Watching the constant movement of CFOs in multinational organizations over three decades, it is a fact these executives are constantly tested with the decisions they make for companies. What I will share with you in this article are patterns that have occurred again and again as CFOs make decisions on building a strong inhouse tax organization or outsourcing the tax function. The purpose of this article is to share valuable insight learned from the many experienced CFOs and Tax Executives I have had private discussions with over the years. The goal is to educate corporate executives by learning from those who navigated challenging markets before them.
Foresight is a very valuable tool because it provides lessons learned from hindsight. The examples provided in this article are the lessons I learned from numerous experienced CFOs and Lead Tax Executives as they navigated challenging times. What qualifications do I have to share this knowledge with you? View our accomplishments along with our great team at this link: View Our Clients Here.
Historically, since the 1930s there have been 14 recessions but for the sake of this article my discussion involves what I learned working through the last four recessions with CFOs and Lead Tax Executives. Here are the four markets our team worked through over the years, and in all these times we had to adapt to succeed.
The Gulf War Recession (July 1990 – March 1991)This was a result of the Gulf War and its effect on oil prices and the savings and loan crisis. It also greatly impacted small local banks and put many of them out of business due to rising interest rates in response to growing inflation.
The Dot Com Recession (March 2001 – November 200) This recession occurred when tech IPOs and stock prices became grossly overvalued. The recession started when the stock prices of internet companies crashed as the Fed began raising interest rates in 2000.
The Great Recession 2008 (December 2007 – June 2009) This recession was triggered by the subprime mortgage crisis and the collapse of the U.S. housing bubble. In 2007, subprime lenders were filing bankruptcy due to bundled bad mortgages loaded with borrowers unable to repay. Major financial firms went bankrupt, the stock market fell which triggered a global recession.
The Covid – 19 Recession (February – April 2020) is when more than 24 million people lost their jobs in the U.S. The stay-at-home orders by the government had an impact on businesses that is greater than any previous one. Tax and financial teams ahead of the curve on the adoption of software and technology were able to adapt and rebound more easily.
What We Learned From Our Private Conversations With CFOs and Tax Executives
It is valuable for today’s corporate tax and financial executives to be aware of and learn the lessons of generations of CFOs and Tax Executives before them. The focus of this article is to educate management as they contemplate whether to insource or outsource the tax function. CFOs are often weighing how to cut costs in the company to positively impact the bottom line. The lesson we have learned many times over is the most successful companies have a CFO and lead tax executive who work closely together. These two executives are in sync where a CFO do not make a business move until they have run a deal by their tax executive first.
Many CFOs have privately called to ask me to find a Head of Tax to help them out of a tough spot they got themselves into with an acquisition. If the deal would have been structured properly in advance they could have saved themselves millions or even a billion. However, the deal was so secret they did not think to get the advice of their lead tax executive or tax counsel first. It is usually a mistake inexperienced CFOs make once and learn their lessons the hard way.
With a CFOs focus on cost reduction, we often find that in hindsight they realized they “threw out the champagne with the cork” when they elected to shut down their internal tax team and outsource the entire tax function to an outside firm who was not privy to the deals they were working on. Additionally, some CFOs simply do not understand tax and forget to bring their tax executive to the table. This results in bad financial business decisions for companies. The smartest CFOs always have their tax executive look at the deals first so they have a thorough understanding of the impact on the business. I know of several tax executives who have clawed back billions of dollars in tax savings that would otherwise have been lost forever.
Know what the pros and cons are when making the very important decision to build a tax organization within your corporation or outsource the tax work to a firm. When you have a first-row seat how CFOs react to cost cutting with internal corporate tax and accounting teams during four recessions, you see patterns that provide valuable insight. These private communications are insightful and enable you to make more informed decisions about the actions you take whether to insource or outsource your corporate tax function. Here are quotes of private conversations I have had over the years.
“My CFO has been fantastic to work for since he has given me everything the tax function needs to be successful for our organization. Our success is due largely to the fact that our C Suite executives see us as a “profit center” and not merely a compliance shop. We have proven to them what the opportunities are with strategic, thoughtful tax planning and we implement these strategies. The outside big firms can come up with tax planning ideas, but they do not implement these tax savings strategies. You must build internal relationships with the subsidiaries to be successful. We have improved our corporations bottom line time and time again and are known as a significant money maker and profit center. The fact that we discovered smart tax savings strategies and opportunities and implemented them has had the biggest impact on our bottom line for all stakeholders. Our CFO has told me that building a tax function inhouse has been the best move we have ever made as an organization.”
~ Head of Tax, 7B+ Multinational Media Corporation
“When I was first hired by this company, I had a CFO who wanted to outsource the corporate tax function to cut costs and overhead. In the end, he realized it cost us much more to outsource the tax work by the outside firm and they were big bills. Honestly, it all sounded like a great strategy to outsource the tax function as the Business Development Partner who sold us on outsourcing the work was very polished and successful in courting us. It all sounded so perfect in the beginning but eventually turned out to be a bait and switch and dog and pony show. The staff turnover was very high on our account with new people who had to relearn what the previous staff person was doing. We were charged for the same work over and over time and time again. We even found a huge data entry error that was being implemented for several years and we were charged millions of dollars for work done incorrectly by this firm.
~ Chief Tax Officer, 2B+ Multinational Manufacturing Corporation
“My son and daughter both took the career path of starting with a Big Four firm and it is very different from my experience twenty years ago when I was employed by the same firms. With both of my children working in the BIG Four with less than 2 to 3 years of experience, my son and daughter were training staff in other countries how to prepare tax returns. They barely knew how to do the work themselves, yet they were training staff in a foreign country struggling with another language how to do the compliance to prepare tax returns. In my opinion, their training was insufficient and one has already exited a big multinational accounting firm. Now when I am outsourcing work to these firms, I do not have 100% confidence in the work being outsourced. This new generation entering the tax and accounting profession is looking at spreadsheets and data without really knowing what it truly means or have an understanding where these numbers come from in the business and how they flow through. Mistakes will happen!”
~VP Tax, 10B+ Multinational Corporate Tax Organization
“I have managed both inhouse and outsourced tax departments. You will discover your mistakes more easily when you have an inhouse team because they will have a better understanding of the business operations. However, when the work is outsourced to people who do not have knowledge of the company operations, you are likely to find things that were overlooked because the person who did the work did not understand it.”
~VP Tax, 1B+ Business Services Corporation
“When I first arrived we decided to retire early tax department management who had been in place for many years. We decided to go with a firm and outsourced our tax function. I do not know a thing about tax and decided this outside firm would handle everything for us. Everything seemed great in the beginning when we signed a contract with the firm. The Tax Partner assigned to our account left for another firm and the work went downhill from there. Eventually the expensive bills the firm sent motivated us to bring tax inhouse one again. We started the inhouse tax function from scratch again by organizing it all online with a great Tax Calendar.”
~CFO, 1B+ Technology Company
“We developed a hybrid tax function that suit our needs. Having the experience of start-up tax department with just myself running the tax obligations to a tax function with more than thirty people, I kept what was important inhouse and outsourced to experts in specialty areas. For instance, we have outsourced to an Opportunity Zone expert and benefited greatly zeroing in on these tax advantaged opportunities. We have also outsourced projects on refundable tax credits and incentives, grant applications, property abatements, and expatriate tax returns to expert boutique firms like Global Taxes, LLC or 1040 Abroad.
~Head of Global Tax, 7.5B+ Internet Services Company
“As the CFO stepping into this new company, my Head of Tax followed me. We could not find tax staff as we were building out the tax department so we invested the time to train them. They are loyal and engaged because we invested in their education. We paid for their Masters in Tax education, and they appreciate it.
~ CFO, 2.5B+ Technology Spinoff
“Our company is in the range of 70M and we have outsourced the entire tax function as it works for us. However, as we have grown over the past few years into multiple states and new markets, we are now looking at bringing the tax function inhouse.”
Managing Principal, 70M+ Software Company
“There is no investment in the lower-level staff anymore. We do not train as much as we did previously in the firm. It is more of a sink or swim attitude with lower-level staff. This is all due to the high level of turnover at the staff level. It is a completely different mindset at the lower levels today since they do not want to put in the work we did to learn and to succeed.” ~National Tax Firm Principal, Top 20 Firm
“As a Tax Partner with a Big Four firm, we do have high expectations of our staff. Admittingly, the turnover is so high at the staff level we just do not have the time we previously had to mentor our staff. With turnover as high as 35%-40% annually at the staff level, we have trouble keeping them. Many of the exit interviews on these staff level employees describe the work environment as too many hours and they decide to leave the profession altogether. There is no interest in making the investment in training staff while we keep our heads above water doing the work for clients.”
~ Big Four Tax Partner
These are just a few of the conversations we have shared with CFOs and Tax Executives. There are thousands of conversations that occur every day like this on these same topics. We know that tax organizations are changing and the corporate tax departments of the future will look very different from those of today. My advice to every CFO is to give your tax leaders all the support they need to build a strong internal tax department and outsource special projects to tax services experts who are specialists in their respective areas. By all means get organized with a TaxCalendar so you can track everything going on with your inhouse tax function.
Conducting a search for a talented corporate tax executive is one of the most important actions you will take for your organization. If you are seeking to find the very best in the tax profession, please contact me to conduct a smart and strategic tax executive search. Contact email@example.com or visit the link for more information: https://www.taxconnections.com/tax-executive-search-services
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