Podcast transcript: How one acquisition sparked a co-sourced tax revolution

Introduction

Moderator, Simon Hobbs

This is the EY podcast, “Tax and Law in Focus” – ideas for leadership from one of the world's most successful C-suite advisors. I'm your host, Simon Hobbs, in California. And today, tax meets television. Discovery is best known to many for Shark Week. But it's nothing less than a TV juggernaut, delivering 8,000 hours of original content each year to virtually every single country on the planet. Now that's been turbocharged, with the launch of Discovery Plus, its new direct-to-consumer internet streaming service, streaming the greatest collection of real life.

Discovery’s channels range from Food Network to Animal Planet to Motor Trend. Its alliances from the PGA Tour to Oprah Winfrey's Channel Own. But in 2018, Discovery made headlines of its own, paying $12 billion to acquire rival Scripps Networks. Instantly, Discovery became the world's largest non-scripted factual media company.

Discovery’s tax leader had, however, already seized his opportunity. Rather than a traditional merger of two tax functions, Todd Davis won support to totally reimagine a new tax operation – agile and dynamic enough to keep Discovery at the cutting edge for decades. Todd decided to place three quarters of his own staff at the heart of a new co-sourcing agreement with EY. In the process, Todd Davis became an industry first mover.

Please remember, conversations during this podcast series should not be relied upon as accounting, tax, legal investment, nor other professional advice. Listeners must consult their own advisors.

Hobbs

Todd Davis, EVP at Discovery, its senior tax counsel, joins us now from New York. Thank you, Tom for sparing the time. Good to meet you.

Todd Davis

My pleasure.

Hobbs

Also joining us from New York, Alan Luchs, EY’s global media and entertainment tax leader, who made Todd's vision work. Alan, welcome. This was a big project for you, hey?

Alan Luchs 

A tremendous project and a tremendous opportunity. And we’re really hopeful that folks listening in today will really see the kind of creativity that we invested in this.

Hobbs

Todd, why don't you kick us off with how you personally think about the scale of the existing Discovery business. And of course, the recent launch of Discovery Plus. Which, clearly, you guys hope is going to be a game-changer.

Davis

When I was thinking about joining Discovery, I was really surprised at how global a company it is. I had no idea we are in 220 countries and territories. We broadcast in about 50 languages. We have a physical presence in probably 40 or so countries give or take. So we really are a truly global media company. We're everywhere. And a lot bigger than I think a lot of folks in the US probably recognize. We usually have one of the top positions in most of the markets that we're in.

Hobbs

So how would you describe the complexity of the Discovery tax function, which is obviously your bread and butter?

Davis

Going right along with that, we have a tax function that's located around the world. Now, of course, with EY we're even more global. But we deal with all of the issues that are right at the center of a lot of the tax world right now. We're an IP-based company, we're a multinational, we license our content and distribute it around the world. So we're really wrestling with all of the issues that most multinational companies are dealing with, as well as local country issues around the world too.

Hobbs

Alan, the truth is, of course, that the tax landscape for your industry was already changing long before the Scripps deal came along for Todd. What change would you highlight as being the most relevant? Digital is the name of the game, right?

Luchs 

Absolutely. I think you can see that most companies have gone from what they call an OTT (over-the-top) model – some people know it as direct-to-consumer – but in this sector, the move to digital is tremendous. You can see, with the Discovery Plus announcement, that clearly Discovery understands how important that is, and is really going into it in a big way, as are all our other clients. What you'll also note, in addition to digital, is that a lot of companies are trying to figure out where they’re going to make their investments, and where they’re going to spend their money. So they do talk more and more about managed services and other types of solutions, that allow them to focus on their product and not their infrastructure.

Hobbs

And from a tax perspective, help me understand: an over-the-top, direct-to-consumer digital offering, is that a very different set of tax considerations than a traditional situation, where you're moving through local cable companies, Alan?

Luchs

Yeah. In general, the sector is seeing this move to digital. I think we all saw during the pandemic there was a real rise in folks who are home and looking for content. The traditional linear method has always been watching it on your TV set. But these nonlinear, direct-to-consumer methods, watching on your computer, the younger generation really enjoys watching it wherever they want, whenever they want. So as a sector, there's been a big move toward this digital model, and all the big players are there. And of course, Discovery’s there as well.

Hobbs

So Todd, before the Scripps deal came along, had you and Alan been doing some groundwork thinking on how ideally you might change things at Discovery? I mean, what was shifting? What were the tectonic plates?

Davis

Some other companies had thought about doing something like what we ended up doing here. So I knew that I might be called upon to answer as to whether we should do this or not. I was looking at this with Alan, but with no real sense of urgency. I had just, in the couple of years since I joined Discovery, built a really, really terrific department. And I'll be honest with you, I wasn't terribly interested in changing that again, until Scripps came along.

Hobbs

Let me take you back, Todd, to the Fall of 2016. I think you'd got the call notifying you that there might be a deal with Scripps, internally, obviously, around Thanksgiving. Is that correct?

Davis

We probably got notified a little bit before that. But certainly, as we got closer to Thanksgiving, we knew that we had a decision to make as to whether to adopt Scripps’s operational headquarters in the US or maintain our own. And that decision was going to determine where my tax function would be. So I knew that I might have to make a very big change. And that's when this conversation got a lot more serious.

Voice over: With the Scripps deal in place, the stage was set for Discovery to begin the process of reimagining how its tax function operates

Hobbs

 Let's drill down on the inspiration for the biggest solution and the formation of that. To come back to the point you're making there, Todd: at its most basic Scripps was based in Knoxville, Tennessee, and Discovery’s HQ was 500 miles away in Maryland.

Davis

That's exactly right. And when the decision was made that we were going to adopt the Knoxville headquarters, whereas my tax function was centered in Maryland, I knew that, unless I did something, I was going to lose my department and have to try to rebuild one in Knoxville. And there's not a deep bench of international tax talent there. Or I’d just completely outsource the function, which is not something I was interested in doing. In talking with Alan about this, finding a way to co-source the function to try to retain my team and work with EY, was the way to salvage a function that I had just build. It really was a defensive move against that decision to change headquarters. It's only later that it became something that I saw positive attributes about.

Hobbs

Let me just layer some more concerns on to that decision. You've told me before, that on the one hand, you feared that change might be disruptive, but that on the other, you clearly had your eyes on being part of EY’s global Service Cloud. Do you remember the first conversations with Alan?

Davis

 Yeah, and that's really what happened. Initially, again, I just was not in favor of disrupting things. Things were working very well, but I knew I was about to get disrupted. So in thinking about how to respond to that, I started thinking about the advantages of partnering with EY and making this function: we're keeping the team largely intact, and at the same time tapping into resources that we just did not have access to as an individual company. Few individual companies can build the kind of global resources that a firm like EY can, so being able to tap into that professional services cloud, and these global resources, was potentially a big upside for doing this.

Hobbs

Let me put a marker down for you, Todd, specifically on something that I know you felt was important. You had major reservations about outsourcing tax work. What did you witness over the years, that led you to a fundamentally sceptical position?

Davis

Years ago, there was a big move toward outsourcing tax functions, as well as other functions. The way they worked was companies would just largely eliminate their internal function and send the work by contract out to a provider. It was sort of throwing the work over the wall, and getting the work product back, and sending it out to low-cost places around the world very far away, to people who maybe don't really know your business or your industry, and it didn't work so well.

So I really wanted to make sure that we did this differently. Making sure that we had a significant portion of our team involved was a big part of that; making sure that we were working, really cooperatively as one team; making sure that we had people who stayed behind at Discovery, who knew and worked with people at EY; and that we maintain the sense of team [despite] people getting pay checks from two different places. But they all felt like they were part of the same team. That was a critical success factor, and something that Alan and I agreed early that we needed to do here.

Hobbs

We'll come back to that again and again, because I understand how important it is to you. How did the detailed vision then become the co-sourcing agreement with Alan? Because ultimately you decided to transfer three quarters of Discovery's tax headcount, along with three quarters of its tax function to EY. Why is that fundamentally so different from an outsourcing deal?

Davis

 First, we had a lot of people who were going to make the transition from being Discovery employees to EY employees, and a lot of them had previously come out of public accounting firms and had made the decision to come to corporate. And we were basically going to be sending them back. We wanted to make sure that we managed how they felt about that, and how receptive they were to just all of the HR issues, making sure that all the compensation packages could be carried over, and that people knew that they were still going to be part of the Discovery team, which is where they’d chosen to be. And getting all that done quickly. Because we had an announcement to make internally: although the decision had been made as to going to Knoxville, that wasn't communicated right away. So Alan and I had a very tight timeframe, to figure out how we were going to sit down with people, when they heard that we were changing headquarters. I wanted them to hear at that moment, if not before that moment, that they were all going to be safe and secure and continuing to be part of our team.

Hobbs

You were determined that, if you did this, it would be a one team mindset. I think that's the expression that you use, correct?

Davis

Absolutely.

Hobbs

Alan, that sounds like a very clear, very strong demand. From a client like Todd, how did you set about doubling down on fostering these stronger connections that seemed to be the priority?

Luchs

We really spent a lot of time thinking about the people side to this. It was critically important to Todd and incredibly important to me. EY is a people organization, and Todd runs his department really focused on people. What we talked about when we collaborated, was how we were going to get the best of both worlds. And I'm sure Todd remembers this. And we talked about this with the folks that were coming over. And when I say the best of both worlds, we were going to bring over people that had worked many years, and had different experiences, and had worked internally and really understood what it takes to run a tax function and to be part of a tax function in a business in the larger group. We were going to bring those experiences to EY. And at the same time, be able to give them better training, be able to give them the global network that Todd talked about, be able to give them some of the things that we could offer. Together, we could really build something that would be unique. I like to say of folks who work only in public accounting their entire careers, that it's kind of like being a teacher at a university – you never really practiced. Bringing those folks over and giving them some of the things that we think we can add, I thought was building the best tax function you could build. And then, of course, we would add technology and tools and things of that nature, that no one company can really offer.

Voice Over: The logistics were in place, and the contract was ready to sign. The cameras were rolling, but the setting for this crucial scene was not your usual office affair.

Hobbs

Todd, what should we make of the fact that you and Alan were still working on the contracts on New Year's Day, huddled around the kitchen table?

Davis

I think we worked at several different tables. But we spent a lot of time out at EY’s Long Island office. I remember a conference room that had food coming in and out at all hours while we were getting this done.

Luchs

New Year's Day finalization was in my kitchen table in Long Island. Todd came over. We were trying to put the dressing on it, if you will, because he had to make an announcement. I think it was around January 6 2018.

Hobbs

Before you got to the announcement, how did you set about successfully selling this internally at Discovery?

Davis

We had a lot going on in Discovery at that time. And fortunately, I've built up enough political capital in the company that they trusted me to make the right decision about this. But it was a big change. The alternative just wasn't very attractive, to have to lose the department that I built, and then go find a new one or just completely outsource. The advantages that I pitched were maintaining the people that we had. We had a great, great team. And we wanted to maintain that. And I knew that, if we executed this properly, we were going to be able to tap into resources in a way that we just otherwise wouldn't have. We had access to the technology resources to upgrade what we had been using internally. The ability to bring expertise to bear on our account as we needed it, to bring people in and out as we needed them to serve the account, really provided a lot of upside that people bought into, and people trusted we would do it. So then it was just on me to make sure we did it well.

Hobbs

To be specific, Alan, on the execution, you ended up matching Todd with the EY tax and finance operate which, at the time, as I understand it, was in its infancy. This was one of the first TFO deals that you did. Can you explain in layman's terms, from your side of the equation, what that is squarely aimed at?

Luchs

When EY refers to TFO, they're thinking about tax and finance operate. What that really means is how do we help companies succeed in helping you in a managed service-type solution? And what we've had to think about here was how are we going to manage the demands on talent? How are we going to think about technology?

As Todd indicated earlier, this whole thing started because of the Scripps deal. But as Todd and I spent more and more time talking through this, we realized there were a lot of other areas that no one company can really invest in. So there were a lot of the triggers for doing a TFO or a co-sourcing type arrangement (I use the term co-sourcing, as well, as I think every company needs to own some aspect of their tax function).

As we started to explore this, we saw that there were a host of other areas where we could bring additional improvement and growth to the practice around technology demands. A company like EY really spends time investing in our tools and our technology, and what we call the global tax platform. We also spend a lot of time around regulatory and legislative issues. We're also dealing a lot with making sure that we give great training. So when Todd and I looked at what things could we add to the team that would make it stronger, there were resources that we could bring to help them in terms of their accounting, for instance. Together, we really built a state-of-the-art team.

Hobbs

There are obviously a number of levers that are embedded in the TFO solution. You mentioned the skill sets. I think you strengthened the areas that were left at Discovery by supplying subject matter professionals. But let me come back to this idea that you're better able to deal with the regulatory and the legislative issues in addition to the technology. That that is key, correct, Alan?

Luchs

It is. It's very important. When he started off today, Todd talked about how Discovery truly is a global company. And what's also unique about Todd, as a tax practitioner, is that he spends a lot of his time thinking about shareholder value and how to create shareholder value. In doing so, he thinks about legislation very differently than some. He thinks about, not how he deals with legislation, necessarily, but how he actually influences legislation. How is he able to get ahead of legislation in order to bring that shareholder value to his company, and our client? Having EY folks in different locations, and really at the helm of what's going on, has made Todd even more effective. We've had instances where their business was growing. Todd will even recall, in one instance, he had mentioned he'd love to talk to somebody in government, and a couple hours later he was meeting with them. I truly believe that this is a big part of what's appreciated by our clients, and what we can bring to the table when we do these CFOs.

Hobbs

Just as a footnote, Alan, it's also important to mention that, in the three or four years since you've done the deal, EY’s enterprise cloud platform – the Global Tax Platform, hosted by Microsoft Azure – has risen to greater prominence. But at the beginning of your deal, that was not such an issue. It wasn't really around then, correct?

Luchs

That's correct. As you indicated earlier, the beginning of our co-sourcing arrangement with Discovery and with Todd really was at the forefront. We were one of the first companies to really embark upon this. Todd's trigger was very specific at the time. One of the things, that I don't even think Todd appreciated, but I think he really appreciates now, is the investment we've made in technology. No one company can invest in technology the way EY has. And the Global Tax Platform is really a big part of that. It's our vision, it's the way in which our firm will operate, for now and in the future, where we can really tie the data directly and automate a lot more of what goes on and be able to really produce items that you've never gotten before. I've been in this business for 35 years. And, quite frankly, as a tax practitioner, when I started, we spent a lot of time trying to sift through financial information and putting it into a tax return format. And 35 years later, that's still the biggest issue. And I think EY is really answering that with the Global Tax Platform. How do we take that data? How do we able to map it? And how are we able to use it to get analytics on the back-end that can help our clients like Todd do planning, and at the same time give us a trail for IRS controversies in the US and controversies around the globe? These are things that have been sorely missing. And I don't think, when we started this, Todd and I really spent a lot of time thinking about that. But right now, he's starting to see what we've been able to produce. Again, I think the firm has made a huge investment that we're starting to be able to cash in on.

Voice over: with the EY and Discovery tax teams aligned, now was the time for the director to call ‘action’.

Hobbs

What stands out for me is that you decided that the action plan had to be executed in six weeks. How did you set on six weeks? That seems really fast to an outsider.

Davis

As I mentioned before, we were going to announce to the world, really, but certainly to our internal organization, that our Silver Spring headquarters was going to be closing, and we were going to be adopting the Knoxville headquarters of Scripps as our new US operational headquarters. When they got that message, everyone was probably going to pick up the phone and start looking for jobs at that point, because I don't think we were going to get a ton of people who wanted to move from the Washington DC area to Knoxville. So I had to make sure that, when we made that announcement – and we had a date imposed on us as to when we were going to – I had to make sure I could get my team together, and tell them at the same moment that we were all staying together, we were keeping Alan, and how we were going to all work together, going forward. That really was imposed on Alan in May.

Hobbs

Alan, how did you feel about the compressed timeframe? Are there workplace studies that indicate that speed is sometimes a useful tool in helping team members better embrace change? I imagine that's a possibility, isn't it?

Luchs

Absolutely. If one of the triggers is a transaction like here, where there was an acquisition, speed is going to be critically important. If there's a change in the business model that requires us to be able to be agile and flexible, and move quickly, we prove we can do it. Remember, we did this in a six-week timeframe, when these things weren't even tested at the time, but we had great people who really knew what they were doing, and our HR team was second to none. They really were able to get the Discovery team's attention. Todd was able to get the right people in his group to talk, and we just worked through it.

It’s a challenge, like any new challenge, but challenges are exciting. And it provides us with opportunity. And we knew what we were creating here would be adjusted along the way. And it has. I think we were able to take it head on. And we both felt like this is something, we can do this a lot. We have a lot of trust working with each other. We've worked with each other for a number of years. I think trust is very, very important in these transactions. I think Todd will tell you that. Over time, we've made some adjustments, but it was a great opportunity that, so far, has resulted in some great work.

Hobbs

Todd, I'd be fascinated to know how you, as a senior executive, feel during the execution of a plan like that? What’s the dominant emotion, and what other areas did you have to get really focused on so that you didn't run into bigger challenges? Were you aware of where most of the effort had to be?

Davis

It almost makes me tremble a little to think back to it. So much was going on, we were doubling the size of our company, we were going through massive change, massive transformation in the company, just broadly. On top of that, my specific function was being impacted significantly. I really expected, and Alan probably did to, to run into a lot more problems than I think we ultimately did. I was focused mainly on two things: the people, and making sure that the people felt good about the transition; and then the work – making sure that we didn't drop the ball on any of the work that we had to do.

And there was a lot of work to do. We were engaged in a company transforming acquisition, which just turned everything upside down, in addition to moving our headquarters in the process of all that. So, making sure that we didn't drop the ball, making sure that people felt motivated and cared about in the transition was critical to me. We did that. Alan and I expected to lose people, and we lost almost no one. People really enjoy working on our account. And they've stayed with it. We've attracted other people, and they wanted to be working on our account as well. We didn't drop the ball in terms of the work, the work all got done, and it got done really well. We learned along the way some lessons about just how to do it well, but nothing that caused any problems along the way. Just, how do you do this? How do you do that?

There were bits to figure out along the way. But I would say it was our best-case scenario in terms of how it ultimately played out.

Hobbs

Let me just pick up a point that Alan made about transparency and honesty. Some people say that co-sourcing, to do it successfully, is like a marriage. You need cooperation and collaboration at the ultimate level on both sides. How easy is it to codify that, so that it works at a very practical level? Because this has to be designed to work long after either or both of you have moved on.

Davis

That's right. I think a lot of it goes back to what Alan said before about trust. He and I have worked together for many years. And we trust one another. We crafted a statement of work that described, as best we could, everything that the co-sourced function was going to do. And we figured out what would be in addition to that advisory work, etc. And we drafted that as best we could. But, at the end of the day, we both had to trust each other. We did. And we do. And that really has worked very, very well.

I don't think he or I are planning to leave anytime soon, so we'll figure out how to make sure it stays when it's a legacy engagement. But I do think it's very, very important for the people at the top of the internal organization – the corporate side of the organization, as well as the EY side of the organization – to work well together and trust one another.

Hobbs

Alan – Todd talks about something that surprised me there, where he seemed to be suggesting that, in the future, if one of you were to leave, and it became a legacy operation, there might be something extra that you would have to do…

Luchs

I'm not sure there'd be something extra we'd have to do. I just think the uniqueness of our working relationship, and the trust we have for each other, has to be consistent with whoever would be in either one of our jobs, to do these things correctly. To have a true partnership, you both have to have each other's interests at heart. When I think of Discovery, I think of making Todd successful, I think of making sure that we're doing all we need to do to make the company successful. And I think Todd equally has EY’s interests at heart. He wants to make sure that he has the best people, and that people want to work on the account, and that they have learning and that they feel appreciated. That mutual partnership respect would need to be replicated. It's a key ingredient to making this a truly, truly successful co-sourcing partnership.

Davis

That’s really not different from most business arrangements. You can have the lawyers codify as much as they want. But at the end of the day, if the two partners are working together and considerate of each other's interests, it'll work. If they're not, it probably won't work. If Alan were to leave, or if I were to leave, we would just have to make sure that the people who are running both sides of this team trust each other and see the fact that they have shared interests in this arrangement. And that's very common in business.

Hobbs

How do you project this around the world? Todd is making the point that Discovery spans 220 territories, 50 languages. Did the speed of adoption vary? Because, in many senses, this is also a parallel to what other business have had to do during COVID.

Luchs

I think one of the two key features about EY is that we operate like one firm. We really do believe that the interests of our clients are the interests of all of our firms. So my ability to get other countries on board wasn't that difficult. Do other countries move at different speeds, in terms of the ability to get things done, or to be able to replicate the vision that Todd and I had, that we were implementing in the US? But the truth of the matter is that EY – especially now we've been in this agreement for about three years – has come a long way.

As a firm, we believe that, in order to be able to serve clients globally, you have to serve them globally, you've all got to be in it. So the firm is prepared to be able to deliver on these kind of services. Between Todd and I, the hiccups were few. In the US, we were able to move even quicker and faster to get to where we want it to be. In some countries, it took us a little bit longer, maybe because there's cultural differences. But we got there.

When we got this deal done, the CEO of Discovery made the announcement about Scripps, and that was after Todd had told his team. His CFO came and met with our tax folks – the new EY folks as well as the folks coming over – and said he wished they had thought of how they could do a similar kind of deal in other areas of finance and elsewhere in the organization. So we've made a real mark within Discovery, around our ability to work and get things like this done globally.

Hobbs

It’s worth punching that out. Todd, what Alan describes is your CFO saying that he was comfortable to further expand co-sourcing deals throughout the business. Three years on, did it meet your expectations, whether that's the operational effectiveness, the efficiency, freeing up time for strategic thinking? Did you get your one team mindset?

Davis

We really did, and this arrangement has exceeded my expectations. As I mentioned earlier, I was sort of compelled to do something like this, I wasn't a big fan of doing it. I've realized a few things: I've realized how good a team we have. Because the people who are doing all this work, and have made this transition, have really done a really fantastic job. I've realized just what the advantages are of plugging into a Service Cloud, services that I never would have been able to have in-house. Having my tax department be co-located in the form of EY, and being able to access all the resources of EY, is really an immense advantage. And, as you say, my CFO has not only said that this has worked really well, but we're actually looking at co-sourcing other parts of the finance function and other parts of the business, because this one has worked out so well.

Hobbs

Alan, how does your experience helping Todd shape your vision of the future? Has it changed the way you look?

Luchs

Absolutely. I believe that EY will be more of a co-sourcing managed service provider to other companies. I truly believe, as Todd said, that there are advantages that a big company like EY can bring around technology-bound resources and subject matter specialists, that no tax department can really invest in at the same pace.

Companies today are looking to be lean, they're looking to make sure that their finance function is focused on the business, not on some of the more standardized tasks. A lot of the arm and leg work could be done by a managed service-type solution. And some of the things we've learned here have already been replicated. We have a very successful practice, our TFO solution is truly number one. We've done surveys out there. And clearly the market is seeing what Todd has described. But, again, I truly believe that the future of the firm, around our tax function, is that we have to be in a position to take on more and more of this work. We need people. We need to continue to invest in technology. I think the Global Tax Platform is going to be a real changer for us.

Hobbs

And Todd, for the other tax leaders that are listening to you now, what piece of advice would you give them?

Davis

Just that this can work. I would recommend opening your mind to this, if you haven't already. I certainly wasn't terribly open to it until I had to look at it. But I've learned that, if done right, it can work really well. You can have key members of your team stay in your function and sort of be the client, and you can have a lot of the rest of the work done by a global team that is EY, and you can tap into all of the advantages that they can bring to bear. It's really the best of both worlds. Again, if it's done properly.

Hobbs

Guys, it's been a real pleasure. Thank you both for sparing the time, that was great. Todd Davis, EVP of Discovery and its senior tax counsel, and Alan Luchs, EY global media and entertainment tax leader.

Luchs

This was tremendous. I loved the experience. I'm glad we were able to get some information out. Hopefully it's helpful.

Davis

Great conversation. Thanks very much for having me.

Hobbs

For more information, visit ey.com. A quick note from the attorneys: the views of third parties set out in this podcast are not necessarily the views of the global EY organization nor its member firms. Moreover, they should be seen in the context of the time in which they were made. I'm Simon Hobbs I hope you'll join me again for the next edition of “Tax and Law in Focus” brought to you by EY. EY, building a better working world.