Tax automation: What’s the endgame?

Tax leaders evaluating one of the decade’s biggest technology transformations might look to a line from the decade’s biggest Hollywood blockbuster for some valuable insights.

As companies continue to invest in cloud-based enterprise resource planning applications and other systems, tax executives can benefit by looking ahead to assess where the cloud migration journey is likely to conclude. By understanding three likely cloud migration destinations, tax leaders will be well-positioned to work with their information technology functions to optimize the organization’s current and future tax technology investments.

As the migration of enterprise technology to the cloud continues, corporate tax professionals may understandably find themselves asking, “Where are we going?” to borrow a line from "Avengers: Endgame." But the answer to that question is more nuanced than the steady processions of cloud adoption stories and statistics would have us believe. It will take time before most companies conclude their cloud migrations. And many organizations will discover that they are better served by moving some or many — but not all — applications to the cloud.

The ultimate cloud technology model that companies settle on will vary according to several factors. And this variability is causing confusion inside many tax functions. The major enterprise technology vendors have competing visions of cloud technology models, and those plans influence the organizational technology strategies each IT function adopts. It is also important to keep in mind that IT strategies can change, often with little notice, in response to a range of internal and external factors, including business consolidation activity, changes in senior IT leadership, evolving cybersecurity strategy and requirements, and the ongoing impact of new and emerging technological advancements, along with a host of related change management activities.

While tax functions do not set IT strategy, they should understand it, as well as what factors will shape it in the future and how to align their tax technology needs to it. As a result, tax leaders should be able to distinguish among the three cloud technology models and then understand the pros and cons of each and assess how tax management applications work within them. The three models include:

• On-premise;
• Private cloud (sometimes referred to as “on-demand”); and,
• Public cloud.

Cloud migration in context

Many of the largest enterprise technology vendors have been encouraging existing customers to migrate to cloud-based applications for some time. While different vendors promote different approaches (e.g., private cloud versus public cloud), recent survey research suggests this push is working.

Sixty-nine percent of organizations are moving data for large ERP applications to the cloud, according to a report produced by the Cloud Security Alliance. This shift is driven by compelling forces, including the lower cost of maintaining cloud systems, steadily growing confidence in the sophistication of cybersecurity capabilities that protect cloud-based data, and a widespread need to replace a range of outdated legacy systems in some companies.

While emphasizing those benefits as well as other cloud-based computing advantages, a recent McKinsey paper also sounds a note of caution: “[A] large-scale move to the cloud isn’t a matter of merely ‘lifting and shifting’ applications and data from on-premise services to cloud platforms. It’s a complex endeavor that requires companies to build new capabilities. One often-overlooked capability is planning the cloud transition. IT leaders need to weigh the pros and cons of migrating each application or data asset.”

Tax leaders whose functions are considering investments in new supporting technology also should be aware of the pros and cons of cloud migration — and, more specifically, the benefits and shortcomings that various cloud technology “endgame” scenarios typically deliver. Those scenarios often are identified within the IT strategies set by chief information officers and/or other IT leaders, although IT strategies are subject to change for a couple of compelling reasons.

Aging legacy systems mark one driver of IT strategy change as well as cloud migration (another obstacle that can hinder cloud adoption). As companies in many industries square off against digitally born competitors, their IT functions are seeking to replace aging legacy systems that drive high maintenance costs and hamper business agility.

CIO turnover represents a second driver of IT strategy change. As a Wall Street Journal headline noted last year, “Increasingly, the ‘C’ in CIO Stands for ‘C’Ya Later.” The article cites an executive search firm survey in which 58 percent of CIOs at the world’s top-performing companies planned to leave their position within three years or less. As is the case for most newly hired C-level executives, an incoming CIO’s first order of business is to assess and, wherever possible, strengthen the company’s IT strategy. In many cases these leaders are brought into the organization by the CEO and the board for the express purpose of implementing a new IT strategy. Organizations that experience more frequent CIO changeover are also likely to experience more frequent overhauls of IT strategy.

Three cloud technology models

As tax leaders and managers take a closer look at their organization’s current IT strategy, they should understand three cloud technology “endgames” — the architectural framework models that IT functions are likely to rely on as cloud migrations increase and mature. Regardless of which scenario an IT function chooses, it is important for tax leaders to understand the pros and cons of each as well as their implications on tax technology:

• Endgame 1: on premise. Sometimes referred to as “legacy” or, more recently, “classic,” the “on prem” model enables the organization and its IT function to control the entire technology environment, including software and hardware. The IT function is responsible for performing upgrades of hardware and software. This control is more valuable to certain companies and industries. Some retail companies may want to control upgrades so that no major application or hardware changes occur during the holiday season rush (during which a major portion of annual revenue is earned), for example. This control can be a “pro” — in organizations with ample IT resources and dedicated data centers — or a “con” — within companies with more streamlined IT support functions that might struggle to balance all the organization’s upgrades and change requests it receives
• Endgame 2: private cloud. Frequently referred to as “private cloud,” this software-as-a-service model outsources control of the IT infrastructure to an external technology partner while enabling the company to retain control of software and, in the case of tax management technology, content. The private cloud model generally costs less than the on-premise model. This model sometimes, but not always, equips organizations with slightly more flexibility to customize or configure the software compared to the public cloud model. In this model, the IT function manages the change control process of software upgrades provided by the technology partner and determines when those updates occur. As is the case with the on-premise model, this type of in-house control may be viewed as a pro or con, depending on the degree to which the organization and its IT function can effectively and efficiently manage software and tax content updates.
• Endgame 3: public cloud. In the public cloud model, the external technology partner manages the hardware and the software. The organization essentially has no, or limited, control over whether — and when (e.g., within a three-week period) — to perform upgrades. This model may not work in organizations with rigorous IT risk management processes that require unique change control activities. Cost and the speed with which upgrades occur tend to be the two most prominent advantages of the public cloud model.

How hybrid helps

As tax leaders evaluate their tax technology needs, it is helpful to assess the organization’s current (and potential future) business models, consider what major strategic events may be on the horizon (e.g., consolidation activity), and understand how IT strategy supports the business model. All these high-level factors influence current and future decisions about ERP systems. It is important to not only recognize that the current IT strategy is prone to change but also to be prepared to respond to that change.

If, for example, the company uses an ERP vendor that favors migration to a public cloud model, the tax technology that integrates with the ERP system should also be able to thrive in a public cloud model. The same holds true if the IT function prefers an on-premise or on-demand ERP model. In this way, a tax management system should be “hybrid-cloud-friendly” — that is, able to exist within the three cloud technology endgame models while producing the exact same calculations: on-premise, private cloud and/or public cloud.

As the cloud migration continues, more IT and business executives are concluding that a one-size-fits-all approach to cloud technology is not optimal for their company. In many complex enterprises, all three models may exist. Enterprise software, including tax technology, therefore should align with the current IT strategy while also being able to accommodate changes to that strategy — and the cloud models it favors — without requiring a heroic change effort. By maintaining the flexibility to deploy on-premise, on-demand or in the public cloud, tax technology needs to sustain its support and maintain its value no matter what other changes the universe has in store.