Focus on trade compliance functions
Priorities and performance
With trade compliance functions still evolving, only a minority of these functions have set metrics to monitor their performance. Without specific metrics and quality data to support them, trade compliance functions are unable to determine or demonstrate their value to the organization. As a result, global trade functions may have difficulty making the case for future investments in technology, automation and processes that are needed to help fulfill their potential.
For trade compliance functions that have established performance metrics, duty minimization and cost reduction are cited most often, followed by other costrelated measures such as minimization of interest and penalties and accuracy of import declarations. Fewer of these companies report having metrics related to timely and accurate submission of declarations, suggesting that compliance has taken a back seat to cost reduction, particularly in organizations with over USD20 billion in annual turnover.
Reducing external provider spend is one cost area that organizations are giving less priority in terms of performance measurement. Given the dynamic changes occurring in the global trade environment — from Brexit through US tax reform and renegotiation of the North American Free Trade Agreement to new agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — this trend may signify that organizations with cost-cutting agendas see the importance of external advice on managing the impact of these changes.
A more balanced range of metrics, covering not only cost reduction but also compliance and qualitative measures, is needed to help trade compliance functions articulate the strategic value they contribute. These qualitative measures could involve, for example, relationship-oriented activities such as dealings with customs authorities, interaction with other functions, and reducing spend on customs brokers, agents and forwarders.
Accountability and visibility
Organizations are continuing to move to a more global approach to trade compliance, as shown by the rising number of organizations that have a global head of trade compliance. While this trend was previously most prominent among organizations based in North America, the trend is clearly spreading to other regions. The rise of dedicated, centralized leadership is a further sign that the world’s trade functions are continuing to mature, allowing them to gain efficiencies, leverage leading practices and enhance local and regional collaboration.
However, many global heads of trade compliance appear to be hampered by a lack of visibility over duty costs by country. A clear view of local costs and activities is a key to realizing the benefits of central leadership, but it appears that many organizations have not yet developed the systems and processes needed to enable effective global oversight over their trade compliance data. Integrated systems to support global trade can open a window on local trade activities and duty payments, helping trade compliance leaders understand and enhance, for example, their duty payments for specific products across locations.
As with the regionalization of indirect tax functions, many trade compliance functions are developing regional trade compliance structures with dedicated leadership. Compared to other regions, however, there are notably fewer regional heads of trade compliance in the Latin America region.
The result is somewhat unexpected, given the relatively high diversity among trade regimes in Latin America, along with higher trading costs and additional complexity stemming from the complex indirect tax and enforcement environment. The trend is less apparent among larger companies with over USD20 million in annual turnover, suggesting they have been quicker to recognize the merits of regional thinking and/or have larger, more sensitive operations in the region.
Unlike indirect tax functions, which overwhelmingly report through the broader tax function, there is no single structure emerging for the governance of trade compliance functions. Trade compliance functions most commonly report through supply chain or logistics functions, but significant numbers of them report through the finance, tax or other functions (e.g. procurement or chief compliance officers).
This suggests that there is no one function where trade compliance may best reside, since accountability is spread across multiple departments and the desired reporting structure varies from one organization to the next. For some organizations, for example, reporting through the tax function may be advantageous, given its traditional compliance mindset. Also, as tax has become more transaction-oriented with the rise of GST/VAT and as corporate income taxes have dwindled globally, we may begin to see stronger alignment of tax and trade functions. Other organizations may opt to have trade compliance report through compliance and ethics functions, a newly emerging functional focus that could make sense for many trade operations. A careful strategic analysis of functional alignment is required to determine the appropriate fit.
Risk and controls
Just as global trade compliance functions lack visibility over local activities, many of them lack knowledge of risks in the various regions: about 60 percent in the European, Middle East and Africa region, and under half in the other regions. Organizations that have identified risks, which include a higher proportion of larger companies with over USD20 billion in annual turnover, also tend to have embedded processes and controls in underlying business processes to manage them.
To verify the effectiveness of these processes and controls, the trend toward internal peer-to-peer self-assessment is increasing. Recent years have also seen a rise in the number of organizations engaging in internal or external audits to gain assurance that their controls are well designed and effectively deployed.
While third-party trade compliance audits offer the highest level of assurance, many companies are gaining acceptable comfort by balancing high volumes of smaller internal audits and peer assessments with external audits of selected areas of particularly high risk or strategic importance.
Evolving compliance models
Compliance models among trade functions are still predominantly local, although a shift toward more centralized models, including shared service centers, is expected as trade compliance functions continue to mature and more global and regional heads of tax are appointed. As with indirect tax functions, centralization of trade compliance provides stronger governance and control in setting global standards, leveraging local solutions and sharing knowledge. Compared to indirect tax functions, however, the shift toward centralization is more limited to date among trade compliance functions. This could suggest that trade compliance functions are at an earlier stage of maturity, but it is also possible that some organizations have determined that some trade compliance processes are better handled locally.
Experience suggests that a centralized model should not necessarily cover all trade compliance activities. A mix of local and central processes can potentially provide greater benefits, depending on the individual processes involved and how well they lend themselves to automation.
Looking ahead, there is an expectation that companies will move toward a more outsourced model in the next 3 years. Again, this trend is in step with indirect tax functions, which also plan to outsource significantly more activities so they can exploit the technology investments and economies of scale of third-party service providers and focus more on strategic pursuits and adding value.
Investing in technology and resources
Only a small majority of larger organizations with USD20 billion of annual turnover say they use global trade management software and technology to manage aspects of their import/export activities. Overall, the use of global trade management software is even lower, as reported by just over half of organizations. Where such solutions are in place, they are most commonly used to improve efficiency and data quality in operational processes such as import and export classification, free trade agreements and import valuations.
Organizations show a strong appetite for investment in the near term. Technology tops the list of priorities for investment in the next 3 years.
Most companies say that they have not been able to invest in technology because they lack the budget or organizational support to do so. This suggests that trade compliance leaders are struggling to make the compelling case for these investments. Many trade compliance leaders say they believe their leading opportunities for adding value lie in improving their processes and their risk management. Only a small minority are looking beyond improving the status quo to technology’s transformative opportunities.
A stronger case for investment could be made by highlighting technology’s power to deliver deeper insights into the flow of goods through enhanced use of data and reporting. Trade compliance leaders can benefit by positioning any proposed systems implementation holistically as a way to transform the trade compliance function and drive value — highlighting how the function will evolve and what tangible benefits to the organization will accrue.