Applying the Enterprise Advisor Consulting Framework to Tax Advisory Services
When do I solve problems ike a family enterprise advisor? When do I solve problems like a tax lawyer? What's the Action Research Model? What's the difference between content, process and context? I I wrote a reflection paper for my Masters of Tax Law (LLM) class on tax problem solving that highlights how similar approaches may be applied in both disciplines. Read for how to put the Action Research Model and content-process-context method to good use. After all, they are simply tools at the service of helping families plan forward.
In this reflection paper, I compare and reconcile the problem-solving approach presented in my LLM course on Problem Solving in Tax Practice, to my experience and practice as an enterprise advisor, with particular attention on the “Focus on the Facts” paper authored by Shay Menuchin. The aim is to compare the methodologies and processes introduced in the LLM class to the tools and learnings that management consultants may apply in advising enterprises.
Lawyers are part of a larger multi-disciplinary client advisory team and tax planning is part of financial planning so danger lies in operating in content-only silos. The methodologies in this problem-solving course fit together with the research and consulting models that enterprise advisors or change management consultants utilize. A structured, thoughtful approach with a focus on data gathering and analysis, understanding the client profile and the internal and external circumstances of the enterprise would put the legal practitioner in great stead towards providing a worthwhile legal opinion.
Change Management Consulting: Action Research Model
What is tax planning? It is financial planning for tax efficiency. As such, tax advisory and planning services fall under the aegis of financial enterprise planning. What is change management? It is a structured approach to help organizations make changes within an evolving business environment. There is no singular approach for change management. The Action Research Model of the organizational change process uses an external party as the change agent to contract with the enterprise to engage in organizational research. The process consists of five iterative phases, which can be outlined in a circular manner:
The Five Phases
In the initial contact with the client, the change agent ascertains the source of the “pain” that has influenced the client to come for help. In this phase, information is gathered by asking questions, interviews, record review and listening to several enterprise stakeholders, from employees to executives. The change agent would find the actual issues of the enterprise. Note that in the data gathering process, the change agent will likely find facts as well as what the client believes or thinks are the facts of the case.
Menuchin writes about the “taxpayers as curators of facts”, meaning that the facts of the case are not handed to practitioners on a silver platter. Rather, the taxpayer ought to gather the facts, via documents and interviews, to disentangle what is a fact and what is false; appreciate the circumstances, i.e. context, that caused the client to engage the lawyer, including market forces, geography, politics, etc.; and summarize the facts in order to provide a position on the application of the law to such facts and circumstances.
Using both hard data (e.g. corporate and tax documents, banking records) and soft data (organizational governance and time-measured plans, communication patterns, organizational vision and sophistication), the change agent completes the picture of the enterprise, including governance and operations, to understand both the presenting and the real problems. Information is analyzed into primary concerns and problem areas and the change agent builds a map for the change process.
In gathering the facts, the taxpayer ought to know its facts (separate the wheat from the chaff), to document such facts (data storage and retrieval) and to establish and lay them out so that its position is supported in an audit or court. Additionally, Menuchin writes about the “tax profile—setting priorities and preferences”. The practitioner ought to know who the client is. Does the organization value simplicity or the intrigue of complexity (and has the resources to understand, monitor and defend planning)? Does the organization’s vision speak to community engagement and fairness (e.g. Lush) or to providing products and services at the lowest cost (e.g. Amazon)? Truly, the analysis phase brings together data discernment and the KYC (know your client) processes.
The goal of the feedback and action planning phase is to provide a forum for discussion, prioritization and planning. The change agent shares the findings of the previous two phases and the enterprise is actively involved in developing action plans. There are factors and risks of providing feedback, including:
a. The connection between the change agent and the enterprise, which may positively or negatively affect the trust and respect between the parties;
b. The competency of the change agent, including a skillset that matches the level of the presented issues and proficiency in decision making and prioritization;
c. The quality of the report, including organization in a sensible format, consideration of strengths and weaknesses, whole system perspective, contextualizing issues and suggestions for solutions
This is the legal opinion or tax advice stage. In formulating feedback, the practitioner ought to:
· hear from the client about why the previous planning, if any, was structured in a certain way;
· what the client wants the practitioner to do (the why did you engage us question);
· prepare a defense mechanism in case the facts are different; and
· consider timing (including flexibility and phasing solutions), cost of implementation, cost of administration, corporate resources for continuity and communication (understanding why a structure was implemented and how to maintain it) and taxpayer risk profile.
In this phase, plans that were decided in the feedback stage are set in motion. Specific actions are carried out regarding the issues that have been identified.
It may come as a surprise that the action or implementation phase is such a short step. But the strength of the tax planning exercise is in the fact finding; fact rating; and preparation of a defense mechanism (i.e. if certain facts are different, would the legal advice fail?).
the change agent evaluates the effectiveness of the action plan using the initial data as a benchmark. In this phase, any action steps, implementation or subsequent changes would be compared and evaluated against the initial status quo.
Menuchin describes the advisory process as a continuous cycle and not a one-off process. Yi-Wen Hsu regularly instructs her team to conduct internal audits to test the soundness (new factual or legal landscape), administration (cost and simplicity) and timing (growth versus mature phase) of her organization’s tax planning. This iterative, self-testing process is exactly the anti-fragility principle in action. The principle posits the fragile systems are damaged by disorder or shock; resilient organizations are unaffected by stress or failure; and anti-fragile enterprises benefit from volatility and noise (e.g. startups). In my practice, I focus on “uncoupling” the tools and solutions so that the system can survive if one part of the planning changes. In our exercises, our group analyzed the scenarios according to several criteria, including containing the planning so that failure in one jurisdiction would not result in failure in other jurisdictions.
Content, Process and Context
An effective enterprise consultant appreciates that providing advice is a recipe composed of three ingredient categories that must be carefully balanced: content, process and context:
1. Content is the component that addresses “what”. Here is where material, data, information, the initial presenting issues and goals fit.
2. Process is the component that addresses “how”. Here is where attitudes and aptitudes for change and implementation sit, where group effectiveness, culture, dynamics, facilitation and communication fit.
3. Context is the component that address “why” or the dynamics of the case. Here is where the SWOT (strengths, weaknesses, opportunities, threats) analysis of the enterprise’s unique assets and challenges within the market place and geography are slotted, where vision, legacy, intentional strategies, productivity, alignment and leadership fit.
While law school teaches lawyers content (laws and rules) and a competent practitioner may develop a process for both gathering information and analysis, it is a truly a professional advisor who considers context and dynamics in serving clients. To paraphrase Menuchin, the discussion most often focuses on the technical rules of law but such discussion’s utility is greatly compromised or limited in practice if the advisor does not dedicate effort and drive to “gathering the facts, understanding the circumstances, and curating the basis for the application of these legal rules.” In other words, competent planning and execution requires content, process and context.