Tax executives know that their professional raison d’être is to manage global tax risks and create value by minimizing the tax burden of their companies. They also know this is increasingly difficult to do against a backdrop of relentless regulatory change, globalization of business, heightened scrutiny on all fronts, and resource constraints.
The truth is that the job is just nowhere near as fun as it used to be. While tax staffs are extremely dedicated and will go to any length to “hit the deadline,” they are also burning out and spending entirely too much time chasing data rather than adding real value. Meanwhile, the possibility of material weaknesses in tax internal controls remains a concern. Even though first-generation “tax transformation” projects offer some measure of relief, the tangible results typically lack the deep effect desired by the tax department.
This is a familiar story for those who work in corporate tax. The stars are aligning for tax process improvement, however, and new possibilities appear on the horizon. The Finance Department has learned from enterprise resource planning (ERP) implementations, and the lessons learned — coupled with technology improvements and the tax executive’s evolving role (from merely a tax technician to a combined corporate strategy stakeholder, risk manager, and efficiency engineer) — have set the stage for wholesale tax transformation. The result is a sea change in how tax executives and their departments conduct and manage future global tax operations.
Finance Is Now Ready and Able to Take on Tax
First, consider briefly the evolution of “transformation” in business over time. It all started with a well-known transformational leader, Henry Ford, who achieved productivity gains by integrating Ford’s production lines. In the 1930s, Toyota evolved Ford’s concepts into the Toyota Production System and later the Materials Requirements Planning (MRP) system of the 1970s. The technology revolution spawned ERPs, creating systems that are now part of the infrastructure of all major companies. Since then, the management theories of Lean and TQM, Six Sigma, and Business Process Reengineering (BPR), brought further transformational changes in pursuit of the optimal “better, cheaper, and faster” equation.
With successful ERP and Business Intelligence (BI) implementations, Finance is ready for tax transformation. Why? Because the ERP systems integrated all core accounting functions and enabled new and significantly more productive operating models. The depth and breadth of these systems in terms of managing transactions, processes, and SEC reporting have been phenomenal. It took years of extraordinary effort, investment, and leadership to reengineer finance operations, but it happened. Regrettably, because Tax’s data and system needs are so extensive and intertwined with Finance’s functions, in most cases they were placed at the bottom of the priority chain. In colloquial terms: “Fugettaboutit.”
Within the past few years, however, Finance has invited Tax to the transformation table. Progressive CFOs now recognize that significant value creation and tax risk management can only occur by fully integrating Tax’s operational and data infrastructure needs in the company’s strategic enterprise information systems and business operations. While this will be no small task, it is possible and a worthwhile pursuit.
New Tax Technologies Emerge
In addition to Finance’s new capacity to integrate tax processes, innovative tax technology vendors have shifted their strategies and development efforts from one-off solutions, to holistic, integrated global tax management platforms along the lines of today’s ERPs and BI technologies. Built from the ground-up based on the IT lessons of the last 20 years, these new tax technologies involve lock-step integration with Finance and enterprise tax data management, as well as leveraging data across the full tax lifecycle of provision, compliance, planning, and audit management for both direct and indirect taxes. The idea is to touch the data once and use it for all lifecycle needs — similar to ERP-enabled Finance processes, but for Tax’s specific requirements.
Admittedly, enterprise tax technologies are in the early stages of development and will take some time to fully build. The foundation, however, is set — in the form of a commercial-grade tax data warehouse that can store all book, tax, and return data for every tax obligation that is open to audit. In addition, the first fully integrated tax applications sitting on top of the data warehouse are built for global interim and annual provisioning and global transaction taxes, including global VAT and U.S. sales and use tax. This platform offers the latest in query, analytics, and custom reporting technology, similar to what Finance has been using for years, but designed for the tax function. These enterprise tax technologies hold tremendous promise to enable material productivity and control improvements in global tax operations.
Tax’s Changing Role
Another factor setting the stage for tax transformation is the expanding role of the tax executive, from tax technician to executive strategist, risk manager, and efficiency engineer. Progressive tax leaders have applied savvy political and relationship-building skills to educate and influence key non-tax stakeholders on why Tax matters and how it can add value to almost every business strategy, plan, and transaction, but only if its operations can be optimized. These leaders have effectively convinced the C-suite that the time is now to embrace the value and competivie advantage that Tax can add by fully integrating Tax into global business operations, both from a process and systems point of view. It takes time, money, and effort and it will be difficult. But it is where business generally is and where tax executives need to be in order to help their companies compete in an increasingly competitive world.
Why Transform Tax Operations? Can “It” Be Achieved and What Does “It” Look Like?
There is a clear value proposition in transforming tax operations. Simply put, only through transformation can successful companies manage the litany of global tax risks and capture the value of tax efficient business operations as their businesses continue to grow and change.
Tax processes must be optimized and transformed in order to meet the end-to-end tax needs of the company with the limited resources that are available, comply with increasing regulatory requirements, address increasing scale and complexity, operate across an extended global enterprise and leverage enabling technology.
According to Eric Johnson, Senior Director of Tax Operations for Intel Corporation, “There’s nothing new under the sun here. But the pipe dream of totally efficient tax processes is much closer to reality. For the first time in my career, you can see the end of the tunnel and all the pieces coming together. It just takes time, effort, leadership, and money.”
But what does “it” look like? “It” is a combination of people, processes, and technology informed by recent transformational concepts and the latest leadership practices enabled by new enterprise tax technologies. It consists of (a) an organization of knowledgeable tax and non-tax professionals, (b) following a common set of standardized processes and procedures, (c) utilizing an enterprise global tax technology platform consisting of a tax data warehouse, lifecycle applications (planning, tax accounting, compliance, and audit defense), and complementary tools for managing workflows, documents, calendars, and reporting, and (d) led by a committed, forward-looking, transformational leader with the ability to influence and sell key stakeholders on the merits of fully integrating tax operations into all aspects of business operations for the good of the organization and shareholders.
In other words, it all comes back to people, process and technology. And, of course, a tax transformation plan.
In terms of people, a new set of skills is needed. Most important, for the tax executive, transformational leadership skills including political, relationship building, and ability to influence others are required. Tax staff will need process improvement and technology skills as well as the ability to work collaboratively with all stakeholders in the tax process. These skills may currently be outside of the team’s comfort zone, but they will prove pivotal in the tax department of tomorrow.
From a process standpoint, tax professionals will need to learn and apply the proven concepts of Lean, Six Sigma, and business process reengineering to their world. Briefly stated:
1. Every process within the end-to-end tax lifecycle should add value. If it doesn’t, it should be eliminated.1
2. Employ the proven Six Sigma DMAIC Approach:
- Define: Determine customer needs and map the process to improvement.
- Measure: Define metrics to gauge process efficiency.
- Analyze: Identify process shortcomings and how to alleviate them.
- Improve: Create and implement a solution.
- Control: Once a process has been improved, maintain it so that quality does not recede.
3. Use the power of modern technology to radically redesign your tax processes.2
Where to Start?
Not surprisingly, successful tax transformation must incorporate planning that begins with the end in mind and results in a tax transformation roadmap. This is crucial to securing c-suite, audit committee, and attest firm approved and the necessary budget.
The roadmap should define the current and future state of the tax operating model. It is important also to describe in detail the benefits for both the department and the overall enterprise. Define the project milestones to allow for early wins so that momentum can build throughout the project. The transformation process can be difficult, but those involved will find motivation in achieving milestones and witnessing how the end results impact the organization.
It is also important to remember that Tax does not operate in a vacuum. Hence, the tax department’s leaders must be mindful of where the company is going in the next five years in terms of changes in the business strategy, expansion, and M&A plans as well as process, technology, and resources. Is there an ERP upgrade planned? Will the company be entering new and expanding geographic markets? Tax must ensure that the roadmap is flexible and can be modified in response to both internal and external changes.
The good news is that there are now more resources to help transform tax operations than ever before. Consultants specialize in tax process assessment, determining the proper people, processes, and technologies needed and working in tandem to develop a transformation roadmap. Finance is becoming a willing collaborator because Finance employees, too, are interested in managing risk and creating tax value.
In addition, tax professionals have Web 2.0 tools to share their insights, experiences, and best practices involving tax transformation. These include forums on websites such as those hosted by Tax Executives Institute, the Manufacturers Alliance, and Financial Executives, as well as LinkedIn (www.linkedin.com) and Tax 2.0 (www. tax2point0.com), an online community of senior corporate tax professionals that offers a Total Tax Transformation assessment.
Now Is the Time
The stars are aligning for Tax Transformation. Finance is more capable than ever to entertain and address Tax’s operational and data needs; new enterprise tax technologies will enable wholesale process change across the tax life cycle; and a more sophisticated corps of tax leaders are calling for a new operating model. Tax leaders need only seize this day, develop a multiyear plan, and lead the charge in building the tax department of tomorrow for the good of the tax team and the entire organization.
Bob Norton is Chief Income Tax Officer at Vertex Inc. and is responsible for Vertex’s global income tax solution vision and strategies. Mr. Norton is a frequent speaker and writer on corporate tax automation, accounting for income tax, and the effect of technology on the corporate tax process. He is a certified public accountant, and received a B.S. degree in Accounting from Pennsylvania State University and an M.S. degree in Taxation from Villanova University School of Law. He is a member of the Tax Council, Financial Executives International, the American Institute of Certified Public Accountants, and the Association for Computers and Taxation, and serves on the Editorial Advisory Board for Financial Executive magazine. He may be contacted at Bob.Norton@vertexinc.com.
1. Rowland Hayler & Michael D. Nichols, Six Sigma for Financial Services (2006).
2. Michael Hammer, “Reengineering Work: Don’t Automate, Obliterate, Harvard Business Review (July-August 1990).