Why five years of transforming finance and tax functions is paying off
Kellar Nevill of EY identifies the key trends to emerge from a survey of tax and finance professionals, with a particular eye on what recent transformation in the field means for the Asia-Pacific region
Converting organisations’ finance and tax functions into modern, data-powered operations that deliver insights to help to direct the wider enterprise is one of the most significant and consequential business stories today.
EY teams have been chronicling this trend for the past five years with a series of surveys. The transformation began as a practical solution for these critical but cash-strapped divisions dealing with a confluence of pressures. These pressures include:
Rapid legislative change;
Endlessly accelerating data and technology developments; and
A radically shifting talent environment, including a continued shortage of accounting and tax professionals.
The 2023 EY Tax and Finance Operations survey of 1,600 tax and finance professionals across 32 jurisdictions and 18 industries, 372 of these professionals being from Asia-Pacific, finds the phenomenon is evolving in critical ways. Among other things, it is now clear these transformations are being driven by more than just pragmatism – they are intended to empower finance and tax functions to deliver more strategic value to inform and influence decision making across their businesses.
Primary challenges facing businesses, and how they are responding
The latest survey finds businesses face many of the same pressures that sparked the transformation trend in 2018:
51% of leaders say they struggle with motivating talent and avoiding burnout;
48% say the lack of a sustainable plan for data and technology is the biggest barrier to achieving their vision for sustainable finance and tax functions;
90% say they expect moderate to significant changes to their business operations as a result of the implementation by governments of global minimum tax rules developed by the OECD/G20 Inclusive Framework;
75% say they plan to reduce the costs of their finance and tax functions over the next two years. Broadly speaking, respondents have reported an average two-year cost reduction ranging from 4% to 9% in each of the four EY surveys, including the newest one.
The new survey does find more businesses are transforming – and co-sourcing – in response.
96% say they are changing, whether it is to build their own capabilities, outsource key finance and tax functions to third-party vendors, or some combination of the two;
95% say they are more likely than not to co-source finance and tax operations in the next two years, an increase from 81% and 73% in 2022 and 2020, respectively; and
Co-sourcing with a provider with significant capabilities in data, technology, and a shared services centre delivery model was identified as the top priority by respondents making changes.
Co-sourcing’s growth in popularity as a solution
“Companies have gone from ‘how?’ to ‘now!’” says Marna Ricker, EY global vice chair – tax. “The conversation around transforming tax and finance functions has changed in five short years from ‘is this something we should do?’ to ‘how quickly can I get the most out of a co-sourcing relationship?’”
For example, there are concerns about how to deal with requirements around global minimum tax rules developed in pillar two of the OECD/G20 BEPS 2.0 project. While 90% said they expect to experience a “moderate” or “significant” impact from BEPS 2.0, only 30% have completed an impact assessment.
Survey respondents also say there is growing pressure on finance and tax functions to provide the data companies need to meet their ESG and sustainability objectives and obligations, including voluntary disclosures of tax information to the public. Many are struggling with post-pandemic shifts in where and how workforces perform their tasks. And questions about how generative AI tools will affect tax compliance and administration loom.
In EY’s inaugural 2018 survey, 84% of companies surveyed said they were exploring how to transform their tax operating models to better manage relentless pressures. They just were not sure how to do it.
Building in-house modern finance and tax functions equipped with the right people and future-proofed technology remains a viable path for some. But the latest survey makes it clear that co-sourcing with third-party vendors that invest in dedicated people, data capabilities, and technology needed to manage the complexities of, and pressures on, modern finance and tax functions has emerged as a preferred choice for most businesses.
Ninety-five per cent of respondents say they are more likely than not to co-source selected finance and tax activities over a two-year period in the new survey, a 22 percentage point increase since 2020.
Moreover, respondents say they are co-sourcing across a wide range of tax competencies, including tax accounting, direct tax, indirect tax, environmental tax, and transfer pricing. Ninety-one per cent say they are co-sourcing other finance function activities, including statutory reporting compliance, legal services, payroll, HR and other people-related services, customer reporting, and ESG reporting.
Transforming finance and tax functions is one way to achieve the gains necessary. Fifty-nine per cent say the ability to drive effective talent management is the most significant benefit of partnering with a provider to co-source multi-country tax compliance and statutory reporting activities. Just 18% identified cost savings as the biggest benefit.
Grant Duncan, global head of tax at New Zealand-based Fonterra, a global dairy nutrition co-operative, said that “co-sourcing has given us a high level of confidence that our compliance is being managed appropriately and accurately in each country. This frees up my team’s time and resources to perform more strategic tasks and value delivery. It also gives the board the confidence that we are managing all of our tax risks globally. Simply put, co-sourcing delivers a high-quality product that would have cost significantly more to replicate in-house.”
The trend of transforming finance and tax functions and the ensuing popularity of co-sourcing as a solution initially started with the world’s biggest companies, especially those with revenues of $20 billion and above.
EY’s latest survey finds a sharp increase in action being taken by businesses in smaller revenue bands; co-sourcing is also growing in popularity with these businesses. For example, the proportion of businesses with revenues of $20 billion and above that were "more likely than not" to co-source remained at a significant 95% in 2023. Among businesses with revenues below $20 billion, that figure is 94% in 2023, up from 79% in 2022. This is particularly prevalent in Asia-Pacific.
The key drivers of finance and tax operating model change
Hiring and retaining skilled talent, the rapid pace of legislative and regulatory change, and the need to keep up with technological advances have been the primary drivers of finance and tax operating model transformation over the past half-decade. Budget pressures have also been a contributing factor.
The latest survey confirms these factors are still the biggest concerns. For example, 48% of respondents identify a lack of a sustainable plan for data and technology as the biggest barrier to achieving their finance and tax function purpose and vision. Twenty-two per cent point to their inability to hire and retain the required talent. Some 24% say a lack of budget was their biggest barrier.
Moreover, three-quarters of the respondents in the latest survey say they plan to cut the cost of their finance and tax functions over the next two years, consistent with previous years. In 2018, survey respondents were planning a 9% reduction. It was 8% in 2020, 6% in 2022, and 4% in 2023. Headcounts are also shrinking – 91% report that they plan to freeze or reduce the number of workers in their function in the next two years, by an average of 4.4%.
In addition to shrinking headcounts, 63% say their employees will need to augment their tax technical skills with new data, process, and technology abilities in the next three years. And 29% say they do not have enough highly skilled professionals capable of monitoring, evaluating, and implementing tax legislative and regulatory change around the world.
In addition, two-thirds of respondents say they are at least moderately struggling with promotions and putting employees on a career path. More than half say they are experiencing at least moderate struggles in motivating talent and avoiding burnout. Nearly half – 48% – have at least moderate struggles paying employees at market rates. Notably, respondents that co-source 25% or less of their workload were much more likely to report struggling with these issues than those that co-source higher concentrations.
The lack of a sustainable plan for data and technology is consistently identified as the biggest barrier to achieving finance and tax functions’ purpose and vision in the surveys over the past five years, which also helps to explain the popularity of co-sourcing. This is especially true among businesses with under $20 billion in revenues, which are less likely to have resources to build future-proof systems in-house, as is often the case in Asia-Pacific.
In fact, 61% of survey respondents report they rely on service providers to consolidate tax data on their behalf, while just 34% report having their own data lake or warehouse. Seventy-two per cent say they have some gaps between their ERP and source systems set to capture relevant tax information, and just one in five say their finance and tax functions’ data management capabilities are mature. Businesses that co-source higher levels of activities were much more likely to report having higher levels of data management maturity than those that co-source 25% or less of their activities.
These findings also help to explain the co-sourcing phenomenon. Third-party providers have made dedicated investments in these capabilities (and the people to complement them). And while the survey’s sponsor was unknown to the respondents, the EY organisation was identified as the global market leader for co-sourcing and for data and technology tax services for the fourth consecutive year.
How to formulate a five-year plan
The story of reimagining finance and tax functions over the past five years is instructive for those trying to plan for the next five. And every finance and tax function should have a five-year plan, even the ones that have undergone, or are undergoing, a transformation.
Fundamentally, businesses have the same choices they had in 2018. First, they can build modern finance and tax functions internally by investing in the right people, data capabilities, and technology. Second, they can outsource a significant amount of their finance and tax compliance activities. Or third, they can take the hybrid approach, co-sourcing with external providers on some activities while choosing to keep others in-house. Clearly, after five years, the hybrid approach has proven to be more popular.
All the pressures that have driven finance and tax functions to modernise will continue to exist over the next half-decade. They will just be exacerbated by additional developments. There will be more legislation. Workforce demographics have fundamentally shifted, perhaps permanently. The geopolitical environment is highly unpredictable. And technology will continue to make breakthroughs (in the survey, 85% of respondents say they do not think generative AI tools will help to drive increased effectiveness and efficiencies within their tax function in the next three years).
Anyone making a new five-year plan for their tax and finance functions should do the following:
Adopt a strategic view around talent. The best-prepared businesses need to be able to attract, develop, and retain people who know not only finance and tax but also how to use technology to analyse data in a way that complies with the law and helps to deliver insights to the full enterprise.
Determine how to identify, evaluate, and implement regulatory, legislative, and transparency initiatives, especially those related to BEPS 2.0 implementation in the coming years.
Make space for finance and tax functions to play a principal role in the organisation’s sustainability strategy. This allows finance and tax to help to manage ESG messaging, educate leadership on tax considerations, and evaluate potential risks.
Finally, find the right balance of internal and co-sourcing arrangements to solve all these challenges. An effective co-sourcing arrangement should cover basic finance and tax compliance obligations, while providing the agility needed internally to get the most out of a function’s people.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.