Two years ago, a small number of forward-looking enterprises issued RFPs requesting ‘end-to-end invoice compliance automation services’. These RFPs requested all VAT-related compliance decisions to be managed through a single SaaS platform which integrated with the requesting company’s invoicing engine. In this article, we’re exploring the background and implications of this apparent evolution in market behavior.
Compliance automation vendor landscape challenged
This RFP approach puzzled the vendor community, which traditionally was used to these services being provided by at least two separate types of vendors:
- ‘Form compliance’ vendors, which usually have a background in ‘trust services’ that are rooted in public key infrastructure. These vendors specialize in ensuring compliance with requirements that aim to give tax administrations comfort that electronic invoices are worth looking at in the first place – which isn’t the case if you cannot be sure they aren’t fake or modified. These VAT requirements are about managing the evidence of integrity and authenticity of e-invoices throughout their legal life cycle.
- ‘Content compliance’ vendors, which usually have a background in legal information services. These vendors specialize in ‘tax engine’ functionality, which helps enterprises determine the applicable laws, associated VAT percentage or other transaction taxes when creating or receiving invoices. Some of these services also verify or suggest invoice notifications that are related to the tax percentage, or assist with reporting.
Importantly, the integration of these software packages (whether locally installed or consumed as a service via the internet) has historically taken place in different parts of the enterprise software ecosystem: form compliance vendors normally target transaction platforms, while content compliance vendors have nearly always been integrated with ERP systems. This varying focus has reinforced the notion that these are fundamentally different types of compliance automation functionality.
Reasons for a shift in market behavior
We have discussed this matter with a number of VAT managers who are thinking about their future needs in the VAT compliance automation area. Their assessment, alongside ours, consists of two interrelated components:
- Real-time controls increase exposure: the risks related to VAT discrepancies being exposed and caught by tax administrations is quickly increasing as a result of tax controls evolving from periodic aggregate reports to invoice-by-invoice real-time reporting or ‘clearance’ approvals.
- With VAT controls evolving from periodic to transactional and real-time, it will sometimes be more natural to apply tax determination functionality closer to transactional engines rather than close to the ERP. We particularly see this need arise in scenarios where a large part of the underlying business process is run by a third party vendor platform.
A case of market consolidation?
Would an enterprise looking for this next-generation combination of form and content compliance services necessarily care if they are provided by different vendors? The answer we received is ‘no, but’. ‘No’ because, ultimately, it’s for vendors to decide what is the most cost-effective way of managing skills and specialization to guarantee the best possible business value to their customers. ‘But’, because there are many administrative, legal, technical, operational and other issues that drive costs on the user side and which vendors are often not perfectly equipped to assess. When controls that businesses must perform are driven by the same body of law, and when they must be performed as part of the same enterprise process and system, companies will often expect to contract for such functionality with one and the same vendor to keep overhead in these areas to a minimum.
How will vendors adjust?
We at Sovos are thinking actively about the strategic impact of this shift in market expectations. As can be judged from recent press releases from other vendors in the broader compliance automation and e-invoicing space, we’re not the only ones.
We would be interested in your feedback on these matters:
- Do you agree that this is a market trend?
- Are you working on an RFP combining these compliance areas?
- Are there other trends you believe we should consider in this context?
