Establishing a baseline of an organisation’s ‘current state’ is an important step to take before implementing a target operating model which responds to the unique environment that an organisation is facing. We discuss the important role that benchmarking can play in reaching this point.
Challenging macroeconomic conditions, an increasingly digital world (including the emergence of digital tax authorities) and fundamental changes to the ways in which people are now working, are just three of the factors that are driving accelerated transformation programmes for tax functions. For organisations taking their first steps towards building an optimal tax function operating model - establishing an accurate ‘current-state’ baseline can be crucial to deploying resources and investment in the right places, but what is the best way to go about this?
Understanding the challenges
A sensible area for organisations to focus in the first instance could be the challenges they are facing, and these can be sorted into two broad categories - internal and external. Externally, tax functions have faced a shifting regulatory environment, driven by increasing digitisation, and real-time reporting requirements. There is also a heightened focus on transparency driven by institutions such as the OECD, with the effects being felt in processes such as ESG Tax reporting. Internally, tax functions are driving their own cost-saving and efficiency initiatives to ‘do more with less’, and are increasingly being encouraged to input into wider finance and business strategies.
Framing the need for change
We often see tax functions struggling to frame the need for change. The process of identifying, understanding and articulating the starting point for change, and why, can be intimidating. Quantifying this starting-point to build a business case and articulating the need for change, is even more difficult.
The starting point for each tax transformation project will depend on the maturity, complexity and size of the organisation’s operations, and will be unique to them. However, for every company kicking-off their transformation journey, or project, knowing in detail the ‘current state’ is critical to providing a starting-point for change. This baseline can be referred to throughout the journey, from providing a measure to build the business case for change to tracking progress and impact as the project moves forward.
Organisations can arrive at their starting-point by conducting a current state maturity assessment which includes activity baselining and benchmarking. This ensures the tax function is clear on its current state, and is therefore able to make informed, future-proofed plans which clearly identify the ‘quick wins’ and priorities for change.
Benefits of benchmarking: Why benchmark?
Benchmarking enables organisations to compare and measure themselves against their peers, using public and non-public data - are they ahead of the curve, in the pack or behind the curve?
For tax departments, as well as their stakeholders, publicly available data such as the complexity of operations and ease of paying taxes will be of particular interest. As well as the following non-public data:
- The overall cost / full time equivalent members (‘FTEs’) of the finance or tax function and as a percentage of revenue
- Tax cost / FTEs as a percentage of finance cost/FTEs
- Proportion of costs across tax specialisms (e.g compliance vs other areas)
- Roles and responsibilities of the tax team
- Average cost of FTEs.
Benchmarking helps an organisation build the factual analysis required to prepare a business case and roadmap for change. The metrics also have the benefit of providing insights into the art of the possible, by learning from the experiences of others.
Where do you start?
There are huge complexities in any tax function design project, and a benchmarking exercise is just one of many parts in running a successful programme. Using relevant and detailed supporting data alongside findings from benchmarking and other assessments, such as current state assessment and baselining activities, can help build a plan to move from current to future state.
If you’d like to explore how a benchmarking exercise might support your tax transformation activities, at any stage of that journey, or other options for successful tax function optimisation please get in touch.
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