Multinational consumer products companies need to get closer to shoppers around the world. But how can they build an operating and tax model that delivers the necessary balance of flexibility, efficiency and control?
Global consumer products (CP) companies have typically structured their operations on the assumption that big is best. The benefits of scale conferred by a global or regional operating model gave them an important source of competitive advantage. And this kind of model was often attractive from a tax perspective.
But as the sector continues to disrupt at pace, global CP companies need to question their assumptions about the value of a global operating model. For many, this structure is no longer fit for purpose.
Empowered by technological and business innovation to shop whenever and however they want, consumers around the world are increasingly looking for products that are local, authentic, transparent, traceable and ethical. Homogenous, global products are losing their appeal. This is a deep change in shopper behavior and it’s eroding the value of global scale for many companies.
At the same time, local players are building their capabilities and establishing market-leading positions. Because they are closer to consumers, they are often more able to develop relevant offers than their multinational rivals. And without a global management hierarchy, they are empowered to make decisions and be more agile.
A changing tax environment is also putting the value of some operating models in the spotlight. Regulators and tax authorities are increasing their focus on how and where value is created and are pushing for much greater recognition of local intangibles.
The combined impact of these changes represents a tipping point for many companies. Is your operating model enabling growth? If you need to make changes, are you looking at an evolution or a revolution?
Scale may still be the most important driver for some areas of your business. An above-market, centralized model will likely still make the most commercial sense for value chain elements that are not consumer facing, like shared services for back office operations and some highly technical centers of expertise.
For other areas, by getting closer to the consumer, companies are achieving benefits that far outweigh any costs they might incur by sacrificing scale benefits forgone. When it comes to developing market-specific products, pricing, marketing and promotions, for example, a more decentralized management model could better fit your business requirements.
Companies should look at every area of their value chain and ask, “What drives competitive advantage?” and “What model will enable us to win in the market?”
It’s also important to get the right balance between flexibility, efficiency and control. Would you trade a few percentage points in operating cost or an effective tax rate to improve corporate agility and ultimately gain market share?
You can empower local management to pursue market-specific strategies that drive growth if you decentralize aspects of the business. But empowerment can increase costs and reduce control if it’s not supported in the right way.
Likewise, a more flexible management model can increase the entrepreneurial spirit and drive growth in new and innovative ways. But such models typically create costly duplication and reduce corporate control in ways that increase risk.
We see global CP companies responding to these competing pressures by adopting a new range of operating models. By moving away from the homogenous models of the past, you can find a more customized, balanced approach – one that offers different spans of control across different areas of the business.
In order words, the level of centralization will vary by function, product category, brand and geography, reflecting the specific drivers of competitive advantage in each area.
Tax must follow the business reality, and the reality is that value is being created at multiple levels and locations across the value chain – not in one neat and tidy place in a regional head office. As you think through the implications for your tax model, it might help to reflect on these questions:
- Do the “traditional models” have any place in this new world?
- Is a limited risk distributor model applicable for markets where you are trying to drive growth?
- Can regional manufacturing hubs support an agile supply chain?
- Does centralized pricing help you respond quickly to market conditions?
- If your operating model is unique to your business (and therefore difficult to benchmark), what’s the right transfer pricing approach?
- Do the new business practices increase direct tax risk – how will private equity and withholding tax risk be managed?
- What’s the best way to align how intellectual property is developed, maintained and exploited in your new model?
- How do you create and structure the legal entities needed to house your business functions, assets and profits?
- How will your new transfer pricing model and transaction flows affect your direct and indirect tax liabilities?
- What role should financing play in your new tax model – and can your finance and treasury centers support a more decentralized operating model?
- How should you reflect the business contribution of non-people functions? (For example how do you value and reward data and intelligent automation?)
- What’s the best way to build flexibility into your new model, so you can grow or adapt quickly as operational needs change?
- As your tax and operating models change, how much can you rely on existing incentives, advanced pricing agreements and rulings?
Given the significant changes to the business and tax environment, devising and implementing an operating and tax model with the right balance of global consistency and regional freedom is becoming a more complex and nuanced task.