Creating Value in the Corporate Tax Function Through Benchmarking

By Cheryl Anderson, MBA, MST

Co-Editors: Steven F. Holub, CPA; Jane T. Rubin, CPA

Today’s tax departments are required to balance day-to-day operations, changing tax laws, and regulations with limited resources and constrained time lines. Compounding those challenges is increased regulatory scrutiny requiring more transparency and currency, which in turn requires greater data accuracy and internal controls. These challenges are driving a change in how the corporate tax function should operate. The tax department is now required to collaborate more effectively with finance and business management and play a larger role in higher-value business activities. To meet these expectations, tax executives need to develop new capabilities among tax teams to perform the higher-value activities while still performing their traditional core functions.

In a 2007 CFO Research Service survey commissioned by the accounting firm Ryan, senior corporate finance and tax executives identified five key challenges in which high-value activities are giving way to low-value demands.

1. Lack of alignment: Finance and tax executives disagree on the sources of business value; finance executives feel that tax is focused on technical tax matters and not on strategic business activities.

2. Increased requirements and complexities: External factors such as corporate governance, new accounting standards, and regulatory scrutiny, and internal factors such as globalization, add to the tax department’s already overwhelming burden.

3. Resource scarcity: Tax leaders are pressured to do more with fewer and in some cases less-talented resources.

4. Risk management: Senior financial management is not confident of the tax department’s ability to measure and mitigate tax and business risk.

5. Data integrity: Decentralized, redundant, and unreliable data continue to inhibit the efficiency and effectiveness of the tax function.

These challenges create pressure on the tax function and serve as a catalyst to prompt businesses to review their current approach to tax management. Benchmarking can be a powerful assessment tool to help identify best practices and build a case for transformational change. Companies that conduct a benchmarking study can better determine the effectiveness and efficiencies of their operations.

A benchmark is a measure of best practice performance. A best practice is the most effective and efficient process for achieving any objective or task. Benchmarking refers to the search for best practices, with emphasis on how to apply the processes to achieve superior results. Components of benchmarking include evaluating and measuring current processes, conducting a study, evaluating gaps in processes, and adapting and implementing best practice processes.

Evaluate and Measure Current Processes

Benchmarking asks, “What is the tax department now, and what does the tax department wish to be?” In order to understand the status quo, a tax team needs to have a thorough knowledge of the processes under review. The goal is to collect enough data about the processes to be fairly certain how change would affect performance. Although current processes may be documented for Sarbanes-Oxley Act §404 purposes, the team may find a disparity between the documented and the actual processes. It is necessary to understand the context of the practices and their dependencies (those practices that are subordinate to or dependent on others) in order to position the team to effectively evaluate the practices. Measures and metrics will allow the determination of the present level of performance. But metrics must collect accurate and complete data that measure the appropriate thing, because this first-time documentation process will set a baseline for future comparison and continuous improvement.

Conduct the Benchmark Study

Next, select potential companies with which to benchmark. A tax department may choose to compare itself with a peer, a group of peers, or even itself over time, but it must select companies that are willing to cooperate in the benchmarking process. A code of con-duct can help avoid potential problems and misunderstandings, protect confi-dentiality, and facilitate information exchange. Whether using surveys or interviews, the team must clearly understand the scope of the benchmark company’s projects, success factors, challenges, and opportunities.

A simple approach of “what was done right” and “what was done wrong” will drive the dialogue. Learning from the successes and struggles of another team is fundamental to the success of the benchmark. This can be accomplished with a questionnaire that focuses on the specific information desired. The questions should be designed to discover common practices and characteristics among the potential benchmark companies. A survey is not by itself benchmarking. While a survey may provide interesting numbers, benchmarking is the process of finding out what is behind the numbers and applying the best practices identified to the organization or task.

As plans for the benchmarking study develop, consider the following: Comparison with a similar company may be helpful, but it may also be of limited benefit. It is important to look beyond a specific industry to find where processes may be similar but well executed. An industry can also learn and adapt a similar process from a totally different industry. For example, customer surveys from a hotel chain indicated that there were long waits for hotel rooms. The hotel chain benchmarked the admittance process of hospital emergency rooms and as a result was able to reduce check-in times and develop many more process improvements.

Do not make the mistake of copying another tax team’s solution verbatim. Adapt and customize those solutions to meet the necessary requirements of the company performing the benchmarking project.

Evaluate Gaps in Processes

Once the data have been gathered, define the tax department’s goals. Valuable information can be gained when comparing successful work processes, inputs, and outputs of one tax department with those of another. Identify the procedural differences between an outside company and the benchmark company to understand why there are differences. Then evaluate the gaps between the performances of the two companies. Do not ignore the culture and circumstances or neglect the best practices that have worked in the past.

As the documentation continues, it is beneficial to assign a value to each process. This allows a tax department to see if certain measures are appropriate or cost effective. Transformation efforts have associated costs as well as benefits; the fact that an improvement has been identified does not mean it should be adopted. Identification of alternative practices should be followed by objective measurements. Definable measures of efficiency and effectiveness must be clear in order to determine whether one measure may create a conflict for another measure. Remember that the goal of benchmarking is to improve the process, not necessarily to be like everyone else.

With low-pressure demands pushing aside high-value activities, it is important to understand how corporate objectives, departmental realities, and the current state of the business affect decisions. It is in the team’s best interest to develop evaluation criteria for prioritizing improvement opportunities. The team should also develop a business case based on investment return to justify the need for additional financial and human resources.

Implement Best Practices

After the best practices have been identified, they must be implemented. Start with the identified best practice opportunities. Provide recommendations on how to implement the best practices, recommend resources required, establish a time line, and list the necessary financial resources. Key factors for a successful implementation include buy-in from everyone involved and measuring the success of the transformation efforts. The outcome of these efforts is useful for future initiatives, and it can work as a scorecard on the effectiveness of the leadership heading the improvements.

A Case Study in Benchmarking

The benchmarking experience includes areas such as shortening cycle times for tax return preparation and IRS audit examinations; Sarbanes-Oxley §404 documentation, implementation, and testing; listed transactions; enterprise resource planning system design and implementation; and other miscellaneous compliance processes. The following describes the strategies and approaches behind the successful shortening of cycle time for federal income tax return preparation based on one tax depart-ment’s actual experience.

The first tax season after joining a Fortune 100 manufacturing company, a director observed that staff were still working on the company’s tax return the night before the due date. Shortly after the return was filed, the director began to oversee federal income tax return compliance and mandated that the tax return now had to be completed three and a half months before the due date. The director began benchmarking against existing processes and applying best practices. First, redundant and inefficient processes were identified and eliminated. Task dependencies were identified, acknowledged, and prioritized to increase efficiencies. Using a project management tool, the details of each task in the tax return preparation process were documented and, based on survey information and other compiled data, evaluated to determine the best practices to use as benchmarks for the process.

When an individual was ready to prepare a tax adjustment, the project plan anticipated advance data requests so that the data were available when needed. In the past, a data request was generated, and the task stalled while waiting for the information.

Resources were assigned to each task with an allotted time to complete the task. Responsibilities were rearranged so that one person would not be overburdened while another was underburdened. Next, the value and need for technology were assessed for labor-intensive activities. A web-based survey was developed for the research and development tax credit process; as a result, compiling survey recipients’ e-mail addresses was reduced from an 80-hour manual task to a half-hour electronic task.

Reports were designed to track the project’s progress. The reports showed who was doing what and when so that the team would know if the return was on target. The team met weekly and reviewed each project’s status; everyone was held accountable for specific tasks and would share the status of each contribution. This was also a good forum to identify and resolve problems. Wherever appropriate, the project plan was modified and expanded.

This 100% accountability approach was very successful, and the competitive spirit of the team prevailed. It was truly a team effort—when a team member needed help, others pitched in to do whatever it took to complete the task. The team functioned as one and realized the goal of completing the federal income tax return on schedule. As a result, there was more time to conduct internal and external reviews, and the state income tax preparation process could be started earlier. In retrospect, the company was well positioned when Sarbanes-Oxley §404 requirements came into play.

The first time a team takes on a project plan of this magnitude, it will take a significant amount of time. Team members will need to conduct the benchmarking exercise while continuing to perform their regular jobs. The team must embrace the additional work and make it happen, with a view toward the resulting benefits.

Getting the Most from Benchmarking

In this case study, benchmarking helped to determine the reference point and standard from which future improvements would be made. Benchmarking became an ongoing process of continuing improvement. The team began with a plan of how to perform the work and followed the plan to produce results and measurements, which resulted in lessons learned and contributed to the next planning activity.

In benchmarking best practices of the federal income tax compliance function with other companies, the following information may be helpful. When starting a benchmarking project, start by defining the objectives. Ask what is to be learned from the project. Then identify companies to benchmark with, set the agenda for the initial benchmarking meeting, and create questions for feedback. Areas that might be considered in a tax department questionnaire include the company’s organizational structure and the tax department organization chart (both domestic and international). Obtain an understanding of the organization’s planning processes, such as mergers and acquisitions, local foreign-country practices, global issues such as federal tax credit limitations, subpart F income, repatriation, financing, and intangibles, to name a few. Ask about the tax risk analysis tools in areas such as accounting for income taxes under FAS 109/FIN 48, transfer pricing, and Sarbanes-Oxley §404 compliance. Formulate questions about federal and state income tax compliance and about federal, state, and overseas audit defense.

Some items for consideration may include competent authority issues, advance pricing agreements, and alternative resolution methods. It is essential to understand the company’s enterprise resource planning and other systems. Also, ask for explanations of any other processes that may be considered best in class—for example, contract reviews, formalized legal entities reviews, and tax department operational excellence reporting.

Before the first benchmark meeting, send participants a cover letter confirming the date, time, and place of the meeting, the names and titles of company attendees, and the list of specific questions for consideration. During the meeting, ask for explanations of what went right and what went wrong. People tend to be very open about both successes and failures, and the team will gain much from those experiences. Follow up after the meeting with a thank-you letter summarizing the key points. Always summarize the meeting’s results and primary lessons for the benchmarking and management teams. Throughout the process, it is important to report and present progress made in connection with benchmarking activities.


In ever-changing times, the tax function will constantly be exposed to a fluctuating business environment that makes best practices a continuously evolving and dynamic process. This should not be a one-time effort but a cultural shift that adopts a best practices mindset. Implement a successful communication plan that solicits regular feedback from stakeholders for perceptions and measurement of tax department performance. Continue to constantly monitor the changing needs and objectives of the stakeholders. Regularly communicate tax department goals and prioritize transformation initiatives. Benchmarking and implementation of best practices will lead to a greater appreciation for the tax function and allow every tax department to make a higher-value business contribution.
Editor Notes:
Steven Holub is a partner in Cherry Bekaert & Holland, LLP, in Tampa, FL, and is a former chair of the AICPA Tax Division’s Tax Practice Management Committee. Jane Rubin is with Educational Strategies Co. in St. Louis, MO, and is the chair of the AICPA Tax Division’s Tax Practice Improvement Committee. Cheryl Anderson is director of Federal Income Tax Practice at Ryan in Boston, MA.

For more information about this column, contact Ms. Anderson at
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