Outsourcing: opportunities and challenges for the corporate tax executive.

• Author: Levine, Martin A.

At Tax Executives Institute's 1992 Annual Conference, the Institute's Corporate Tax Management Committee held a session on outsourcing, featuring a panel of TEI members and representatives of three Big 6 accounting firms. Outsourcing is a hot topic, and it evokes strong feelings from corporate employees. Indeed, some in the audience felt that by sponsoring the session TEI was allowing the Trojan Horse into Troy. Others agreed that, by understanding outsourcing and its causes, the tax executive can influence and direct his or her firm's outsourcing of taxes.

This article--by two of the panelists--summarizes the principal points that were made during the conference session. It provides a brief description of outsourcing and its roots, discusses how poor communications may increase the likelihood for outsourcing, and describes how the tax executive may better approach the issue of outsourcing to do a more effective job of managing the tax function of the company.

1. The Views of a Senior Tax Executive

   Professional journals note that more and more companies are turning to outsourcing for assistance in managing some or all of their internal operations. This practice of outsourcing means handing over a corporate function to a firm that specializes in that function. Anita Micossi's article "Farming It Out" in Enterprise Magazine states that outsourcing has always been a logical option for non-strategic areas such as payroll processing, public relations, building maintenance, and human resources. Recently, outsourcing has become a more visible concept as companies turn to it in operational areas, such as engineering, logistics, design--and tax. Some companies are signing multiyear, multimillion dollar deals divesting themselves of operational functions deemed not strategically vital. Hechinger's has outsourced the entire corporate tax function; Montgomery Ward has outsourced most of its tax positions; and British Petroleum has outsourced a significant portion of its tax compliance work. Other companies are actively exploring plans to outsource part or all of their tax function.

   1. Overview

      The "trend" toward outsourcing is being driven in part by the revolution in information technology, which has turned many corporate activities into routine functions. Traditionally, outsourcing was standardized and defined by boilerplate contracts of limited duration. In the past, managing information flows and completion of tasks was more difficult when an outside firm did the work. Today, however, successful outsourcing engagements feature customized agreements between organizations that permit company personnel to spend more time using the technology to advance business objectives, and less time on day-to-day tasks.

      Outsourcing is not a Trojan Horse. It is an outgrowth of the current business environment of total quality, reengineering, peer review, and benchmarking. Outsourcing is just one of the options available to companies. The question is whether it is the right option for any particular company and what process should be followed in making that determination. The key to the answer is good communications.

      There are many ways of asking, "Are you sure that you are providing the best service to your clients?" Without an ability to communicate and communicate well, the tax executive is limited in his or her ability to answer the question and, therefore, effectively to serve his or her clients (including those to whom the tax executive directly reports and the company's operating groups). The good communicator is not threatened by outsourcing because outsourcing is merely one vehicle for the tax executive to consider in providing management with good advice. In other words, the tax executive is an integral player in the outsourcing decision. Indeed, any outsourcing should be furnished only upon the recommendation and initiation of the tax executive. Poor communicators, on the other hand, may feel endangered; they may be denied the opportunity to pose, let alone answer, the question. The solution is for them to become better communicators; they need to evaluate and enhance their roles within their corporate cultures to ensure that they are an integral part of management's team.

      Do you feel appreciated? Do you have adequate resources? Are you well compensated for your efforts? Many tax executives answer these questions "No." It is no surprise then that these tax professionals view the current phenomenon of outsourcing as a threat to their continued employment. In today's world of downsizing and reorganizing, every successful employee must make positive contributions to the corporation. Good communications skills are essential to success in any organization. Employees who do not add value--or who are viewed as not adding value--to the shareholder may be perceived as, at best, a necessary evil or a "black box." As a consequence, they stand a good chance of being outsourced.

   2. Communications Is the Key

      How can this situation be effectively addressed, if not remedied? Many tax professionals do not talk in terms their CFO and CEO understand. They talk about Code sections, regulations, and court cases. They provide options with no recommendations, or recommendations out of sync with management's strategic goals. They offer no suggestions on how to achieve management goals with the best results and minimal risk. Upper management understands and is interested in earnings per share, cash flow, financial statement presentation, and level of risk. With these things in mind, plain language should be used to advise management on the best choice, including what trade-offs may be involved in taking a specific tax position (i.e., possible erosion of earnings or cash outlays in the short run that will be more than made up in the long run).

      It is no surprise that corporate tax executives with poor communication skills feel put upon by upper management. Frequently, they have insufficient resources and work long hours. When they talk, management's eyes may gloss over. They receive no positive reinforcement for the tax function from their supervisors. They become negative in their responses to management, which aggravates the relationship between the tax department and senior management. As a result, management is even less likely to consult with them in planning and decision-making, and that further isolates the tax function from the core business.

      The focus on outsourcing in today's business climate can be viewed as either a threat or a wake-up call. The latter makes more sense. The outsourcing phenomenon gives the tax executive an opportunity for greater and more open communications with upper management. If the tax executive brings the subject up--or seizes the initiative-he or she can frame the debate. The tax executive can point out the many benefits provided by the corporate tax...