Three approaches to reimagining the tax and finance function

Companies facing digital advances and global tax reform must adapt to continuing challenges. 

Our recent study, Reimagining the tax and finance function, of senior executives from 1,722 large organizations around the world indicates that 84% of companies are taking action due to deficiencies in their current target operating model.

It demonstrates how the tax and finance function generally is struggling to keep up with digital advances, a push toward transparency and global reforms of the international tax system.

The survey, which was conducted by Euromoney Institutional Investor Thought Leadership and includes respondents from 63% of the Forbes Global 500 largest public companies, indicates organizations recognize they need to be bold and innovate their tax and finance function to successfully manage these pressures and deliver value in an era of cost reduction. But it also shows many are struggling to find the right solution.

(Also read our updated 2020 TFO survey.)

Determine your approach

Once they decide to act, leading companies typically choose one of three approaches. Each has its pros and cons. This report explores these options in more detail, using survey results to explain what companies are doing in the aggregate while offering insights to help companies decide which approach is right for them.

The first option is rebuilding or transforming the existing tax and finance function. This generally will include building a new digital platform, training or hiring tax technologists who understand both tax and the new tools and exploring the creation or expansion of a shared service center.

The second option is outsourcing tax and finance activities to a third party. Under this option, the IT costs and risks are shifted to the vendor(s) who have already made large investments in a technology platform and a global network of skilled people. However, it requires a significant change for the organization, including a new management and governance model.

Find your path forward

Leading tax and finance professionals need to reimagine their tax and finance functions to properly manage today’s mounting pressures. The path to success starts to emerge as companies take a holistic look at their tax and finance function and the role it plays in the overall organization.

To identify and execute the change required, companies can take these few steps:

Scrutinize the current target operating model: Companies must first examine their priorities around cost minimization, value creation and risk management and how the tax and finance function plays into the overall strategy.  With a thorough understanding of their priorities, companies will have a clear view to assess any gaps in their current target operating model and its ability to stand in the future.

Determine what to build: Keeping tax and finance activities in-house generally requires some degree of internal transformation aimed at optimizing a company’s existing people, process, data and technology.  Oftentimes, companies will want to maintain or build activities that are considered higher-value, or best-in-class, as they should be performed with optimal effectiveness and control.

Examples of best-in-class activities include tax planning and managing controversy.

Determine what to buy: Activities that are considered lower-value, or best-in-cost, should be performed at minimal cost through centralization, sourcing from lower-cost locations, or via third parties. This provides high efficiency performance of those activities at a lower cost. Some typical activities with lower cost or efficiency objectives include completion of tax returns and data collection.

Find the right mix: Once a decision has been made to designate an activity as best-in-class or best-in-cost, companies need to decide whether they want to “own” that task by keeping it in-house or alternatively “buy” or outsource the task to an external provider. Many businesses choose a hybrid approach in order to maximize the effectiveness and efficiency of their tax function.

In-house versus outsourcing

There are pros and cons to keeping activities in-house versus outsourcing. An internal transformation and keeping these activities in-house is the most traditional and may be the most familiar solution, as it creates the least amount of change and disruption. But it requires significant management focus and capital investment. Moreover, sustaining a robust tax and finance function in a rapidly changing environment may be the most difficult challenge of all.

Outsourcing to a third party can ultimately reduce overall tax costs, control unpredictable IT investment and pivot internal resources for more strategic activities. Because the external vendor bears the burden of making considerable investments in the necessary talent and technology, the company is able to leverage change more effectively. However, outsourcing requires a significant transition effort as well as management and governance of a new operating model.

With the challenges for the tax and finance function building, it is imperative to act. Companies should consider the best approach and take the necessary steps to meet their tax and finance objectives. Only then can they fully reimagine and deliver the tax and finance function they need and be positioned to thrive.