6 minute read 13 Apr 2022
Two men looking at graphs on computer

Why utilities should reimagine their tax and finance functions

By Darrell Smalley

Principal, Indirect Tax, Ernst & Young LLP

More than 25 years of experience serving clients. Helps clients evaluate their operating model and manage global tax burden.

6 minute read 13 Apr 2022

Tax and finance functions are often viewed through a lens of cost, not value. But new operating models, technologies and skills can offer better results.

In brief:

  • In a survey, leaders in the sector say they face several challenges, including talent shortfalls and lack of a sustainable plan for data and technology.
  • Our five-step process can accelerate transformation, encouraging utilities to determine their priorities and focus areas and then build a road map for change.

Today, amid evolving demands from customers, regulators and shareholders, utilities are facing increased pressure to incorporate more renewable energy generation sources into the business and integrate more digital technology into their operations to deliver safe, reliable energy to their customers. Power and utility (P&U) companies need to innovate while managing risks, managing their workforce and digitally transforming their back-office functions — and they must have capital free to do so.  

Against this backdrop, tax and finance functions have a significant opportunity to distinguish themselves as a function of value rather than as a source of cost. 

Tax and finance functions are often bogged down with repetitive manual tasks and charged with maintaining compliance — but what if instead they could also capture hundreds of millions of dollars in capital that could be freed up for investment?

A confluence of challenges for tax and finance functions

Yet utility tax and finance functions also face an environment of budgetary pressure, constantly evolving technology and regulatory challenges, as well as talent shortfalls. In 2022, an EY survey gathered insights from 1,650 executives around the world to understand how tax and finance functions of organizations are changing. An analysis specifically of the P&U respondents - representing 74 businesses spread across more than 40 jurisdictions- shows that:

• 78% plan to reduce cost of their tax and finance function and 100% are reallocating cost from routine to strategic activities.

• 43% believe digital tax filing requirements will increase the cost of the tax and finance function and P&U companies estimate to spend $12m over five years

• The inability to hire and retain required talent is cited as the biggest barrier to delivering their tax and finance function's purpose and vision.

Repetitive manual tasks and outmoded technology limit what tax and finance functions can achieve. Instead of merely focusing on compliance, they could be a source of value, freeing up capital for investment.

In the face of these dynamics and — at times — competing priorities, how can utilities reimagine their tax and finance functions to drive value across the organization?

With this transition, we will have access to advanced digital capabilities and long-standing tax experience to improve planning and risk identification in today’s evolving business landscape.
Stephen De May
former Duke Energy Senior Vice President of Tax and Treasury

A fit-for-purpose operating model for utility tax and finance functions

Utilities should look broadly across their tax and finance functions now and in the future and address them as a cohesive whole as opposed to siloed competencies. Specifically, companies should:

1. Scrutinize your current target operating model. Now is the time to examine your organization’s priorities around cost controls, high-value activities and risk management to understand how your tax and finance function contributes to your overall business strategy. 

Most of the utility companies surveyed say that they are not spending appropriate time for routine and strategic tasks:

Routine and strategic chart

2. Determine what to build. Keeping tax and finance activities in-house generally requires some degree of internal transformation to improve efficiency of existing people, data processes and technology. Some organizations may decide to keep activities they consider higher value and best-in-class, but they need to be sure they can perform these activities with improved effectiveness and control.

3. Determine what to co-source (or outsource). Some organizations may decide it’s better to co-source some activities, especially those that are more routine such as completion of tax returns, regulatory filings and data collection. It may be that co-sourcing these tasks can be performed at lower costs through centralization or use of third parties.

Utilities

82%

of respondents say they are likely to outsource or co-source in the next two years

Co-sourcing and outsourcing often offers the easiest and quickest path forward to results. A wide spectrum of options exist that would be effective for different P&U companies, but efficiency and headcount reduction — while understandably important — should be approached thoughtfully to deliver greater value, not just cut costs.

4. Find the right balance. The shifting regulatory landscape and sudden technological advances can be a struggle to keep up with in a cost-effective manner: addressing the needs of today with an eye toward tomorrow in back-office functions risks fraying your focus or requires costly investment. Finding the right balance of what to own and what to outsource or co-source enables flexibility so an organization can scale up or down as needed, in response to growth plans or challenging periods.

Getting the most out of a third-party provider requires understanding where in-house resources are best positioned to add value and where their capabilities may be lagging. The options available exist on a spectrum: many companies will decide a hybrid approach is right for them, where they decide to continue to own some tax and finance functions they consider to be critical, while co-sourcing others.

5. Maximize your data. Data is a core component to capturing value from an operation model redesign: how many sources of it you have access to, how much it’s integrated into the operating model through automation, and what level of governance supports the integrity of the data and how well it’s used. Bringing together data with fresh thinking in a co-sourcing or outsourcing arrangement can be a powerful driver of value.

  • One utility’s path toward tax transformation

    In a 2018 press release, Duke Energy Corp. announced a strategic tax relationship with the EY organization and Stephen De May, the company’s Senior Vice President of Tax and Treasury at the time, said, “We are excited to collaborate with EY, offering meaningful development and career growth tracks for employees and gaining efficiencies that will lead to savings for our customers. With this transition, we will have access to advanced digital capabilities and long-standing tax experience to improve planning and risk identification in today’s evolving business landscape.”

    In 2021, Duke Energy Senior Vice President and Chief Accounting Officer, Tax and Controller Dwight Jacobs said: “Our industry is rapidly transforming, and it has been incredibly valuable to collaborate with EY along this journey. We have stretched our team members to grow, we have driven new and better processes together, and we have delivered value to the bottom line. Our collaboration with EY is working.”

A value driver for power & utility companies

Ultimately, the right mix of top-quality people, greater efficiencies through technology and a forward-looking operating model can provide more time and ability to expose value across a company

For P&U companies specifically, opportunities exist in virtually all areas of tax, such as sales taxes and property taxes and beyond— as well as getting plugged into renewables and e-mobility offerings, for example — along with risk reduction and mitigation.

Summary

Realizing the value of your tax and finance function helps utility companies free up capital and better address risks, while cost-effectively maximizing the benefits of both technology and people.

About this article

By Darrell Smalley

Principal, Indirect Tax, Ernst & Young LLP

More than 25 years of experience serving clients. Helps clients evaluate their operating model and manage global tax burden.