At the beginning of 2017 PricewaterhouseCoopers made an unusual move: hiring General Electric’s huge tax team. PwC got not only a lot of tax expertise but also GE’s advanced tax-focused technology. GE, for its part, lowered its costs while retaining access to its legacy team of tax professionals.
After absorbing 600 additions to its workforce, the professional services firm set a goal to execute an additional five to seven such transactions in 2018. And it did that, PwC says, although it declines to identify the companies — except the latest one.
In January, 19 members of the tax team at Synchrony, a publicly held financial services firm that was a unit of GE Capital until a 2014 split-off transaction, were transferred to PwC’s payroll.
Three team members have remained with Synchrony. “When we do these deals, we always encourage the company to keep some people,” says Doug Thomas, leader of PwC’s Insourced Solutions for Tax (IST) unit. “There’s a handful of functions that a third party just can’t do, like final signoff on the [annual] tax provision, signoff on significant tax controversies, and interaction with the C-suite.”
As with the other deals, the new employees are not assimilated into PwC’s general tax practice; instead, they join the IST unit.
PwC’s strategy in absorbing corporate tax departments involves not only using the new staffers to service their former employer but leveraging their expertise for other IST clients as well.
The backdrop for IST’s growth is a changing tax environment. “The tax world didn’t get any less complex in the U.S. with the passage of tax reform,” says Thomas. “And only adding to that complexity is the demand for increased transparency from taxing authorities around the world.”
At a glance, one might briefly puzzle over the ITS strategy, for a couple of reasons:
- Previously, all work performed by the Synchrony tax department, for example, was for the benefit of Synchrony. Now, the firm must share the team’s labor with other PwC clients.
- PwC is absorbing the labor costs of the acquired staffers. Those costs presumably will not be any less than they were for Synchrony, and just as clearly the fees Synchrony pays PwC for tax services will amount to less than PwC’s incremental labor costs.
While Synchrony did not respond to multiple requests for comment, Thomas explains why the IST strategy overcomes those points.
For one thing, says Thomas, a portion of a company’s required tax expertise is needed only briefly, such as at the end of quarters or even to make a once-a-year calculation. Companies typically hire consultants to perform those tasks or bear the costs of upskilling internal staff to handle them. “Now the company can reach into our broader firm for expertise in those specialties,” Thomas says.
At the same time, in many companies the most seasoned professionals, who are best deployed to high-level thinking, have no choice but to spend some of their time doing work that’s less appropriate for their experience.
“We’re a learning organization,” says Thomas. “We hire thousands of kids out of school every year. That allows our more experienced team members to focus on what they’re good at and leverage those less-experienced people for things that are appropriate for their skill level.”
And for PwC, a key is that the time that’s freed up for the higher-level professionals can be redeployed to other clients, Thomas notes. “We’ve done a lot of financial modeling around this business model,” he says.
Further, PwC is picking up full-service tax clients for the IST unit that don’t require it to absorb any labor costs. For example, a spinoff company has a build-or-buy decision with respect to fulfilling its tax management needs. A couple of such companies so far have decided to take advantage of the unit’s ready-made suite of expertise and technology, according to Thomas.
The IST team will be setting a new goal for insource deals in 2019, says Thomas. It’s looking for companies (in any industry) that “want the tax function to contribute to the value of the organization and are substantial enough in size that we can spool up technology to create efficiencies for them.” Much of the technology IST relies on was acquired from GE.
There’s not necessarily a ceiling to the number of insource deals IST will do, but it’s trying to set a reasonable pace for expansion. “It takes a bit of effort to onboard the people and onboard the technology, and then it takes time to really start producing efficiencies,” Thomas says. “I think we’ll have to look at it each year.”