Bob Norton
Bob Norton

Death by a Thousand Cuts

Hyper-regulation and its implications on tax operations.

March 24, 2011
by Bob Norton

The massive tax and accounting changes occurring worldwide mean that for many companies, the global tax picture is quickly becoming truly overwhelming. The resulting hyper-regulatory atmosphere will result in dramatically increased workloads for tax departments.

Most tax departments are already facing "death by a thousand cuts" due to over-reliance on manual processes and workarounds that consume their limited and valuable resources. Given the effects of hyper-regulation on tax workloads, this could plausibly become "death by a million cuts" if tax professionals don't find ways to get more work done with the same staffing and in a way that doesn't increase risk.

To survive in this new environment, it's crucial that you find ways to increase the efficiency of tax processes, particularly in the area of tax data management — the common foundation of all tax processes. In our work with hundreds of companies, anecdotal data indicates that collecting, validating and preparing data may consume upwards of 50 percent of a tax department's total time. The majority of customers use a patchwork of custom-built approaches to collect, validate and prepare data. For example, for data movement, they use flat files created by the IT department to import trial-balance information, supplemented by Excel(R)-based tax packages for adjustments and other information. For data storage, they use either home-built databases or tax applications — an error-prone and extremely inefficient way to manage tax data. For data validation, tax professionals manually double and triple-check everything, which consumes even more time.

In the end, tax data gets calculated to produce generally accurate provisions, tax return calculations and tax planning scenarios — but at what cost? Without the ability to leverage the work done in the provision process to jumpstart compliance and planning, tax professionals will continue to fall further behind and become more reactive and distracted, rather than proactive and focused on value-added activities. In a hyper-regulatory environment, this is a high-risk situation. Complicating matters is the fact that the various, disconnected tax-technology solutions for provision, compliance, planning and audit defense (and their underlying databases) only serve to re-silo data, rather than create a single, integrated and reliable source of the tax truth.

Responding Through People, Process and Technology

So what can you do to prepare your organization for what's coming? At a high level, you have three primary "levers" for getting more work done: people, process and technology. Tax has historically focused on people first, as the seasoned tax professional's tax planning knowledge can be invaluable when applied properly. Unfortunately, much of this potential sits idle as these highly trained professionals check and double-check data or spend time searching for key information needed to address an issue or perform an analysis. Further, with the economic realities of the "new normal" being shaped by hyper-regulation, increasing headcount isn't possible, so the focus needs to be on getting more meaningful work completed using existing resources.

For much of the industry, then, this leaves process and technology as the only viable levers to drive efficiency improvements. With respect to process, there are tax services vendors and even some software vendors (Vertex included) that offer process review services whereby tax processes are benchmarked against industry norms. These services often lead to specific recommendations or at least a business case for pursuing a process-improvement initiative. In the area of process improvement initiatives, the big news is the advent of systems capable of "programming" tax work using new workflow software. These products can organize, notify and track the progress of key tax processes over time. Used correctly, they can help you deploy best practices and facilitate continuous process improvement.

But in order to have a workflow solution help you get more work done — rather than just document your current, inefficient processes — you need a way to implement best practices and there's the rub. According to a Vertex-commissioned blind survey in December 2009 administered by a third-party research firm, a wide variety of barriers to process improvement exist both within firms and across the industry as a whole. Unless these barriers are addressed, simply deploying a workflow system alone is the equivalent of wallpapering over a window; it may look "solid," but because there's been no structural change to what's behind it, it's still fragile and ineffective.

That brings us to the topic of technology in a broad sense. The question is — can your hodge-podge of existing tax solutions enable your department to increase productivity sufficiently to handle the excessive workloads heading your way?

Most likely not. Hyper-regulation will heighten pressure on tax operations, so workloads will likely get worse before they get better. The sheer number and degree of pending changes mean that many national and multinational businesses will reach a point in which they can't efficiently and cost-effectively manage their tax positions — or effectively manage tax risk around the world — using the tax tools currently at their disposal. These include stand-alone, country-specific compliance systems and spreadsheets, both of which require too much manual data entry and constant maintenance. The only answer is to find technology-enabled efficiency improvements.

What's Needed?

To protect your organization from the risks and work overloads of doing business in this hyper-regulatory environment, what's needed are true, enterprise-class tax software solutions that are not only scalable, flexible and integrated, but also enable you to:

  • Dramatically increase the operational efficiency of your tax department — particularly around tax data management;
  • Establish a comprehensive, centralized tax data warehouse offering a single, reliable and multi-year source of tax truth so you can have complete confidence in the data you provide to the U.S. Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), state departments of revenue and their country equivalents;
  • Model (and re-model) your tax positions swiftly for accurate tax planning;
  • Know more than federal and state government bodies know about your business and find issues before they find them;
  • Have flexible, adaptable tax solutions so you can rapidly respond to new taxes;
  • Be able to model and re-model different tax scenarios and assumptions as you deal with various uncertainties and legislative changes as they are formalized; and
  • Be able to deploy tax solutions supporting either a centralized or decentralized business process in order to meet your unique needs.

The points above are hard to dispute. But to gain these capabilities, companies must make fundamental changes to their approach to tax technology. To date, no solution — software, service or a combination of both — has emerged to address new tax requirements in a cost-effective way.

To address upcoming challenges, Vertex expects enterprise tax technology to evolve gradually and in ways that will transform all core tax processes: provisioning, compliance, planning and audit defense.

But each tax-software vendor will approach the development of enterprise solutions differently. Each approach will have strengths and weaknesses in the short and long term, so you will want to become an informed technology evaluator so you can make the best investment for your business.

The Next Step

As tax professionals, you can either view hyper-regulation as yet another burden or as an opportunity to make long-needed technology and process changes that will yield unprecedented efficiency improvements in your global tax operations from tax planning and accounting for income taxes to tax compliance and audit management.

From Vertex's perspective, hyper-regulation opens a unique window for you to make fundamental technology and process changes that will benefit your tax department and the entire company for the long haul. In upcoming articles we'll explore what's needed — true, enterprise-class tax solutions — and summarize what you can expect in terms of tax-process improvements as these solutions evolve.

 Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Bob Norton brings 25 years of corporate tax experience from both public accounting and global industry to his role as chief income tax officer. He is responsible for leading Vertex's Income Tax Technology business aimed at improving the efficiency, accuracy and controls surrounding the corporate income tax process of today's Fortune 2000 multinational corporations.