actually have to make a case in terms of maybe doing something a little bit differently. And, you know, when it came to the GL, mostly the answer was no. When it came to some things with management accounting and how you do allocations, there would be some cases that could be made, but that was actually a way to do centralization, but it was very manual. I would say today, we have a lot of tools in place.

Birgit Starmanns: And you mentioned a lot of the BI tools are SAP cloud analytic or analytics in the cloud. So there, we can actually go across systems because different systems can feed into one source of the truth so that we can actually see things on a consistent way. So now we’re able to handle that in a more automated way, and we’re able to pull together information that used to sit in different systems where you would have to download it from different systems and then manually consolidate that. So now we can actually do that from a system standpoint, which is a huge benefit that we have systems now to support what customers actually want to do. So they can handle things in a more decentralized way in the backend and then centralize it on the way up in terms of how it’s reported.

Jim Hunt: So that gives them the opportunity to kind of balance that centralization and decentralization. Any other things that have helped them with that balance?

Birgit Starmanns: I would say that there are different models that are in place. So for example, shared services can address these issues. I like to say when I first started with SAP back in 1990, my expense report went to Palo Alto. Then we centralized across the U S then it went to Newtown Square. Now we have three shared services in place. And for three different, I would say global locations just to deal with time zones, right? So one in Europe, one in the Americas and then one for APJ and it keeps those processes more centralized. But then also because we’ve got three shared service centers, they also understand what some of the nuances are on a more jurisdiction by jurisdiction level. So that’s extremely important to have that model in place, whether or not you’re using a system to control that or not having that a shared service center.

And that whole concept, of course, with our shared services framework, we support those kinds of processes. So that’s been very critical. We also have new technology such as machine learning, and predictive analytics in order to make that happen. So being able to see things as an exception, and then you can make the determination. That is because we’re using the rules across the entire company versus being very specific about some of the localizations that are in place for a company code or legal entity. So we definitely have those processes in place that really help balance those things out. And that’s really helpful because a tool for the tool’s sake doesn’t make sense, but a tool that really helps solve a business problem is key. So the problem that we’re solving is that we can do things on a local level to make sure that when it comes to our disclosures, our XBRL filings that happen electronically at every jurisdiction level, those are in place as well as making sure that everything is consistent. And really making sure that everything has been checked off and is consistent when it comes to disclosures at the corporate level, with all of the consolidations at the processes, et cetera, that that happened there. So we have tools for all of these different scenarios. That way we can really strike a balance between the localized and the centralized processes.

Jim Hunt: So you gave a couple of good examples of shared services, like expense reports and some of the HR things. Can you maybe kind of give a short list of the key functions that you typically see companies implement in a shared services model?

Birgit Starmanns: Well I think the transactional ones are the ones that are usually implemented first. So you have things like accounts receivable, accounts payable, asset management. So all of those things that deal with the balance sheet actually, are typically something that gets attacked first. Management accounting, I think is a little bit more complex because of the way that allocations happen. And that is very tied to type of manufacturing. Is it, make-to-stock, make-to-order? Is it discrete as a process? Is it repetitive manufacturing? So the way that you would handle allocations is a little bit different in each one of those environments. So that’s more difficult to put into shared services model, but all of those different transactional elements, AR, AP, assets, expense accounts, et cetera. That’s usually first on the list when it comes to shared services.

Jim Hunt: Okay, perfect. Now we’re coming up on the close of our available time, but, could you talk some about what companies should be doing now to both understand their centralization versus decentralization situation and then how to address these issues?

Birgit Starmanns: Yeah. I would say it’s basically looking at your processes and where you do have nuances that are regulated versus where you’re just doing things differently because quote “we’ve always done them that way”. Also, I would say taking off one bite at a time. We don’t really see big bang projects anymore, like we used to in the eighties and nineties. So now it’s really more about being very targeted. And I would say, through pandemic, we see a lot of talk about resilience and really talking points where you can address them now and address them quickly for a quick ROI. And we actually see a lot of companies turning towards Central Finance, and there’s a misconception that it’s an all or nothing scenario, and it’s not. Some companies will choose to yes, use central finance for all of their finance immediately. Some other companies decide to take a step wise approach. For example, starting with analytics, let’s pull together all of this information that might be in disparate backend systems. And let’s make sure that we can leverage the new technology in order to get that more centralized analytics viewpoint. And then other companies will say, Oh, well, maybe we want to go beyond that. We want to start hitting some of the transactional pieces. Then they might choose to say, okay, we’re going to put all of accounts receivable on Central Finance, or maybe we want all financial processes in this one company code or legal entity to go on Central Finance. But that way you still avoid an upgrade of the backend systems. And especially when it comes to things like the supply chain, you don’t need to touch that right away, but you can still leverage the new technologies, including predictive that’s part of Central Finance and the analytics associated with that

Birgit Starmanns: So basically taking a look to see really what you get the quickest ROI from. And a lot of cases, it is really that analytics piece, but being able to centralize those things and then using Central Finance to help you put things in one place for one source of the truth, really one process at a time, if that’s what you want. If you still want to do big bang, you can. But I would say these days, there’s little appetite for that. And we’ve identified some different topics, whether it’s within close or whether it’s with access control, where we can have very quick ROI, very quick point solutions that will help companies. And then they can expand that later.

Jim Hunt: I would assume that as they’re doing the incremental implementation of various functions with Central Finance, in the big picture, that probably aligns well for companies in the SAP ecosystem to be able to move incrementally, getting ROI in the process toward eventual S/4HANA implementation, I would say,

Birgit Starmanns: Yes, that’s, that’s a really good summary. That being said, it’s not just for installed base. So, I would like to think that everybody uses all SAP everywhere. There are non-SAP systems and you can actually put Central Finance in front of all non-SAP systems. So we can take information from SAP as well as non-SAP. So that’s a big one.

Jim Hunt: Yeah, I’ve had people emphasize the agnostic aspects of it too. So back to our centralization versus decentralization, if I were a company that was making an acquisition of an entity in Europe that maybe isn’t SAP, the agnostic nature of Central Finance could help me do some centralization without having to totally disrupt those functions.

Birgit Starmanns: Right. And then the other point is just because it’s sitting in Central Finance doesn’t mean you can’t have processes configured differently for different jurisdictions, so that doesn’t go away just like your standard finance systems that you have in place, whether it’s ECC or S/4HANA, you can still do things differently by jurisdiction. But then you want that all in one place, again, just to limit the millions of ways that you can clear an open item, the different ways that you can do currency conversion, some of those things you want to make sure are consistent, but other things you can still handle on a jurisdictional basis. So that’s the nice thing about splitting the difference between the two making both of them available within the same system.

Jim Hunt: This has been really great overview. So obviously it’s not an either or centralization versus decentralization. It’s almost always both.

Birgit Starmanns: Ideally it’s both, it’s, it’s one of those things where too much of a good thing. Right? So, you definitely want a balance between the two, because you have to have some things from a legal perspective. You have to have things rolling up consistently. Revenue recognition is another good example of that, but there are others. There are other jurisdictions that just have certain regulations that you still have to meet. So it’s beneficial, both from a legal perspective, as well as from a company operations expected perspective, like financial operations and risk management.

Jim Hunt: That’s a great summary Birgit. Thank you very much. This has been very useful and I’ve learned things from you again. I appreciate it.

Birgit Starmanns: It was great to be here. Jim, looking forward to the next one, have a good day. Thank you. Bye bye.

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