Aberdeen Cloud Research Report 2012

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This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research andrepresent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc.and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

March, 2012

Cloud Tax Management for SMBs:

Cost-Effective Measures to Ensure Indirect

Tax Compliance

As an effort to save on hardware procurement and maintenance costs,companies are looking into using cloud or Software-as-a-Service (SaaS)deployments to support their tax management requirements. By using thisremote service, where the tax engine is being hosted by its vendor,companies essentially outsource their tax management responsibility to atechnology entity - where a dynamic database of tax rates constantly

ensures accurate tax calculations for sales transactions across various states,regions, and / or jurisdictions. Some cloud tax solution providers also havee-commerce support capabilities as well, where tax calculations areintegrated seamlessly with online checkout systems.

Drivers for Improved Indirect Tax Management

According to Aberdeen's April 2011 study,Streamlining Sales and Use TaxManagement: Best Practices in Minimizing Audit Exposure, state and localgovernments are increasing their audit initiatives against companies tocompensate for their revenue shortfall. From the qualitative feedback thatwe've received from our tax community this year, not only has themomentum picked up among the auditors, but the expertise among these

auditors is decreasing. This means that companies that are not transparentand proficient in their sales and use tax practices, and are openingthemselves up to any potential fine or penalty that the government issuesthem - with no means of defense or protection. Experiencing governmentaudits can be disruptive to any business, let alone the potential cost of anincorrectly-conducted audit.

As Figure 1 (on the following page) reveals, there is a sharp increase ingovernment audit activity in the past 12 months. And, as expected, the costof negative audit results remains high, while companies continue to strugglewith compliance with various jurisdictional requirements. It is a pleasantsurprise to see that companies have begun to take the concept of

maintaining tax domain expertise seriously, whether these experts reside in-house or are third-party tax consultants. Some additional qualitativefeedback that was received from our tax community includes theprioritization of sales and use tax versus other business taxes within theirorganizations. When looking at tax domain expertise, it would appear thatmany companies are seeking these experts mainly to manage corporateincome tax, and that sales and use tax often earns less priority. What istroubling about this feedback, particularly with what we are seeing in ourresearch, is that state and local governments obtain nearly 30% (usually

Analyst Insight

Aberdeens Insights provide the

analyst perspective of theresearch as drawn from anaggregated view of the researchsurveys, interviews, anddata analysis
http://www.aberdeen.com/Aberdeen-Library/6595/RA-sales-use-tax-management.aspxhttp://www.aberdeen.com/Aberdeen-Library/6595/RA-sales-use-tax-management.aspxhttp://www.aberdeen.com/Aberdeen-Library/6595/RA-sales-use-tax-management.aspxhttp://www.aberdeen.com/Aberdeen-Library/6595/RA-sales-use-tax-management.aspxhttp://www.aberdeen.com/Aberdeen-Library/6595/RA-sales-use-tax-management.aspxhttp://www.aberdeen.com/Aberdeen-Library/6595/RA-sales-use-tax-management.aspx


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Cloud Tax Management for SMBs:Cost-Effective Measures to Ensure Indirect Tax CompliancePage 3

2012 Aberdeen Group. Telephone: 617 854 5200

www.aberdeen.com Fax: 617 723 7897

These companies rely on process and workflow automation to ensurecompliance with state / local / jurisdictional tax requirements. To achievethis level of efficiency, top performers leverage internal and external expertsto ensure proper technology integration and adoption. As a result, theybuild a strong alignment between domain expertise and compliancemeasures that allow for significant reduction in corporate risk profile.

Technology-Driven Compliance

Of the technology deployment methodologies used among organizations,19% of companies are implementing cloud tax solutions, while the majorityare still deploying their tax solutions on-premise. Of the 19% of cloud users,63% of them achieved Best-in-Class status per the key performanceindicators outlined in Table 1, and 47% of them have annual revenues of $50million or less (the threshold that Aberdeen uses to define smallcompanies).

Table 1: Top Performers Earn Best-in-Class Status

Definition of

Maturity ClassMean Class Performance

Best-in-Class:

Top 20%

of aggregateperformance scorers

83% of all audits in the past five years yieldedpositive results

7% of all internal / reverse audits in the past fiveyears revealed overpayments

33% reduction in cost of government auditpenalties / fines for the past two years

19% reduction in time dedicated to addressing tax

errors for the past two years

Industry Average:

Middle 50%of aggregate

performance scorers

50% of all audits in the past five years yieldedpositive results

11% of all internal / reverse audits in the past fiveyears revealed overpayments

3% increase in cost of government audit penalties /fines for the past two years

12% increase in time dedicated to addressing taxerrors for the past two years

Laggard:

Bottom 30%

of aggregateperformance scorers

Lack of ability to track audit progress

Lack of ability to track overpayments

3% increase in cost of government audit penalties /

fines for the past two years

35% increase in time dedicated to addressing taxerrors for the past two years

Source: Aberdeen Group, April 2011

That said, despite larger enterprises with robust Enterprise ResourcePlanning (ERP) platforms that accommodate tax management solutions,small companies with smaller budgets are finding ways to align their taxationprocesses with cost-effective technologies to achieve success.


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tax all together. In general, e-commerce tax, and all sales and use tax,should involve a thorough nexus and taxability assessment before theirmanagement and support initiatives can begin. Of the companies surveyed,48% are using and / or currently evaluating nexus evaluation tools, while37% are outsourcing their nexus assessment responsibilities to third-partyfirms.

To address e-commerce tax concerns, vendors should implement processesand solutions that enable effective visibility and compliance to state, regional,and jurisdictional tax requirements. Tax rates and regulations are constantlychanging, and such dynamic tax environment poses additional challenges tovendors that conduct e-commerce transactions to / from multiple locations.Given the automated nature of online purchases, vendors should evaluatetax management solutions that easily integrate and interoperate with theirexisting e-commerce platforms to further support this automation -providing real-time tax calculations based on applicable rates, facilitating the

consumer buying process.

Performance Implications of Effective Adopters

Table 2 looks strictly at the statistics achieved by the Best-in-Class, IndustryAverage, and Laggard, with no correlations to the performance metrics usedto define them in Table 1. Though it is impossible to establish a causalrelationship between the number of internal audits conducted, and thenumber of government audits experienced, the statistics in Table 3 do seemto support the notion that being proactive has its rewards.

Table 2: Statistics on the Best-in-Class

Maturity Class Mean Class Performance

Best-in-Class

Conducted an average of7.2 internal audits in the pastfive years (self or via third-party) to ensure accurate taxfilings and readiness for potential government audits

Experienced an average of4.8 government audits in thepast five years

IndustryAverage



Laggard



Source: Aberdeen Group, April 2011

"Automation of tax collectionand reporting allowed us tomove from collecting /remitting in 23 states to doingso in all states withoutincreasing staff."

~ Director, Tax Management,The Orvis Company, Inc.


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Key Takeaways

In a dynamic regulatory environment, where tax rate changes are numerousand frequent, it becomes apparent that human capabilities are at a

disadvantage over software automation. Cloud adoption has made indirecttax management easier and more cost-effective to implement across adistributed team, particularly in global transactions where Value-Added Tax(VAT) compliance is critical. Working in all global time zones around theclock, technology has enabled the capture and use of dynamic tax rates toincrease corporate productivity. This increase in efficiency can be viewed interms of staff roles. With regard to billing tax and procurement tax, salesstaff can now focus on selling, and buyers focus on buying. Saving hours ofhands-on tax rate research among their staff, companies can effectivelyminimize resource costs and manually-induced errors.

Companies should continue to automate workflow from tax preparation toremittance. Aggregating all the tax collections from customers and ensuringthat all the numbers are accurately reported can be a daunting task. Byhaving a system in place where people, process, and tools all work in unisonenables the exact tax amount collected to be transcribed directly to the taxforms (with minimal manual re-entry), and that the right personnel transmitsthis information to the payment department to ensure timely remittance tothe state and local government(s). By establishing this workflow system,companies can reduce the risk of remittance delay, and the cost oferroneous filings.

For more information on this or other research topics, please visitwww.aberdeen.com.

Related Research

Streamlining Indirect Tax Management: Best Practices in Minimizing Audit Exposure;May 2011

Managing Value-Added Tax (VAT) in a Global Environment ; January 2011

Author: William Jan, Senior Analyst, Financial Management & GRC([email protected])

For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class.Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provideorganizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why

our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% ofthe Technology 500.

As a Harte-Hanks Company, Aberdeens research provides insight and analysis to the Harte-Hanks community oflocal, regional, national and international marketing executives. Combined, we help our customers leverage the powerof insight to deliver innovative multichannel marketing programs that drive business-changing results. For additionalinformation, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call(800) 456-9748 or go to http://www.harte-hanks.com.

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologiesprovide for objective fact-based research and represent the best analysis available at the time of pub lication. Unlessotherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not bereproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by

Aberdeen Group, Inc. (2012a)
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Aberdeen Cloud Research Report 2012

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