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I’ve written before about the increasing importance of having a solid technology base for a company’s tax function, and it’s important enough for me to revisit the topic. Tax departments are entrusted with a highly sensitive and essential task in their companies. Taxes usually are the second largest corporate expense, after salaries and wages. Failure to understand this liability is expensive – either because taxes are overpaid or because of fines and interest levied for underpayment. Moreover, taxes remain a political issue, and corporations – especially larger ones – must be mindful of the reputational implications of their tax liabilities.

In this context of seriousness, there are five interrelated requirements for the work that tax departments do:

  • The work must be absolutely accurate.
  • Corporate and tax executives must be certain that the numbers are right – instilling confidence is key.
  • Certainty depends on transparency: Source data and calculations must be demonstrably accurate, and any questions about the numbers must be answerable without delay.
  • Speed is critical. All department tasks related to tax planning, analysis and provisioning can become sources of delay in core finance department processes. Being able to quickly execute data collection and calculations allows more time to explore the results and consider alternatives.
  • Control of the process is essential. Only particular trustworthy individuals can be permitted to access systems, perform tasks and check results. Control promotes accuracy, certainty and transparency.

vr_Office_of_Finance_15_tax_depts_and_spreadsheetsThese requirements form the basis of a business case for a tax data warehouse. Properly executed, it promotes all of these qualities. However, our forthcoming benchmark research on the Office of Finance shows that not many corporations have adopted one. Rather, most companies rely mainly or entirely on spreadsheets for provisioning income tax: managing  data, calculations and modeling. More than half (52%) of companies use spreadsheets alone to handle income taxes while just 10 percent use a dedicated application designed for that purpose. Desktop spreadsheets are a poor choice for managing taxes since they are error-prone, lack transparency, are difficult to use for data aggregation, lack controls and have little ability to handle more than a few dimensions at a time. To deal with these deficiencies companies have to spend more time than they should in assembling data, making calculations, checking for errors and creating reports. 

There are strong reasons to change this reliance on inappropriate tools. One is that more companies must deal with an increasingly complex tax environment. Despite decades of talk about simplifying the tax code in the United States, it has grown ever more intricate. For those with a long memory, there was some simplification in the 1980s, but since then complexity has returned with a vengeance. Moreover, as corporations grow and expand internationally, their legal entity structure becomes more multifaceted, and their source systems for collecting and managing tax data can become fragmented. Unless the tax function is completely centralized, companies that operate in more than a handful of tax jurisdictions can find it hard to coordinate their tax data, calculations and processes. Centralization is not a cure-all, either, as the lack of local presence poses its own issues in tax management in coordinating with local operations and finance organizations.

Another reason is that national taxing authorities are beginning to improve their coordination with one another, which means that tax departments will have to deal with increasing complexity in reporting and a more stringent compliance environment. In 2013, the Organization for Economic Cooperation and Development (OECD) published a report titled “Action Plan on Base Erosion and Profit Shifting”, which describes the challenges national governments face in enforcing taxation in an increasingly global environment with a growing share of digital commerce. The OECD also is providing a forum for member governments to take action (including collective action) to strengthen their tax collection capabilities. Although the process of increased government coordination is likely to take years to unfold, the outcome almost certainly will be to put additional pressure on companies that have legal entities domiciled in multiple countries. The impact is likely to mean longer and more frequent audits (including concurrent audits by multiple tax authorities) with more detailed requests for information. Increased data sharing among tax authorities will make it even more critical that the tax data – and all the minutiae of adjustments, reconciliations and year-to-year permanent changes – be absolutely accurate, consistent and readily available.

In addition, governments worldwide are increasing their electronic collection of tax data. This enables them to improve scrutiny of tax returns by applying analytic techniques that highlight errors and discrepancies as well as to identify suspicious activities or potentially aggressive tax treatments. Eliminating paper forms allows tax authorities to require even more data from companies. In this environment, having accurate, consistent data becomes essential. Having time to consider the best tax-related options thus becomes even more valuable.

In this increasingly complex and demanding environment it is good news that technology, such as a tax data warehouse, has advanced to become feasible and affordable for the kinds of organizations that can benefit most from it. A tax data warehouse addresses all of the needs of a tax department listed above. A single source of data minimizes errors and ensures consistency. It also promotes transparency, especially when used in conjunction with a dedicated direct tax management application. Because it is possible to exactly recreate the assumptions, data and methods used and because the data and the calculations are consistent, the answer to “where did that number come from” can be found quickly and with complete assurance. The process is better controlled, access to the records and application is more secure, and the entire process is much more easily audited than when working with spreadsheets. Since all of the numbers and assumptions are kept intact and readily available, an audit defense can be performed with less effort and greater confidence. In addition, the ability to create multiple scenarios with different assumptions and treatments enables tax and legal departments to determine the best approach for the company’s risk tolerance. The financial impact of these benefits can be considerable because most companies that operate in multiple direct (income) tax jurisdictions spend considerable amounts of time gathering and assembling data manually. As noted, they often use spreadsheets – sometimes dozens or even hundreds of them – for tax calculations and data storage. These spreadsheet-based systems are built on a weak foundation because of the data issues inherent when there are multiple systems of record and inconsistent data-related processes.

vr_fcc_tax_effectivenessThe evolving tax environment means that tax departments must be in the mainstream of finance organizations. Our research on the financial close finds that a majority of finance executives do not know how long it takes for the tax department to complete quarterly tax calculations. Executives who are not tax professionals usually do not appreciate the important difference between finance and tax data requirements. Corporations are constantly changing their organizational structure as well as acquiring and divesting business units. As these events occur, accounting and management reporting systems adapt to the changes both in the current as well as past periods. Tax data, on the other hand, must be stable. Legal obligations to pay taxes are based on facts as they exist in specific legal entities operating in a specific tax jurisdiction in a specific period. From a tax authority’s standpoint, these facts never change even as operating structures and ownership evolve. Audit defense requires a corporation to assemble the facts and related calculations, sometimes years after the fact. A general finance data warehouse does not deliver this capability because it is not – and for all practical purposes cannot be – structured to satisfy the needs of a tax department, particularly those that operate in multiple jurisdictions.

To ensure accuracy and inspire confidence in the products of the tax department’s work, it important for tax departments to tightly control the end-to-end process of taking numbers from source systems, constructing tax financial statements, calculating taxes owed and keeping track of cumulative amounts and other balance sheet items related to taxes. Transparency is the natural result of a controlled process which uses a single set of all relevant tax data. A readily accessible authoritative data set makes tax department operations more efficient. Reducing the time and effort to execute the tax department’s core functions frees up the time of tax professionals for more useful analysis. In a more challenging tax-levying environment, having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides company executives with greater certainty and reduces the risk of noncompliance and the attendant costs and reputation issues. Having an accurate and consistent tax data warehouse of record provides corporations and their tax departments with the ability to better execute tax planning, provisioning and compliance.

Regards,

Robert Kugel – SVP Research

In the wake of the past year’s usual crop of failed ERP implementations, I’ve read a couple of blogs that bemoan the fact that ERP vr_ERPI_01_implementing_new_capabilities_in_erpsystems are not nearly as user-friendly or intuitive as the mobile apps that everyone loves. I’ve complained about this aspect of ERP, and our research confirms that ERP systems are viewed as cumbersome: Just one in five companies (21%) said it is easy to make changes to ERP systems while one-third (33%) said making changes is difficult or very difficult. Yet as with many such technology topics, addressing the difficulty in working with ERP systems is not as straightforward as one might hope. ERP software vendors must make it easier, less expensive and less risky for customers to adapt the systems they buy to their changing business needs. To do this, vendors must design products to be more configurable. The goal should be that organizations can make changes and add new capabilities to their ERP system in far less time than it takes today and without having to engage outside consultants.

That may take some doing. In the current environment, several issues impede users in implementing changes to their ERP systems; some are easy to fix, but others are more intractable. Starting with the easier side, we note that smartphones and tablets have simplified some user interactions with core ERP functions. These mobile technologies enable the use of lightweight applications to automate edge processes that manage, for instance, travel and entertainment expenses, customer service or aspects of workforce management such as scheduling. However, examples don’t point to a future where an ERP system is cobbled together from a constellation of loosely coupled apps. Edge processes are those that can stand alone, have discrete boundaries and interact with a core ERP system by exchanging easily defined data such as amounts, status (for instance, where the individual is in a process) and dimensions (such as time, territory and product family). These applications are relatively easy to construct and use because the heavy lifting has already been done in designing and configuring the ERP system itself.

Trying to equate a smartphone app to a full-fledged ERP system is like comparing a paper airplane or one of those new hobby drones to a jetliner. The former is inexpensive and simple to operate, while by design the latter is not. A jetliner faces the real-world constraint that it must carry hundreds of people safely while handling the stresses of near-sonic flight and withstanding thousands of cycles of substantial pressure and thermal differentials. To be able to do this with utter reliability and safety requires a complex set of redundant systems. This means a passenger jet will never be simple to operate and inexpensive to create. In this analogy, that’s the intractable issue. Yet it’s noteworthy that today’s commercial jetliner is more reliable, easier to operate and less difficult and costly to maintain than the first generation of aircraft that emerged half a century ago. ERP vendors ought to be modernizing their products in a similar fashion.

The primary barrier to making ERP software easy to implement is the inherent complexity of the business processes the systems manage. ERP systems are designed to handle a diverse set of procedures  that might span multiple business units in multiple industries in multiple locations and jurisdictions. In a word, its operation is business-critical. But it’s problematic that the final system design is often the result of multiple trade-offs that best reflect the needs of a variety of competing interests and priorities. These options must be considered, and then agreement must be reached on the mass of details that are baked into the final design. In this complicated process, mistakes are not uncommon, especially by inexperienced or incompetent consultants. Even using the best resources, it’s not hard to make mistakes. One of my favorite examples of how the provisioning of an ERP system can go wrong was the inventory management portion of an ERP system at an airline’s maintenance depot. The new system – designed by accountants and auditors – followed a standard, “common sense” process of requiring the defective part to be checked in before a new one could be checked out. However, the system it replaced allowed pilots to radio ahead when some piece of equipment or component failed so that replacement could start as soon as the plane arrived at the gate. From the perspective of a pilot or maintenance personnel, this approach was sensible. But when the airline changed over to the new system with a process designed for inventory control, very expensive aircraft and many grumpy passengers were left waiting at the gate while the old part was shuttled to the inventory cage and the replacement part was found and reissued. The lesson here is that different types of businesses have their own requirements of varying complexity. For ERP, it’s often the little stuff that trips up an implementation. Even within a given type of business, a company’s unique strategies and strengths may lead it to operate in a different manner. So the various competing interests within a company will always need to resolve trade-offs in implementing and operating a system, and ERP systems always will have a high level of complexity.

Still, not all of the complexity of ERP systems is necessary, and dealing with changes and adding new capabilities can be simplified. As the business software market, including ERP, increasingly moves to the cloud, a major challenge facing software vendors is designing their applications for maximum configurability. By this I don’t mean being able to select modules from a menu, but having the ability for only moderately trained line-of-business users to make more granular adjustments to process flow and data structures in a multitenant setting. This lack of flexibility is an important barrier inhibiting adoption of cloud-based ERP. Although user organizations that are better able to adapt to an as-is version of an ERP system are more likely to take the cloud-based option, this covers only some of the potential market. The cloud ERP vendors that offer greater flexibility in allowing individual customers to modify their implementation to suit their specific needs will have a competitive advantage.

An ERP system that can be more easily configured by end users would also confer a competitive advantage for on-premises deployments. Today, almost all ERP software aimed at large organizations, and many implementations designed for midsize companies, either have versions preconfigured for a specific industry (such as aerospace or automotive) or have evolved for use by some specific industry (beverages) or even a subset of an industry (beer distribution). This cuts down on the amount of work – and therefore the cost – required to set up a specific customer’s system.

This “verticalization” is necessary but insufficient. After an ERP system is installed, user organizations need to be able to simplify the process of making modifications. The elements of an ERP system that are inherently more standalone are the easiest to shift to a more self-service model. The hardest part for vendors will be in changing their architecture and design to make it easier (though probably never easy) for organizations to make modifications on their own or with limited assistance from consultants. Until multitenant cloud deployment came along, and with it the need to enable greater flexibility, vendors had little incentive to work on this issue.

The inability to easily make changes to an ERP system inhibits change and innovation in corporations. This is ironic, since one of the factors driving corporations to buy the first ERP systems in the 1990s was their desire to do business process re-engineering, a useful business strategy fad of the time. Today, few companies do anything more than tinker around the edges of their processes unless they are implementing a new ERP system and there is an urgent need to do so and is why it is part of my research agenda for 2014.

Regards,

Robert Kugel – SVP Research

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