History of consolidation (4/5): The 1990s – The search for a miracle solution
History of consolidation: The 1990s, the search for a miracle solution
By Allen White, Sigma Conso co-founder & Administrator
In the majority of European Community member states, the start of this decade coincided with the requirement for groups of a certain size to produce consolidated accounts. This was a major cultural shock for many which were very ill-prepared to meet this requirement. Why?
Many of the groups discovered that they were groups; they had been used to thinking company by company, ignoring the less important ones and not always including all of their transactions. Consolidation is rooted in each and every held company, regardless of where it is located in the world.
There are so many organisational issues, appeals to authority, rules to be communicated. The scouring effects of consolidation also disturbed many of these secretive groups: intra-group results are eliminated, dividends are eliminated, intercompany turnover is eliminated… What remains of the accounts?
Then, the groups, which had very complex structures, often for tax purposes, became aware of the transparency the technique gradually resulted in. In addition, the requirement involved new costs for specialised staff, software, account approvals by auditors and closer supervision of the companies in the perimeter. This was the state of mind with which many groups set out on this new adventure.
During the first years of the decade, a dozen consolidation software companies were competing for niche markets. The number of groups responding to the consolidation requirement was limited but highly concentrated geographically. This highly competitive environment quickly led to the development of the functionality missing in the software, particularly a decentralised consolidation bundle, consisting of software and data that could be sent to the companies of the perimeter.
It should be noted, however, that at the beginning of the decade there was no email and information exchange between companies was done via telecommunications lines (modem) and, more often, by courier.
What was being exchanged? Essentially, 1.4Mb diskettes in an envelope.
One anecdote I remember is about a company that had carefully sealed an envelope with staples before sending it. The staples went right through the diskette!
More seriously, however, two events had a significant impact on the second half of the decade. The first was technological. It confirmed the definitive advent of Windows, the Internet and email exchanges as the new environment in which software would operate and dialogue. It was truly a revolution in convenience and effectiveness, particularly when it came to information exchanges with the companies in the perimeter.
The second revolution was functional. It attempted to integrate reporting functionality into first generation software, known as statutory consolidation software. Many groups gradually realised how difficult it was to reconcile the figures produced by statutory consolidation with those created following a projected fiscal period, often by different departments.
The approaches were based on different software. Specialised software was used for statutory consolidation and Excel was often used for reporting. Staff often came up through different training channels with more or less detailed-oriented information systems, with complete or partial perimeters, based on different frequencies, etc. In other words, two different number universes coexisted in the groups.
Recognising this, software companies reacted very quickly and launched the concept of “unified consolidation”.
Did the decade end with a miracle product? Not really.
The software developed primarily by European companies with a Latin culture tended to offer functionally complete statutory consolidation software with a few reporting functions which were deemed to be insufficient. The software developed by Anglo-Saxon companies provided excellent reporting functionality but was relatively incomplete in terms of statutory functionality where everything had to be set up with parameters. American groups, which often had vast perimeters, had much simpler tree structures with fully owned companies. The market was clearly moving toward a unified solution. However, vendor culture resulted in software that was either more heavily biased toward statutory consolidation or to reporting.
Unified consolidation didn’t perfectly match market expectations at the end of the decade.
History of consolidation:
- Why consolidate accounts?
- The 1970s, the pencil and eraser age
- The 1980s – The beginnings of the computer age
- The 2000s – Y2K and IFRS