Because of COVID-19, business models have gone digital in just a few weeks. The ‘‘great digital acceleration’’ of April and May 2020 has been a massive proof of concept for potentially viable approaches that have long been resisted or slow-walked: direct-to-consumer channels, large-scale remote work, stepped-up cloud adoption and telehealth, to name just a few.
At the same time, businesses are under financial pressure. Just more than half of CFOs expect revenue and profit declines up to 25%, according to PwC’s COVID-19 CFO Survey conducted in early May. Not surprisingly, 60% of finance leaders surveyed say they will defer or cancel planned investments, with facilities and general capex (83%), operations (53%) and workforce (49%) topping the list of potential cuts.
These two drivers—accelerated digital transformation and cost containment—make it important to consider tax managed services.
Companies are looking for the most cost-effective way to improve high-value, non-core operations like tax services under the most severe financial pressure they have experienced in decades. Tax managed services is a young delivery model compared to the more developed IT managed services model, but it is maturing quickly and deserves closer consideration today.
The least disrupted companies during the pandemic shifted most of their workforce smoothly and effectively to remote work mode or found other transitions to a new operating model. They successfully maintained operations by relying on highly skilled or technology-agile professionals working in secure, connected environments.
Because of the COVID-19 pandemic, organizations scrambled to maintain essential core functions like key finance, accounting and tax services to meet local regulatory filing deadlines. It was difficult for many, particularly for those oriented largely to on-premise processes or those without a robust IT infrastructure conducive to virtual work arrangements.
But the transition was likely seamless for those who had tax managed services in place. Most tax managed services providers were ready to operate virtually—and were already structured that way. They may typically prioritize virtual communication platforms and virtual ways of working, which may be why tax managed services providers can pivot from on-site support to virtual and vice versa as needed.
By shifting quickly to tax managed services, some companies have found a way to work around the strict constraints of lockdowns and stay-in-place orders. For example, PwC’s tax managed services team—agile enough to work remotely with the necessary security safeguards—was able to operate without interruption for a multinational manufacturer as the company dealt with the pandemic’s multifaceted urgencies. It’s one thing to be able to provide connections and access to personnel on remote work, but shifting with the proper security and control measures has been less common. Also, many traditionally operated tax departments, challenged with network and VPN-access capacity constraints, may have turned to consulting firms to provide loan staff and co-sourcing options to help maintain operations, including monthly and quarterly close procedures, to remain in compliance.
Business leaders soon will likely make decisions with major, far-reaching implications for finance and tax—decisions helping them emerge from the crisis in a position of strength. Which deals should they continue and how should they restructure them? Which new, alternative suppliers should they bring in to improve their supply chain resilience? Which parts of the business should they automate further? Which new digital business models, first adopted during the crisis, should they accelerate? What new tax law changes will occur and how will they impact the company?
Companies need a wide range of expertise, which may often be unavailable in-house. In contrast, managed services providers typically have highly skilled, knowledgeable global resources to help support an advisory capacity. Leading managed services providers are data-driven and have data tools to help the company better manage and analyze data, leading to smarter decision-making. Tax managed services providers also focus on operational efficiency and quality of services delivered. The more complex and more specialized the activity, the more a managed services model can deliver a quick advantage.
When scaling up in-house resources, a company evaluates hiring lead times and hidden costs, onboarding and training requirements, and the available pool of qualified candidates. When a company scales down resources, it examines severance costs and union issues. However, when those resources are needed again, it may be impractical for a company to assume it can readily adapt to evolving demands and needs. A managed services provider helps a company scale up or scale down easily and cost effectively, incurring costs only for the demand and support it needs, when it needs it.
When the tax leader at a private equity-held materials manufacturing company suddenly left the organization at the end of the fiscal year—in the middle of a deal—a PwC tax managed services team helped fill the gap by jumping in, helping to finalize year-end activities and close the transaction. Once a new tax executive was in place, the managed services team stepped back. In another example, a benefits outsourcing provider spun off a business unit and leveraged managed services for tax needs rather than building their own department.
The more complex your business, the more global your business and the more nimble you want your business to become, the more a managed services provider could be the right choice for your organization.
Understanding whether a function or process has the potential to be transitioned is the first step toward a decision on the “right fit” delivery model. Companies should perform a detailed “bottoms-up” analysis to evaluate functions and processes suitable for managed services. An organization may need to transition a function or process to a managed services when seeing signals such as:
These signals may flash green for a specific function or service in your organization, but you may want to retain a largely in-house function if the services performed by the function are a competitive advantage, a customer-facing requirement or integrally related to management decisions.
Global patent operations or bank relationship management might be examples of functions you keep in-house, while tax provisioning and corporate income tax services might move to a managed services model.
Source: PwC, “Managed services: a strategic delivery model.” May 2020.
All providers are not the same. Competition among providers is strong in mature and deep managed services markets. Ask the following questions of a prospective provider, being sure to make them specific to your challenges and circumstances:
Beyond these, what should you look for in a managed services provider? How do you manage a managed services provider? Ask questions such as the following:
Even before the pandemic, many of our clients had initiated discussions, conducted pilots or implemented disruptive managed services solutions. Thanks to technological innovations and enhanced capabilities from third-party providers, many organizations are now exploring such an approach—an option that may not have been conceivable just five to 10 years ago. The pandemic has added impetus, helping increase business leaders’ appetite for change while margin and revenue pressures exert discipline in the reimagination of tax service models.