You are currently browsing the tag archive for the ‘legal’ tag.

Longview Solutions has a longstanding presence in the financial performance management (FPM) software market and was rated a VI_FPM_Hot_VendorHot vendor in our most recent FPM Value Index. Several years ago it began offering a tax provision and planning application. I think it’s worthwhile to focus on the tax category because it’s less well known than others in finance and is an engine of growth for Longview. We expect larger corporations increasingly to adopt software to manage direct (income) taxes to improve the quality and efficiency of what today in most companies is an inefficient, spreadsheet-driven process.

Longview’s tax offering consists of four main components. Its Tax Data Platform can be the central repository of a corporation’s tax information. I’ve commented on the need to maintain tax data separate from the data that’s used for financial reporting, managerial accounting and performance management. One reason is that tax accounting must be aligned with legal entities, not corporate organizational structures, because direct taxes are levied on legal entities, not corporate divisions or reporting hierarchies. A second is that tax data must be held in an “as was” state, without regard to subsequent corporate actions such as acquisitions and divestitures or management reorganizations. Longview’s Tax Data Collection software consolidates book and tax data from disparate source systems; it is designed to automate and streamline the movement of data and eliminate time-consuming manual work. It can do consolidations in different, parallel paths if dissimilar methods of consolidating tax-related data are required by the statutes of individual taxing authorities. The Tax Provision/Reporting component performs global tax accounting and reporting. And Tax Planning supports a company’s analysis and planning of its taxes.

Software vendors are taking two different approaches to dedicated tax management software. One mostly focuses on the needs of the finance department: It automates and simplifies incorporation of already calculated tax data into the financial consolidation and close process. This is useful for companies that operate in up to a handful of tax jurisdictions and have relatively simple legal entity structures. The other approach addresses the needs of the tax department as well as the rest of the finance organization. Longview’s tax offering falls into the latter category because it provides the functionality and data-handling capabilities that tax departments need to streamline their operations, enhance their ability to manage tax expenses and improve senior executives’ understanding of tax exposures and strategies to deal with them.

Longview’s tax software can replace desktop spreadsheets, which are the most common tool used for direct tax provisioning and planning in companies of all sizes. Spreadsheets are the wrong choice for managing taxes because they are so time-consuming. Tax vr_fcc_tax_insightdepartments use them to make often complex tax calculations, manage tax data and direct tax processes – these are tasks that dedicated software can handle easily but spreadsheets cannot. They are not well equipped to do these tasks quickly and accurately on a consistent basis. Consequently, facing looming deadlines, tax departments have little if any time left over to analyze and plan tax exposure and tax expense options more broadly and more intelligently. Spreadsheets also do not provide sufficient transparency or forward visibility in a timely fashion in the way that a dedicated system can. Spreadsheets make it difficult for companies to manage their tax risk exposure in a consistent fashion across all business units. They do not give executives sufficient insight into their risk exposure options. Our research on the financial close finds that a majority (53%) of finance executives believe that having better understanding of and deeper insight into their company’s tax positions would enable them to reduce their tax expense.

There are several other reasons why desktop spreadsheets are the wrong choice for handling taxes strategically. One is that tax laws and regulations are so fiendishly complex. For example, some countries have industry-specific statutory reporting requirements (for example, for insurance companies and other financial services). Tax calculations for subsidiaries in one country may not apply to those required for a regional headquarters or the parent company. There may be multiple tax rates applicable to a given legal entity and multiple bases or methods on which to apply each tax rate. Moreover, because book accounting for taxes and actual tax calculations almost always differ in multiple ways, it’s necessary to record and track these differences. Since rules, rates and assumptions will vary from year to year, it becomes necessary to adjust these differences. Desktop spreadsheets lack the dimensionality, data integrity and referential integrity necessary to be able to manage this level of detail easily. Dedicated tax management systems are designed to do it.

One reason why tax departments lag in adopting new tools is that until recently the technology necessary for managing the full range of requirements in direct tax analysis, provisioning and compliance was not mature enough for the organizations that needed it the most. Until recently, corporations that operate in multiple, worldwide jurisdictions with even modestly complex legal entity structures overtaxed the ability of IT systems to support them. However, using dedicated software for direct tax management enhances the efficiency of the tax department, enabling it to become more strategic and contribute to improving the company’s results.

Adopting a more strategic approach to managing direct taxes is an emerging trend in finance organizations, but it’s still at an early stage. Tax compliance is usually the main (and overwhelming) focus of tax departments. Most do this essential work reasonably well, but compliance is a tactical issue. To elevate tax management to a strategic level, tax and finance executives must have greater visibility into tax data and how operational decisions affect tax exposures. For example, finance and tax executives may construct a tax-optimized approach to transfer pricing, but their strategy may not be implemented if the company’s incentive compensation system is not aligned to this strategy. Operating managers in high-tax jurisdictions will try to maximize revenues because that’s what they’re rewarded for, even if it results in higher taxes than are necessary. Using spreadsheets is a significant barrier to tax departments taking a more strategic role in their company. When direct taxes are managed using desktop spreadsheets, there rarely is time for organizations to do much more than basic compliance. There’s usually not time to discover the fundamental disconnects between tax strategy and reality or other, similarly strategic activities such as analyzing and assessing the tax implications of long-term corporate plans.

vr_fcc_tax_effectivenessIndeed, one sign of the tax function’s lack of strategic impact is its invisibility. There is a general lack of understanding of how the tax department functions, even within the finance department. For example, our research discovered that nearly two-thirds of finance executives (and, specifically, 60% of CFOs and controllers) do not know how long it takes their tax department to calculate tax liabilities.

Another reason is the relatively low status of tax departments in their company, which we can gauge through the distribution of titles and relatively low compensation for the highly credentialed individuals in these departments. Those that work in tax also tend to be tight-lipped and reluctant to reveal that their processes are time-consuming and difficult to manage, lest they be viewed as less than competent. The tax department’s invisibility contributes to a lack of focus on direct taxation by senior management, which also diminishes an understanding at that level of the potential benefits of investing in technology. Companies that are most likely to want to improve how they manage their direct taxes appear to be the ones where a senior finance department executive has spent time in tax and therefore has a firsthand appreciation for the challenges.

I’ve commented on the need to make tax more strategic. An increasing number of companies are finding that investing in dedicated software to improve the performance of their tax department is worthwhile. It gives them a deeper understanding of how best to manage what is usually one of their biggest expenses and enables them to make more optimal decisions about taxes. I recommend that all larger companies look into the benefits they can achieve by making their tax department more strategic and that they investigate dedicated software such as Longview’s that can enable them to have such a strategic tax function.

Regards,

Robert Kugel – SVP Research

Informatica and Exterro have announced a partnership in the market for discovery of electronic data and documents (known as e-discovery). Exterro has made its reputation in e-discovery workflow and legal holds management while Informatica is a leader in data integration that our Value Index finds as the top and Hot rated provider. The partnership is designed to provide users of Exterro’s Fusion E-Discovery software with a single point of control for vr_infomgt_barriers_to_information_managementorganizing and managing legal and preservation holds (that is, preventing electronic data from alteration or deletion) of unstructured and structured data that are held in Informatica’s Data Archive. Informatica specializes in the efficient management of information assets, which our benchmark research shows is not easy for most organizations to do because they have data spread across multiple applications and systems: Two-thirds of organizations said that this makes it difficult to manage information. By consolidating in a single repository the storage of information that is likely to be the subject of discovery, companies can simplify and cut the cost of the search process as well as reduce risk. Orchestrating legal and preservation holds can be complex since multiple people or groups within a company may be legally involved with the same data over an extended period of time. Moreover, it’s important to ensure that once the holds are no longer needed, all data that can be eliminated is eliminated.

This situation brings to light an increasingly sensitive predicament for many businesses. Corporations are required by law to retain records for a given period. These times differ from one jurisdiction to the next and vary according to the type of information in the records. For example, retention periods for general business matters tends to be the shortest, while information related to pharmaceuticals and radioactive materials require long retention. Traceability – the ability to determine and verify the history, use or location of an item and its constituent parts across an entire supply chain – is a fixture in some in some businesses such as those providing critical materials used in aerospace parts and to an increasing extent food. Failure to preserve data or to be able to produce it a timely fashion can lead to heavy fines or expensive judgments. The flip side to retention is that corporations must take care to delete records that no longer have business value and are not required to be retained, since even innocent items can pose a needless threat in litigation and add to the cost of maintaining and finding information.

Once mainly an issue in the United States, the increasing volume of litigation worldwide and ever expanding regulation of businesses has expanded the breadth and amount of information that parties may have to produce in the discovery phase of litigation and regulatory actions. Along with this trend, e-discovery has grown exponentially in importance as more and more of everyday business is captured in electronic systems. Hence the need for software to manage the e-discovery process and the underlying data.

A great deal of the information needed for e-discovery is unstructured – documents and email are particularly common. But especially in financial services, information contained in structured databases also is important. Banks, brokers/dealers and insurance companies all generate a considerable amount of structured data related to operations that can be subject to discovery. The volumes of data that are exposed to discovery continue to grow in lockstep with the growth of data created by today’s IT systems.

Law and regulation by the book prescribe processes that must be managed and documented carefully. Workflows handle processes affect the efficiency with which discovery management is executed. Legal holds require tagging of documents that have to be available in the discovery process to ensure that they are not inadvertently removed or deleted from a repository. For example, if a set of transactions and related email messages are germane to a regulatory action, they must be preserved until the issue is resolved, regardless of whether under ordinary circumstances they would be destroyed because their legally defined retention period had expired.

Exterro’s Fusion E-Discovery Suite incorporates the necessary capabilities as well as data mapping and data management to make processing records efficient. Exterro competes with IBM and Hewlett Packard/Autonomy, among others, in the e-discovery market. It positions itself as providing a more open portal than the others, enabling customers to have greater freedom to decide where the data is held. The company will benefit from the new partnership by having tight integration with a key information storage provider. Informatica for its part has acquired another important use case that provides durable value to its existing and prospective customers.

Companies – especially their legal departments – often fail to recognize the negative impact that poor data management has on their ability to execute consistently and efficiently. Usually, they recognize they have a problem only after an expensive or embarrassing failure. It’s important that organizations regularly review their data assets and data management practices to determine where they can be a source of failure or inefficiency and address these issues immediately. They should consider how Exterro and Informatica can help them reduce a potentially dangerous risk exposure that our research confirms that over half (51%) of organizations indicate as their top ranked concern in governance, risk and compliance.

Regards,

Robert Kugel – SVP Research

Twitter Updates

Stats

  • 73,784 hits
Follow

Get every new post delivered to your Inbox.

Join 68 other followers

%d bloggers like this: