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As global businesses reshape for the future, finance functions can play a key role in unleashing new, entrepreneurial ventures.
- Many businesses are responding to rapid change by launching new, entrepreneurial subsidiaries or joint ventures to test new ideas, tap new markets or commercialise assets.
- We examine how the finance function can play a crucial role in supporting these ventures by allowing autonomy while maintaining control by the parent company
- We also explore how managed services can provide the right balance of automation and personalisation for finance functions
The COVID-19 pandemic has intensified the pace of global change, accelerating market disruption, impacting consumer behaviours and fast-tracking technology adoption. Even before the pandemic, whole industries were reshaping, from automotive manufacturers, adjusting to the future of mobility, to energy companies, managing the transition to a low-carbon future.
Staying the right side of change means having a willingness to embrace it: enabling innovation, exploring new business models and rapidly developing new products and services. For large organisations, that often means creating non-core units that, sitting outside the full control of the parent company, can respond more quickly to market changes and innovate more effectively.
These sorts of ‘change-friendly’ non-core units typically take the form of:
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By GlobalDataInnovation hubs – many corporates develop ‘incubators’ that help to create and grow smaller, innovative companies within, but having freedom from, the parent company.
Joint ventures – two or more established companies set up a new entity that brings together expertise and resources to exploit new opportunities.
Commercialising asset function – a separate and distinct non-core business unit that develops assets that may be valuable to others outside the business, and sometimes prepares them for sale.
Separate profit centres – an area of the business is separated from the parent company so it can run its own P&L.
Supporting innovation – the role of the finance function
Establishing and maintaining successful non-core ventures means cultivating an environment in which they have the autonomy to flourish within the framework of a large parent company. But creating the right culture is only part of the answer – getting the finance function right is also crucial.
That’s not always an easy thing for large organisations to do. It’s in the very nature of high-risk ventures that some may fail while others may grow rapidly. Given that lack of uncertainty over outcome, it is sometimes hard to justify investing the time and costs involved in integrating these new, entrepreneurial businesses into the mainframe of the organisation’s enterprise resource programme (ERP) and its shared service centre processes, systems and reporting standards.
As well as being time-consuming an integration approach could be counter-productive, limiting autonomy and slowing down decision-making for the fledgling operations. At the same time, adopting a basic off-the-shelf finance function may not only be problematic for the new venture itself, but it is unlikely to provide the parent company with the assurance it needs. Generally, entrepreneurs don’t want to spend their time or limited resources running their own finance team, yet most would recognise that effective money management is crucial to success and survival. So how can the circle be squared?
A risk-free finance function that supports risk takers
The answer is a finance team that understands the workings and concerns of the parent company, while providing the agility that the non-core business needs to flourish. And all at a cost that meets the budget of what is, despite its ownership, often essentially a small organisation.
This is where a managed service can help.
A suitable provider can offer assurance to the parent company while offering the non-core business the freedom and flexibility it needs to thrive. The CFO of the parent company can win back time that may have been spent carving out a suitable finance function, allowing more time to focus on strategic tasks that add value for the organisation as a whole. And with their finance function taken care of, the entrepreneur can focus on what they do best, innovation and growth.
The managed service must be tailored to suit both the parent organisation and the non-core business unit so that, for example, it uses an accounting platform that’s appropriate for a growing business yet is also compatible with the parent company’s group reporting infrastructure.
While simplicity and speed may be appropriate for a small fledgling business unit, the managed service chosen must be capable of dealing with the complexity required by the parent company. In some cases, such as a new joint venture launched by two large organisations, the level of complexity will likely be such that a standard low-cost, off the peg managed service will not be able to support the finance function. The optimum managed services provider in such a situation will in reality act as an extension of the parent company’s finance function.
Despite the complexity, speed is of the essence. New ventures, particularly start-ups, do not have time to wait for long periods until they are ready to launch. At the same time, it is likely that even the smallest start-up or spin-off will have finance needs that go beyond the basic payroll, tax and accounting services. So, a service that offers access to high-quality advice and support on areas such as tax, legal issues and the ins and outs of setting up or trading in different areas of the world will be valuable, if not essential. A service that is tailored to their needs, of which personal service will be a key requisite. Both the parent company and the new venture need a point of contact within the managed services team to iron out any problems and add value.
Helping businesses to unleash innovation, efficiently
At EY, we’re seeing global organisations take an increasing interest in launching incubators, joint ventures and other models that unleash the potential of their people, intellectual property and physical assets. It’s an area in which EY has already supported many clients to drive efficiency while unlocking innovation.
One example was our work for a global energy major that was investing in a greener future as it navigated the transition to a low-carbon world.
Part of the company’s response was to create a number of small, agile subsidiaries to develop new, greener products and services at pace. The ambition was high growth and fast-paced change but the scale and complexity of the existing group finance systems created inefficiencies for the management team trying to meet the needs of their subsidiaries.
Previously, the group CFO had relied on the central group finance team to service these subsidiaries but the disparity between the requirements of a large corporate and smaller, more agile companies created elements of friction in terms of reporting, systems, consolidation and compliance. In addition, it increased the pressure on a finance function that was already working at full capacity.
By spending time understanding the business model and priorities of the new ventures, we were able to tailor our service to match their requirements. While technology plays a key role in this process, personal relationships will always remain a strong feature. We gave each subsidiary a single and senior point of contact at EY.
By taking care of the non-core business units’ finance function, we were able, through our EY Finance Operations service, to provide a streamlined and highly effective service that meant complex accounting and tax issues, were no longer a concern for the new entities. For the parent organisation, the ability to standardise reporting across different companies and access all the financial data it requires, in the way that it needs it, meant it could stay in control and on budget, while allowing the entrepreneurs the freedom to help create a greener future.
To find out more about how EY Finance Operations can help you adapt and stay agile in a rapidly changing world, book a time to speak with one of our team.
SUMMARY
Organisations are facing unprecedented change, which has been further accelerated by the pandemic. To help them stay ahead, many are forming new ventures to capitalise on opportunities, unlock value and unleash entrepreneurial talent. These ventures need effective, independent, finance functions to support fast growth. By using managed services that are tailored to the needs of each venture, parent organisations can support innovation while retaining visibility and control.
