What management expects: evaluation of the tax department and its executives

Tax Executive, The, Jan-Feb, 1996 by Raymond F. Douglas, Patrick J. Ellingsworth, James P. McAndrews, III

For the past several years, Tax Executives Institute's Corporate Tax Management Committee and its counterparts in the local chapters have undertaken activities and programs focused on what management expects of, and how it evaluates, the tax department and tax executives. In this article, the committee summarizes the data developed from these activities and analyzes its significance and implications.

Introduction

As a result of intense global competition, controlling costs and assessing effectiveness and value of operations are omnipresent factors of daily life in business.(1) In this context, corporate staff functions are increasingly subjected to scrutiny, reorganization, and sometimes elimination.(2) Determining and proving the tax department's value to a company is no longer a once-a-year exercise of listing accomplishments; rather, it is an inherent part of daily management.(3)

While evaluation as both a discussion topic and an essential job responsibility has become constant, information on how performance evaluations of tax departments are conducted is not readily available. Tax involves both knowledge- and technology-based sets of tasks; this area has lagged behind the more process-based tasks of a business enterprise in evaluation techniques.(4)

Traditional evaluation of tax department performance is fairly subjective in approach -- the computation of theoretical tax savings; avoidance of surprising tax or accounting deficiencies or losses; and integration of the tax function into the business-planning process. The language used in many of the "modern" evaluation systems -- under the rubric of reengineering, 360-degree feedback, benchmarking, and the like -- focuses on different approaches to value. Information about these approaches is critical for tax executives, since an alternative to providing value in the newly measured ways is outsourcing.(5)

The solution to the evaluation process is often stated to be "better communication of the department's value." This is certainly accurate, but it raises the question of what factors the persons to whom such communication is directed regard as indicators of positive value. The content of the value concept for the tax department in the reengineered workplace is a topic on which there are many opinions and impressions, but not a lot of data.

To help develop information regarding evaluation, TEI's Corporate Tax Management Committee surveyed TEI's membership on various aspects of the process as actually conducted in their companies. The committee also sponsored sessions with the principal evaluators of tax departments -- Chief Financial Officers -- at which they expressed their expectations of the tax department, as well as their thoughts on evaluating the function. The information gathered from these sources suggests some plain, albeit not highly specific, trends in respect of expectations and performance evaluation. These data are not statistically based, but nevertheless provide concrete evidence of directions and ideas.

Committee Survey

In March 1995, the Corporate Tax Management Committee prepared a survey to solicit information from member companies regarding the processes and measures for evaluating the tax department. The survey was submitted to each TEI chapter, with the request that it be forwarded to the companies represented by the membership; a few chapters consolidated their members' information into a single-chapter response.

The survey questions addressed:

* The regularity of performance evaluation of the tax department;

* The specific measures or targets taken into account in the evaluation;

* The extent and nature of benchmarking activities and pursuit of "best practices" in the tax department;

* Specific questions related to the use of the effective tax rate as a measurement of tax department performance, and whether business managers are judged on pre-tax or after-tax results; and

* Use of outside consultants to critique tax department effectiveness.

The questions were open-ended, not only to gather objective information about practices, but also to elicit descriptions of those practices, their usage, and unique features.

The Corporate Tax Management Committee received 47 company and 5 chapter responses to the survey. The responses were summarized to ascertain if there were any clear trend lines that would show how performance of the Tax Department is conducted and measured.(6)

Central Trends

The following trend lines were apparent in the survey responses:

* Tax department performance is internally reviewed in every case;

* Internal statements of objectives and goals are consistently used;

* Principal factors mentioned in stated objectives focus on tax planning, tax savings, IDR responses, and costs;

* Business units are judged mostly on a pre-tax basis;

* Little benchmarking or work with "Best Practices" is being conducted;

* Third parties are rarely used to evaluate the tax department.

Implications of the survey responses are, as follows:

* Objective external measures of evaluation or measures based on third-party comparisons are difficult to find;