Not All Platforms are Created Equal: Lessons Learned from the Sharing Economy

by Ken Crutchfield

Companies like eBay, Uber, Lyft, and Airbnb can leverage digital platforms that free them from many limitations of the physical world that bound 20th century manufacturing and “brick and mortar” operations. Beyond being wildly successful, these companies all have one thing in common: a centralized, standardized platform that is often grown organically.

The concept of “sharing” is one of the newest approaches used by businesses today to gain massive efficiencies and scale. Schools that offer MBA programs have long touted the benefits of “economies of scale” as a way to achieve a strategic advantage. As an example, prior to the American Industrial Revolution the idea of “replacement parts” did not even exist. It wasn’t until the second half of the 19th century that American businesses began to achieve unprecedented scale by using standardized designs and components.

Another popular path to scale is acquisition. An early example of this is Cornelius Vanderbilt, one of the first businessmen to acquire businesses as part of his railroad empire. As many companies soon discover, although acquisitions can drive scale, they can also create operational obstacles that make standardization challenging. Across many 20th century industries, including steel, paper, and manufacturing, the big “winners” appeared to be those that achieved market share and scale through acquisition. But, integrating disparate operational systems for long-term efficiency became nearly impossible, especially when compared to organically-grown companies. 

Neither General Motors’ century old acquisition strategy, nor Ford Motor Company’s breakthrough Model T standard assembly line can compare to the power of the 21st century’s sharing economy. Companies like eBay, Uber, Lyft, and Airbnb can leverage digital platforms that free them from many limitations of the physical world that bound 20th century manufacturing and “brick and mortar” operations. 

Consider this: 

  • In its first four years, Airbnb built an inventory of 600,000 rooms; which took Hilton approximately 93 years to do. 
  • The World Economic Forum estimated that the social value of Uber in 2015 (just 6 years after being founded) was equivalent to giving every resident $20, regardless of whether they used the service.
  • The sharing economy is estimated to grow to $335 billion by 2025. 

Beyond being wildly successful, these companies all have one thing in common: a centralized, standardized platform that is often grown organically. More than just underlying technology, these platforms are connecting people and processes in unprecedented ways; streamlining transactions and delivering a truly seamless end-user experience, a feat only possible in the digital age. For example, eBay users can research products, sort and filter results, exchange information, purchase products, make payments, and leave feedback. The entire transaction is conducted through just one platform and the business is built around that platform. 

Based on the many successes of the sharing economy, tax executives are now exploring ways to modernize their operational systems by tapping into the proven benefits of centralized, standardized platforms. Savvy executives know that when done right, the benefits of these platforms can be astronomical in many areas of business, including tax and accounting. However, without a centralized approach the path to scale can be a long and arduous one. Ultimately, it comes down to picking the right platform approach for a company’s business needs. 

Platform Business Model for Tax Planning Purposes

Examining a few of the most recent notable tax and accounting events – sweeping tax reform, 2018 partnership audit changes, and the IRS audit campaigns – there is a common theme, and that is change. 2018 is on track to be a major year of change for corporate taxation. Significant changes related to tax reform could drastically undermine existing business processes, which are often proprietary in nature. The kind of sweeping changes proposed by the current administration haven’t been as extensive since the Reagan Tax Reform Act of 1986. Therefore, tax and accounting executives need to be ready to react swiftly, be nimble, and have a holistic view of tax functions across their entire company. By understanding their tax liabilities and identifying ways to reduce these liabilities (or just adapt to new tax law), they put themselves in a much stronger position. But if the company is using closed, proprietary systems to manage their various tax functions, especially if operating in multiple jurisdictions, they have a much harder task at hand.  

By using a platform approach to tax, they can assess their current tax situation; consider the impacts of write-offs, deductions, fixed assets, and industry-specific rules, as well as the downstream impacts of federal taxes at the state level. Corporate tax platform tools can also be used to assess the impact of mergers and acquisitions, multistate activities, and group versus separate state filings. This provides a more comprehensive view of an organization's specific tax situation, even before it happens. This more holistic view of the corporate tax function replaces what used to be a fragmented, complicated endeavor. When an open-platform approach is used, it yields far more accurate, beneficial results.

Platform Due Diligence

Platform business models are emerging more every day. The rise of cloud computing has facilitated this rapid growth, allowing people and organizations to connect anywhere, anytime. However, when considering a platform approach, keep in mind that not all platforms are created equal. The most successful sharing economy companies have built their core platform from the ground up, not via acquisition. And, when they do acquire companies, they become complementary services. 

On the other hand, companies attempting to jump on the platform bandwagon are acquiring core technologies and then calling their solution in their respective space a complete platform. Integrating disparate technologies is certainly possible, but isn’t necessarily an easy feat when you consider that many times these solutions require a patchwork of software integrations. In many cases, platforms that arise primarily from acquisitions are not as reliable as those built from the ground up. Another important consideration is platform interoperability, which is especially critical in the enterprise world. Platforms with open APIs and pre-built platform integration, with ERP systems, and even other tax providers are indicators of a platform that is built to scale. 

The platform approach to business planning and operations is booming. This interactive, interconnected ecosystem (business model) makes it possible for companies that embrace the right corporate tax platform to improve transparency, streamline operations, and gain a more inclusive view of their tax obligations. Plus, these organizations can now do it all with an ease of administration that has been lacking in the world of tax software.

Ken Crutchfield is Vice President and General Manager Bloomberg Tax Technology.