By Dave Helmer, EY Tax and Finance Operate Leader
The question on the minds of leading CFOs is how far will our current talent strategy and technology investment get us as a business? They must consider whether the highly trained and expensive professionals within the tax and finance function are focused on delivering value and proactively managing risk on behalf of the enterprise or are consumed with routine processes.
Today’s tax and finance function faces a vast array of pressures. Global tax laws and policies are undergoing their biggest transformation in more than 100 years, and transparency requirements are unprecedented. Yet, tax and finance functions are also expected to do more with less, managing not only higher workloads but also increased risks.
To better understand how tax and finance functions are responding to this new reality, we conducted a survey of 1,722 organizations globally, including 315 of the world’s largest 500 publicly listed businesses.
The headline findings indicate that businesses recognize the need to adjust their current tax and finance operating models to respond to the mounting challenges. A “business-as-usual” approach will no longer provide a clear path forward. Leading organizations are reimagining their tax and finance function, which includes considering bold and innovative alternative outsourcing options. Other organizations are exploring how they invest in and transform their internal functions to prepare for the future. Oftentimes, a hybrid model blending outsourcing and internal transformation creates the successful formula. Let’s take a look at what is driving businesses to have these conversations.
As technology transforms tax and finance functions, required skill sets are rapidly changing. But the talent possessing those skills is scarce.
A near-unanimous 98% of organizations responding to this survey agree that the core competencies of the tax and finance function will shift from traditional tax-technical skills toward deeper process and technology skills over the next three years. Unfortunately, 89% indicated that they find it a challenge to attract and retain the appropriate tax and finance talent.
The tax and finance professional of the future will be expected to focus on driving cost efficiencies and managing risk for the organization. This requires an increased connection with other parts of the business, active management of a wide range of internal and external stakeholders, and a firm grip on the data that informs decision-making. To address these demands, organizations should explore providing current employees with new skills through evolved learning programs. Additionally, accessing a contingent workforce or teaming with external vendors may also help to supplement emerging competencies.
Legislative and regulatory change
The explosion of new transparency and reporting measures around the world coupled with shrinking tax and finance budgets has emerged as a key driver of risk as businesses seek to do more with less, and businesses are seeking solutions to mitigate these risks.
Respondents indicated almost unanimously (95%) that they expect their tax risk profile to increase because of numerous global transparency initiatives.
The widespread changes in tax rules around the world have also increased risk: the vast majority of organizations (87%) report having inadequate resources to identify, evaluate and respond to new tax legislation. And more than 9 in 10 organizations (93%) are concerned that they might not be taking consistent positions in various tax jurisdictions. In response, organizations need to act to make certain that they have the right talent and technology capabilities to monitor, evaluate and respond to legislative change around the world.
Businesses are facing a significant struggle in addressing these risks: only 36% of respondents are highly confident that their organization has the appropriate process, controls, technology and governance to effectively manage their reputational and tax risk profile.
Many businesses are reviewing their existing processes and controls while exploring alternative global sourcing models to manage their risk profile effectively.
Despite the scale and rapid pace of digital disruption, organizations recognize the need to invest in sustainable technology, including strategies that would help manage increased risks, particularly with the acceleration of digital tax administrations.
More than half (51%) of respondents see a lack of technology investment as having the most significant impact on the ability of their finance and tax functions to deliver on their objectives. Less than half (48%) of respondents are highly confident that they are investing enough time and money in analytics and technology solutions.
Only 53% are highly confident that they have a strategic plan to identify and evaluate the leading technologies to reduce the costs and risks of their tax and finance function. And just 53% are highly confident that they have adequate budget to fund the implementation of identified technologies for their tax and finance function.
To address these challenges, organizations need to develop an enterprise-wide tax technology and data road map that lays out a target strategy, builds confidence in the underlying data and specifies how to source the necessary elements. Leading businesses are finding that a target strategy that keeps all transformation activities in-house can be cost prohibitive. Considering an external vendor or a hybrid approach (i.e., a blend of internal and external transformation) could help businesses realize significant cost savings while also managing the necessary ongoing investment in technology.
Companies report higher workloads and, at the same time, increased pressure to cut costs. Almost 9 in 10 organizations (88%) expect the workload of the tax and finance function to increase as a result of complying with various transparency initiatives. Yet, the vast majority (94%) of organizations have a plan to reduce the cost of their tax and finance function over the next 24 months.
Adding to the struggle to do more with less, tax and finance functions should also explore modernizing their operating model and investing in the right talent and technology. In attempts to manage costs more effectively, organizations are finding that using an external vendor can help them stay current with technology and process demands while providing a scalable resource model that supports changing needs.
The need for a new target operating model
As all these pressures come to a head, organizations increasingly realize that they need to rethink their target operating model. The survey indicates that 84% of organizations are planning to make changes due to deficiencies in their current model to address the array of challenges they face.
Organizations are responding by looking at both the transformation of their tax and finance function from within and the outsourcing of parts, or indeed all, of their tax and finance function.
Three in five organizations think they will either need to re-engineer their tax and finance function or consider functional outsourcing to cope with the challenges. Already, 35% of organizations are looking at reengineering their current tax and finance function, and 25% are looking at functional outsourcing.
A path forward
In light of these challenges and budget pressures, many leading businesses are taking a holistic look at their tax and finance function. They are scrutinizing their current target operating model in light of their priorities around cost minimization, value creation and risk management.
Part of this process involves determining which activities should be viewed as “best in class” and which should be viewed as “best in cost.”
Best-in-cost activities (e.g., tax compliance and transfer pricing documentation) can be and should be performed at minimal cost through automation, centralization and sourcing from lower-cost locations or third parties specializing in the delivery of such services.
Best-in-class activities (e.g., tax advice and tax controversy) are less easy to automate and should be performed with optimal effectiveness, either in-house by employees with the appropriate expertise or outsourced to an external specialist provider.
Once individual activities are designated as best in class or best in cost, businesses must then decide which ones they want to build internally and which ones to outsource to an external provider. Many businesses are choosing a hybrid model that combines “build” and “buy” approaches. Often, this serves to increase the effectiveness and efficiency of their tax and finance function and better aligns with the objectives of the business.
As organizations decide how to move forward, they should consider the benefits of outsourcing. This provides the opportunity to execute the activities where they want to be best in class but do not have the resources internally and also outsource those activities where they want to be best in cost but cannot make the investment to build out a technology and data platform and cost-efficient delivery centers.
Companies agree that they need a path forward. As pressures continue to mount, they should begin the conversation about how to reimagine and deliver the tax and finance function that will position them to thrive.
Reproduced with permission from Copyright 2018 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com