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What are the tax implications of buying or selling a business?

Merger and acquisition activity in many industries slowed during 2020 due to COVID-19, but analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling a business, it’s important to understand the tax implications. 

Two ways to arrange a deal 

Under current tax law, a transaction can be structured in two ways: 

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive.

  1. C corporation pros: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive.

  1. S corporation pros: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier. Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two. 

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines, and it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

  1. Preferences of buyers. For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes. A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.
  2. Preferences of sellers. In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets. With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).
  3. Obtain professional advice. Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results.

Get in touch with one of our partners about your upcoming business endeavors and the tax implications regarding your plans. © 2021

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Taxpayer Opportunity to Accelerate Depreciation Expense Relating to RPTOB Election for Residential Rental Property

The December 27, 2020 emergency coronavirus relief package introduced a taxpayer-favorable change related to the real property trade or business (RPTOB) election made by taxpayers that own residential rental property. As a refresher, taxpayers that make the RPTOB election are exempt from the Section 163(j) business interest expense deduction limitation, but must depreciate nonresidential real property, residential rental property and qualified improvement property over longer recovery periods under the alternative depreciation system (ADS).

Prior to the amendment made by the Consolidated Appropriations Act, 2021, taxpayers making the RPTOB election were required to use an ADS recovery period of 40 years with respect to residential rental property placed in service before January 1, 2018, and 30 years for residential rental property placed in service after December 31, 2017. The Act changed the recovery period for residential rental property placed in service before 2018 to 30 years, thereby making the ADS life consistent for all residential rental property for an electing RPTOB, regardless of the placed-in-service date. Note that this modification only affects taxpayers that made (or will make) the RPTOB election, and only with respect to residential rental property placed in service before 2018. Accordingly, taxpayers that elect or are required to use ADS for reasons other than making the RPTOB election will continue to amortize pre-2018 residential rental property using a 40-year recovery period.

As the amendment applies retroactively to taxable years beginning after December 31, 2017, taxpayers that made the RPTOB election on their 2018 or 2019 tax returns and depreciated residential rental property using the 40-year recovery period are now considered to be on an impermissible method of accounting. To correct this issue, Rev. Proc. 2019-8 indicates that an electing RPTOB that fails to depreciate its nonresidential real property, residential rental property and qualified improvement correctly under the ADS (including using an impermissible recovery period) must file an automatic Form 3115 (DCN #88) with a timely filed (including extensions) federal income tax return for the year of change and a copy of the Form 3115 must be filed with the IRS Ogden, UT office no later than the filing date of that return. Thus, it is not necessary to amend prior year tax returns. The additional depreciation allowed as a result of the modification will be reflected entirely on the tax return for the year of change as a favorable Section 481(a) adjustment. As it is possible that the IRS will issue new procedural guidance to address this specific fact pattern in the near future, taxpayers should check for any additional updates before they begin preparing method changes.

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One reason to file your 2020 tax return early

The IRS announced it is opening the 2020 individual income tax return filing season on February 12. (This is later than in past years because of a new law that was enacted late in December.) Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing earlier this year.

Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How is a person’s tax identity stolen? In a tax identity theft scheme, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund. The real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund. Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can get your individual tax return prepared by us before February 12 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

When will you receive your W-2s and 1099s? To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2020 Form W-2 to employees and, generally, for businesses to issue Form 1099s to recipients of any 2020 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors). If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

How else can you benefit by filing early? In addition to protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account. Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays. If you haven’t received an Economic Impact Payment (EIP), or you didn’t receive the full amount due, filing early will help you to receive the amount sooner. EIPs have been paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Amounts due that weren’t sent to eligible taxpayers can be claimed on your 2020 return.

Do you need help? If you have questions or would like to discuss your return in more detail, please contact us via our website or call your local office. We can help ensure you file an accurate return that takes advantage of all of the breaks available to you. © 2021

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New Stimulus Package Extends and Expands Employee Retention Credit

The Consolidated Appropriations Act of 2021 (Act), signed into law on December 27, 2020, contains significant enhancements and improvements to the Employee Retention Credit (ERC).  The ERC, which was created by the CARES Act on March 27, 2020, is designed to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the coronavirus pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.

Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits.


ERC for 2020

The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020:

  • Employers that received PPP loans may qualify for the ERC with respect to wages that are not paid with proceeds from a forgiven PPP loan.
  • The Act clarifies how tax-exempt organizations determine “gross receipts.”
  • Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee.

 

Insights

  • Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020.
  • With respect to the retroactive measures in the Act, employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020. This should allow employers to claim the ERC in connection with such qualified wages via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an amended return (IRS Form 941-X) for the prior quarter(s) in 2020.

 

ERC for 2021 (January 1 – June 30, 2021)

In addition to the retroactive changes listed above, the following changes to the ERC apply from January 1 to June 30, 2021:
Increased Credit Amount

  • The ERC rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.

Broadened Eligibility Requirements

  • The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019.
  • A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
  • Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
  • The credit is available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.

Determination of Qualified Wages

  • The 100-full time employee threshold for determining “qualified wages” based on all wages paid to employees is increased to 500 or fewer full-time employees.
  • The Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

Advance Payments

  • Under rules to be drafted by Treasury, employers with less than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employers and employers that were not in existence in 2019.

 

Insights

  • Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
  • Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
  • Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. Previously this rule was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer.

The Act may provide significant opportunities for your company. However, the interplay between the Act, the CARES Act and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed.

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2021 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. 

 January 15 

-Pay the final installment of 2020 estimated tax.

-Farmers and fishermen: Pay estimated tax for 2020. 

February 1 (The usual deadline of January 31 is a Sunday.) 

-File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees. 

-Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required. 

-File 2020 Forms 1099-MISC, reporting nonemployee compensation payments in Box 7 with the IRS. 

-File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it; however, if you deposited the tax for the year in full and on time, you have until February 10 to file the return. 

-File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)

-File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all non-payroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return. 

March 1 (The usual deadline of February 28 is a Sunday.) 

-File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans. 

Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

© 2020

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Maximize Your 401(k) Plan to Save for Retirement

Contributing to a tax-advantaged retirement plan can help you reduce taxes and save for retirement. If your employer offers a 401(k) or Roth 401(k) plan, contributing to it is a smart way to build a substantial sum of money.

If you’re not already contributing the maximum amount allowed, consider increasing your contribution rate. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a major impact on the size of your nest egg at retirement.

With a 401(k), an employee makes an election to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The contribution limit for 2020 is $19,500. Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $6,500, for a total limit of $26,000 in 2020.

The IRS recently announced that the 401(k) contribution limits for 2021 will remain the same as for 2020.

If you contribute to a traditional 401(k)

A traditional 401(k) offers many benefits, including:

  • Contributions are pre-tax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pre-tax.

If you already have a 401(k) plan, take a look at your contributions. Try to increase your contribution rate to get as close to the $19,500 limit (with an extra $6,500 if you’re age 50 or older) as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pre-tax — so, income tax isn’t withheld.

If you contribute to a Roth 401(k)

Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners because they don’t have the option to contribute to a Roth IRA. Your ability to make a Roth IRA contribution for 2021 will be reduced if your adjusted gross income (AGI) in 2021 exceeds:

  • $198,000 (up from $196,000 for 2020) for married joint-filing couples, or
  • $125,000 (up from $124,000 for 2020) for single taxpayers.

Your ability to contribute to a Roth IRA in 2021 will be eliminated entirely if you’re a married joint filer and your 2021 AGI equals or exceeds $208,000 (up from $206,000 for 2020). The 2021 cutoff for single filers is $140,000 or more (up from $139,000 for 2020).

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We would love to discuss the tax and retirement-saving strategies that will benefit you the most. © 2020

 

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In a Challenging Covid-19 Climate, Businesses Get by with a Little Help from Bots

COVID-19 has rapidly and irrevocably reshaped the global business climate.

Virtually overnight, restaurants and bars have shuttered their doors to customers, transitioning to delivery and take-out models. Offices have closed, as entire workforces telecommute from home. Manufacturers of much-needed supplies from cleaning products to masks are overwhelmed by demand they’re struggling to meet. Employees across the country have been asked to work differently: harder, longer, virtually—and sometimes more dangerously. And companies of all stripes have had to look for ways to make their cash stretch for an indefinite period that may extend much longer than initially imagined.

The silver lining of any crisis is that there is no better opportunity to drive change. No business can afford to operate the same way it was prior to the novel coronavirus outbreak. Not only must they do more with less, they must do it faster and smarter.
Why Businesses Need Robotic Process Automation Amid COVID-19

For the middle market, the ability to adapt quickly is a matter of survival. The recipe for business resilience is intricate: financial discipline may be the primary ingredient, but too often cost cutting comes at the expense of performance and organizational agility. Adaptability calls for both cost efficiency and operational efficiency–which is where Robotic Process Automation (RPA) comes in.

What is RPA?
RPA is the use of software that automates manual tasks. These “bots” allow organizations to automate simple or repetitive processes to reduce the time spent on costly manual tasks and increase efforts to deliver mission critical work.

The software is designed to perform routine tasks across multiple applications and systems within an existing workflow. It performs specific tasks to automate the transfer, editing, reporting and/or saving of data.

Where there is paper, manual tasks and complex workflow steps, there is rich opportunity to inject RPA to improve accuracy, shorten processes from days to minutes and to dramatically improve business performance. This efficiency can ultimately save businesses critical dollars where it counts, allowing companies to scale quickly to fully meet demand, manage with reduced headcount, or maximize speed and accuracy.

RPA bots can work independently or alongside humans. Attended bots work collaboratively with humans to improve speed and accuracy of the menial aspects of their work, while unattended bots can operate autonomously, without any human intervention at all. For example, in a customer service setting, attended bots can be leveraged to retrieve customer data faster, allowing each customer service rep to work through a long queue more efficiently, thereby retaining customer loyalty.

Unattended bots are more frequently deployed to automate back-office activities involving the collection, processing and analysis of data. Imagine, for example, a hospital system attempting to project the number of ventilators they will need during COVID-19—and whether to redirect supply of these valuable resources from one hospital to another. An unattended bot could collect data from hospital admissions and medical charts to help determine the number of resources required for each facility.

What are the benefits of RPA?
RPA has use-cases in every business department, from account receivable tracking to ensure on time payment, to federal and local COVID-19 compliance documentation.

HR New employee onboarding Employee termination documentation Short-term disability and sick leave
Finance / Accounting AR tracking to ensure on time payment Invoice processing/duplicate review Vendor verification/inactivate unused vendors
IT New user setup Remote work setup (wifi, VPN, hardware registration) Inventory tracking
Sales / Marketing Sales campaign email management Outreach campaigns CRM automation/address cleansing
Customer Service Order processing Customer self-service Chatbot enablement
Others Federal and local COVID-19 regulatory compliance documentation Data collection and management Inventory management

What advantages does RPA bring to a COVID-19 environment?
The pressures of normal business operations have only been magnified by the current climate. Many companies have experienced significant revenue reductions and are under pressure to curb costs and do more with fewer resources to survive.

RPA can help businesses address the following business needs:

  • Cost savings: RPA projects can generate significant cost savings. ROI is realized near-instantaneously, offsetting the upfront investment. A smaller implementation with 10 bots or fewer can be implemented relatively inexpensively and within a short period of time. RPA can increase the quantity and quality of work product, while allowing human capital resources to shift to higher-value tasks or be redeployed to other parts of the business—all contributing to the economics of automation. In the current climate, this is imperative.
  • Speed: RPA can slash the time spent on manual tasks by orders of magnitude—an essential need during the pandemic when lost time can translate to loss of life, as is the case for healthcare providers and manufacturers of critical medical supplies.
  • Productivity: As revenues have dropped, many companies have been forced to lay off or furlough workers. Maintaining productivity with fewer resources is a must. By automating parts of the workforce’s daily activities, staff can instead focus on activities that require human problem solving.
  • Going virtual: With all nonessential businesses forced to cease in-person work and the timeline until a vaccine is available still likely one year to 18 months away, businesses must facilitate highly effective remote work as soon as possible. RPA can be used to expedite the setup process, ensuring employees have access to appropriate Wi-Fi at home and are registered for new equipment for at home offices.
  • Business continuity: In some cases, automation can protect staff’s physical health by limiting exposure. For example, essential businesses are using bots to evaluate each employee’s current health and COVID-19 risk. Based on the survey responses it helps determine each day if the person is low risk enough to go into work. This use of RPA could become helpful when parts of the country look toward a phased reopening and want to prevent widespread infection in the workplace.
  • Accuracy: RPA allows you to eliminate the human margin of error, which in the case of repetitive tasks is set between 5% and 10%. Improved accuracy and quality of work product is essential in high-stakes tasks.

 

Near- to Mid-term Applications of RPA During the Global Pandemic

The potential use-cases for RPA in this climate are endless. Here are a few examples already in play:

Accelerate patient enrollment for COVID testing: As diagnostic labs, drive-through testing centers, and hospitals test hundreds of Americans per day for COVID-19, there is a desperate need to speed up the process of looking up each patient in the site’s electronic medical records, adding the patient to the system, sharing this information with the CDC, and reporting back to the patient. Often sick people are standing in line 6 feet apart with fevers and respiratory issues for many hours—compromising their own health and those around them who may or may not have the virus. Attended bots can save 8-9 minutes per patient and avoid manual data entry errors.

Process unprecedented product demand: From grocery stores, to meal kit companies, and personal protective equipment manufacturers, there are segments of the economy are that experiencing product demand unlike they have ever seen before. By using unattended bots to process these orders, overextended companies already coping with diminished workforces can redeploy critical headcount toward fulfilling the high volume of orders filed. These companies can thus capture maximum revenue while meeting the societal need to reduce loss of life from COVID-19.

Facilitate productive work from home: Companies nationwide are scrambling to ensure each employee has the internet bandwidth required to do their jobs adequately while sheltering in place. A bot can be leveraged to examine employee zip codes, see what their internet speed is in their local area and collect details on employees’ Wi-Fi plans to determine where they need to invest in upgrading employee internet packages. As COVID-19 moves across the country, and with the possibility of a second wave in the fall, more businesses may need to enhance workforce productivity by ensuring employees’ work from home situation is as conducive to working as being physically in the office. Other applications include registration of new hardware and setting up VPN.

Enable rapid hiring: From Amazon warehouses to delivery services and hospitals in COVID-19 hotspots, some industries need to increase their workforce at record speed to meet demand. Bot-powered solutions can help government entities and companies alike conduct background checks and evaluate employee eligibility, freeing up Human Resources staff to focus on the subsequent stages of employee onboarding.
How to Know if RPA is Right for Your Business

Businesses are making dramatic changes to navigate this new normal, creatively looking for ways to bridge cash flow through this challenging climate by creating additional revenue streams, asking employees to stretch into unfamiliar territory, and curtailing expenses.

As businesses build their resilience in the face of hardship, consider:

  • Cost savings: Are your personnel expending valuable time and effort on manual tasks?
  • Speed: Is your business struggling to keep up with spikes in demand caused by the current climate?
  • Productivity: Could automation increase the work output of each employee?
  • Facilitate Remote Work: Are your employees unable to work from home effectively?
  • Ensure Business Continuity: Are sick employees potentially putting the rest of your workforce in harm’s way?
  • Accuracy: Is human error slowing down processes and reducing quality?

As management teams look to diagnose the best path forward, RPA can address the questions above— keeping companies in business, fully able to meet demand, and boosting the bottom-line.

 

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COVID-19 Is Accelerating the Rise of The Digital Economy

Digital Transformation in the Pandemic and Post-Pandemic Era

If there were any lingering doubts about the necessity of digital transformation to business longevity, the coronavirus has silenced them. In a contactless world, the vast majority of interactions with customers and employees must take place virtually. With rare exception, operating digitally is the only way to stay in business through mandated shutdowns and restricted activity. It’s go digital, or go dark.

This digital mandate isn’t new; it’s simply been brought into sharp focus. Prior to the pandemic, a paradigm shift towards digitization and servitization of the economy was already underway. Current events have accelerated the paradigm, as evidenced by the marked shift in spending towards digital businesses.

And this is just the beginning.

The pandemic is a reality check for businesses that have been reluctant to embrace digital transformation and now find themselves woefully unprepared. On top of the stress of potentially health-compromised employees, a sudden and dramatic drop-off in demand and total economic uncertainty, these digital laggards are now scrambling to migrate their operations and workforce to a virtual environment. While fast and furious is the name of the game when it comes to digital innovation, fast and frantic can lead to mistakes.

On the other hand, businesses that had not only developed digital strategies but executed on them prior to the pandemic are now in a position to leapfrog their less nimble competitors. That isn’t to understate the COVID-19-related challenges they now face, irrespective of their current level of digital maturity.  Going digital in and of itself isn’t a panacea to all that ails businesses in the current economic environment. They do, however, have significantly more tools at their disposal to not only weather the storm, but to come out the other side stronger for it.

Don’t write off the digital laggards just yet, however. Crisis breeds ingenuity, and good ideas put into practice can propel any business to breakout performance. Organizations that rest on their existing digital laurels can be surpassed by those that invest in adapting their digital capabilities for the post-coronavirus future—a future that looks very different from the world pre-pandemic.

Spotlight: The Digital Advantage

Organizations that embrace digital solutions have greater resiliency in the face of adversity—and a leg up on the competition that will enable them to recover faster and pivot from playing defense to chasing growth.

Efficiency advantage: They harness digital technologies to streamline operations and automate manual processes—resulting in greater speed, less waste and more focus on revenue-generating activities.
Productivity advantage: Their employees were already set up to work remotely, so their focus is on leveraging collaboration technology and tools to maximize workforce productivity and sustain company culture.
Security advantage: They are better prepared for and more resilient to the proliferation of cyber threats in the current environment.
Customer advantage: They mine customer data to monitor for shifts in demand and uncover emerging customer needs.
Agility advantage: They leverage data-driven insight to make decisions faster and act on them faster. They have built-in cultural flexibility to adapt or change course at any point.

 

New Reliance on Digital Solutions During COVID-19

Under COVID-19, the world has, by necessity, gone into isolation. Social distancing is currently the most effective way to slow the spread of the virus until a vaccine can be found to protect the population. As a result, anything that relies on human-to-human contact–which is to say, most aspects of our lives–must be amended to account for the dangers of the virus.

Digitization has stepped in to bridge the gaps left by mandated shutdowns and social distancing measures. Without digital tools and technologies, we would have no way to work, shop, go to school, and more.

Let’s take a closer look at how digitization is keeping society–and businesses–afloat during the pandemic:

  • Remote Work: Before the pandemic, only 30% of U.S. employees worked remotely 100% of the time, according to Owl Labs. For the other 70%–including the 38% of the total U.S. workforce that only worked on-site—the transition to working remote full-time has been a shock to the system—figuratively, and in some cases, quite literally, when user demand has exceeded system bandwidth. But the silver lining is that with such a high percentage of the working population now remote, digital collaboration is improving in leaps and bounds, both in terms of the sophistication of the tools to facilitate it and workers’ level of comfort with it.
  • Omnichannel Commerce: As many physical business locations are shut down, consumers are turning to online shopping to meet their needs, even those who had historically been reluctant to do so. In particular, grocery delivery services, such as Instacart, have been in high demand. Consumers can choose their groceries, pay online, and leave feedback all on one convenient app. Businesses are blending the physical and the digital to provide for their customers through delivery methods such as curbside pickup and contactless delivery. Physical-digital integration is more important now than ever before.
  • Digital Content Consumption: Homebound consumers are turning to digital content providers to meet their entertainment needs. 51% of internet users worldwide are watching more shows on streaming services due to the coronavirus, according to data from Statista. Netflix alone saw 16 million new signups for its service in the first three months of 2020.  Meanwhile, many film studios have been pushing new releases to streaming services early to captive audiences.
  • Platformification: Institutions and organizations of all types are trying out digital platforms to stay above water during the pandemic. The fitness industry has shifted to holding virtual classes on streaming services, both live and pre-recorded. Almost every school, from elementary schools through graduate programs, have shifted to online courses. Large-scale conferences and events are being held virtually. The NYSE has moved entirely to online trading. While some businesses will revert to their traditional models when the crisis abates, others may opt for a hybrid approach as they recognize the benefits of recurring revenues.
  • Digital Health Solutions: Much of America’s healthcare system has gone digital to alleviate some of the strain imposed by the coronavirus. Telemedicine and remote diagnostics are helping patients get medical advice and diagnoses at home so they don’t need to come in to the doctor’s office or hospital, and 3D printing is being used to expedite the production of critical medical supplies, such as PPE. In the absence of a vaccine or proven treatment, the best preventative medicine is information-sharing. Digital contact tracing has already been used to effectively slow the spread of COVID-19 in East Asia. The technology itself is at least a decade old but has struggled to gain traction in the Western world where views on privacy have been prohibitive. Whether American citizens (and those that govern them) will be willing to trade individual privacy rights for the greater public good remains to be seen, but there may be more leniency around data collection going forward.

The pandemic serves as a widespread test case for the effectiveness of these digital solutions, many of which will be permanent fixtures and lead to long-term changes for many businesses.

The Case for Digital Transformation in Crisis

The economy is now mired in a downturn, which may outlast the current (and hopefully sole) wave of the pandemic. Some organizations may be inclined to retrench on their digital transformation plans, as part of a broader belt-tightening agenda. A good cost reduction program focuses on trimming the fat without cutting away the essential parts of the business that are necessary to sustaining current levels of business performance. If we view an organization as a living organism, digital transformation powers the backbone, muscle, brain and heart of the organization. Halting digital innovation efforts in crisis will significantly compromise overall business health.

Though it may seem counterintuitive, crisis is the ideal time to double down on digital transformation. Rather than putting digital transformation plans on hold, organizations need to go all in.

It shouldn’t be prohibitively expensive. Many businesses are understandably reluctant to loosen the purse strings in the current environment of uncertainty. While digital transformation is often viewed as a massive upfront investment in long-term results, it doesn’t need to be. Some of the most successful transformation projects start with low-cost pilots and limited resources that are scaled up once the kinks are worked out and the results are proven. Done in the right way, digital transformation can be self-sustaining, with each incremental improvement paying for the next leg of the journey.

You can actually save money. Past recessions show that controlling costs by improving operational efficiency—a task for which digital solutions are perfectly suited—is more effective in sustaining businesses through financial turbulence than traditional cost-cutting measures alone. For example, companies that rely primarily on workforce cuts to manage costs only have an 11% chance of “breakaway performance” coming out of a downturn, whereas companies that focus on operational efficiencies over layoffs are more likely to experience breakaway performance, according to research from Harvard Business Review.

The biggest efficiency play is automation. With automation projects, ROI is realized near-instantaneously, offsetting the upfront investment. Robotic process automation allows organizations to automate certain types of work processes to reduce the time spent on costly manual tasks and reallocate resources elsewhere. The economics of automation are simple: the same work is performed faster and with fewer mistakes, while human capital resources can be redeployed to higher-value tasks or to fill critical gaps. More sophisticated machine learning tools can be used to identify and address unforeseen areas of waste.

Business reinvention isn’t always a choice. Many businesses are experiencing devastating financial consequences from the pandemic, whether because of supply chain impacts, forced shutdowns, a significant pullback in consumer spending, or all of the above. Consumer discretionary manufacturers and retailers, oil and gas companies, and the service industry are among the sectors that have been struck the most grievous blows. To avoid catastrophic revenue losses, these companies have no choice but to shift focus to their business’s existing digital channels or make a bigger pivot to a digital business model. But again, there is a silver lining: The innovations that are made out of necessity could become lasting pillars of the business that help it to thrive well beyond the pandemic.

There will be no “return to normal”. The coronavirus is permanently reshaping the way we live and work. Some of the behaviors developed in crisis—including wide-scale digital adoption—will outlast the pandemic, well after restrictions on activity are lifted. To stay competitive, organizations must respond to these behavioral changes and meet emerging customer demands. Savvy organizations will focus now on leveraging advanced analytics to extract insights from their customer data and continue internal and external data integration efforts to develop a more holistic view. Detecting those signals of change early will be crucial to optimizing the customer experience and redefining customer value propositions in line with evolving preferences and needs.
COVID-19 Trends Here to Stay

  • Remote Work Arrangements
  • Digitization of Customer Service
  • Shift to e-Commerce
  • Greater Use of Self-Service
  • Contactless Delivery Options
  • Outsourced IT
  • Customers Focusing on Spending Less and Saving More
  • Increased Focus on Safety, Cleanliness and Health
  • Bulk-Buying and Stockpiling
  • Use of Online and On-Demand Platforms

 

Summary

Digital transformation is more necessary during this crisis, not less. But that doesn’t mean it will look the same as it did before the pandemic. Resources—both in terms of talent and money—will likely be constrained. Digital initiatives may need to be reprioritized based on relevance in the current environment. New problems and opportunities may come to light with greater urgency. For some businesses, the forces of disruption may be so great that the long-term strategic vision will need to be overhauled. And any digital transformation roadmap that does not deliver value at every increment will need to be reimagined. The key is continuing to experiment and innovate with digital solutions front and center. With the right approach, businesses can come out of the fray stronger, more agile, and more customer-centric than before.

 

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The Data Analytics War Room: Lessons Learned from The Covid-19 Pandemic

The COVID-19 pandemic has threatened the health of our communities, businesses and the global economy.

The stakes are too high to allow room for error when decision-making is often a matter of life or death. From a societal standpoint, both human lives and livelihoods hang in the balance. For many businesses, actions taken in the coming months may determine their survival.

In this climate where the complexity of the problem exceeds the limitations of a judgment-based approach, we must turn to a more powerful tool than human experience alone: data analytics.

Predictive data models are essential tools for ensuring the next hot spot of infection has the right number of beds, medical staff, personal protective equipment, and ventilators on hand.

Data analytics can project how much policy measures—such as stay at home ordinates, the closure of nonessential businesses, or mask mandates—will flatten the curve. And these insights can help local leaders determine the appropriate timing and approach to reopening the economy without unnecessarily risking a resurgence in illness.

In this unprecedented time, we have seen governments and health organizations recognize that no matter the wisdom and experience of leadership, determining the “best decision” requires the examination of a range of factors and consequences that cannot possibly be processed through human judgement alone. Rather, to decide upon the most optimal action to take under such stressful, high-risk conditions, decision-makers must consult the data and look at the models to determine with clarity “what would happen if…”
Data Analytics-Driven Decision Making is a Business Imperative

In this challenging climate, middle market businesses are doing all they can to stay afloat, from cutting costs to overhauling their revenue models. Under pressure to take swift and decisive action, the most resilient businesses will leverage data analytics to light the way forward.

The business case for transforming into a data-driven enterprise is already well-established: “Insights-driven” businesses grow at an average of more than 30% each year and were predicted to take $1.8 trillion annually from their “less-informed peers,” according to research from Forrester.

While most businesses are shifting focus from capturing growth to preserving value and mitigating risk, data-driven decision-making is no less essential. In fact, it’s more essential—gut feel doesn’t cut it when human lives and livelihoods are at stake.

Business intelligence systems for big data gained popularity in the wake of the 2008 recession. While IT budgets were slashed in 2009, investments in business intelligence platforms continued to tick up, as companies began to recognize the value of information access and real-time insight.

In the 12 years since the last recession, business intelligence tools and techniques have evolved dramatically to meet the demands of the big data environment. Visualization and clustering techniques, for example, are used to more easily inventory and categorize raw data. New data preparation tools can automate the extraction of data into an analytics-ready format. Greater processing power and edge computing has enabled organizations to collect and analyze data from mobile devices and embedded sensors. Advanced analytics and machine learning applications can be used to solve more complex business problems and form a predictive response. These advanced applications are enabling organizations to do far more with their data, from driving new operational efficiencies to detecting anomalies or threats to uncovering emerging customer behaviors.

In a COVID-19 climate, data analytics can help businesses to:

·       Decide which products and services, capital projects, markets, and people to invest in.
·       Determine which disruptive events might require a change in strategy.
·       Monitor for anomalies and patterns that may indicate a threat or opportunity.
·       Pinpoint the best actions to take if these disruptive events occur.
·       Smooth friction in the business operations, product portfolios, or supplier relationships that might constrain ability to act with speed.

However, with capital constraints an issue for many during this time, the journey toward operationalizing analytics across the enterprise can and should start small, with ad-hoc adoption of analytics in dashboards and reporting. Even with ad-hoc projects, it’s important to keep the end game of insight-led innovation in mind, which is the premise that today’s innovations should pave the way for tomorrow’s. Every innovation should enable more informed, data-driven, strategic business decisions down the road.

As companies position themselves to adroitly navigate COVID-19, management teams can learn valuable data analytics lessons from the present pandemic.
COVID-19 Lesson #1: Success Hinges on Addressing “the Data Problem”

Accurately forecasting the trajectory of COVID-19 is easier said than done. Even with the brightest minds in the world on the case, and highly sophisticated artificial intelligence (AI) models, predicting when the current pandemic wave will end with a high degree of certainty still eludes us.

It’s a data governance problem. How COVID-19 data is reported varies significantly from country to country, and even from state to state. Some reports include presumptive positives in their numbers, while others do not. Many reports categorize cases by severity or demographics, but don’t use the same parameters to do so. Methods of calculation have changed midway, resulting in discrepancies within the same data set. Divergent testing approaches may have also impacted the comparability of the data. Without a uniform reporting standard, the underlying data points that support COVID-19 projection models aren’t necessarily reliable.

The lesson for businesses? Insights are only as good as the underlying data on which they are based. A significant portion of enterprise data collected is either trivial, irrelevant with no business value, or cannot be read by the systems in place. Extracting insight from data is also constrained by inconsistent naming conventions, duplicate data and incomplete records. According to research by Gartner, poor data quality is estimated to cost organizations an average of $15 million in losses per year and, for some businesses, that figure is much higher.

According to a 2019 IDC infobrief, data workers waste 44% of their time each week on data preparation alone—time that could be better spent on analysis to yield insights. Streamlining the insight discovery process starts with getting your data house in order. Harnessing analytics more effectively can also help bring dark data into the light, yielding significant insights from information that otherwise might grow stale or remain unanalyzed.
COVID-19 Lesson #2: Culture and Talent Can Bring About Data-Backed Thinking—or Hold it Back

As COVID-19 made its way from Wuhan to the United States, California was among the first hit, with the first death in the state traced back to as early as February 6th. California acted swiftly, moving forward with a stay-at-home ordinance before any other state—giving the Governor and the hospital systems the valuable time they needed to prepare.

The state has partnered with a broad swath of technology companies from pandemic early warning AI company BlueDot to California-based data giant Facebook. Through these partnerships Governor Newsom has been able to use mapping technology and anonymized cell phone data to evaluate the effectiveness of stay at home policies in real time and spot potential problem areas before it is too late. California’s plan for reopening similarly hinges on data-backed contact tracing powered through Bluetooth.

A year ago, this approach, and these partnerships would have been politically and culturally impossible. But the stakes of COVID-19 had lead political leaders to shift their thinking and form new alliances—altering the policy decision-making process to mirror the culture prevalent throughout Silicon Valley companies: hinged on data-driven insights.

For many businesses the pathway to exploiting the full benefits of data analytics is helped or hindered by company culture. Perhaps data-driven decision-making is not a part of the company DNA. Current approaches to decision-making may be so culturally ingrained that there is real resistance to doing things differently. This can be especially challenging when these institutionalized practices have achieved desired results in the past, and thus seem effective due to anecdotal evidence. In short: comfort, or even complacency, with “the way we do it” is more handicap than advantage.

How can you encode data-driven decision-making into your business DNA?

  1. Treat data as invaluable. Leadership can begin the wave of cultural change by inspiring employees to view data as a lever to unlock business value. That starts with establishing KPIs to measure not only the value of your data assets, but your data analytics assets—the dashboards, applications and tools your organization has at its fingertips. The best way to value these assets is to tie their use to the business decisions and operational functions they power.
  2. Facilitate smart information sharing. Data is only as valuable as it is useful. Connect disparate “pockets” of analytics and leverage tools like real-time dashboards designed to summarize relevant insights for key stakeholders.
  3. Don’t silo your data scientists. A successful analytics function must have direct access to business leaders and a deep understanding of business challenges. A number of structures can work, but it’s critical to ensure that those with data expertise and deep business knowhow have the opportunity to work in lockstep to solve difficult business challenges.
  4. Define what “good” looks like. Establish policies, protocols and practices for individual data stewardship responsibilities, provide guidance on how and when data analytics should be used, and formalize the decision-making process.
  5. Foster data literacy. While it’s unrealistic to turn your company into an army of data scientists overnight, it’s critical to train employees responsible for inputting data to do so accurately and to teach business leaders throughout the organization to partner with the data team to extract insights. It is best to offer training right before employees can put these skills into practice—giving them the chance to absorb the concepts.
  6. Make it part of the job description. Develop clear roles for data analytics-related responsibilities. Structure compensation and leadership positions to reflect each employee’s part in the stewardship of the data they interact with—not just the data they “own.”
  7. Incentivize good behavior. Recognize employees for good data stewardship and reward the employees who drive data analytics-related financial or operational improvements.
  8. Practice what you preach. Engraining data into decision-making processes is like teaching the workforce to build a new muscle or adopt a new healthy habit. Managers must lead the way by offering data in support of their business decisions and sharing that reasoning with their teams openly. Role modeling these actions can set new cultural norms. Staff should come to believe that in order to build buy-in, you must explore a range of options, weigh tradeoffs, and come to the table with an evidence-based recommendation.
  9. Manage ethical implications. With big data comes big responsibility. Consider ethical and privacy concerns to inform a company-wide code of conduct for ethical data use.

 

COVID LESSON #3: Bring Data Analytics into the War Room

South Korea is a coronavirus success story. South Korea had its first confirmed case of COVID-19 on Jan.20. Four months later, South Korea has a total of just under 11,000 cases and fewer than 300 deaths. The government had relaxed social distancing guidelines—and reinstated lockdowns when data showed it would help prevent a second wave.

While so many other nations have struggled, South Korea managed to successfully flatten the infection curve. What did they do differently? They leveraged data to its fullest extent. A public contact tracing app is used to collect geospatial, transactional and image and video data to provide a full picture of a confirmed patient’s movement, including their location history, when they were there, how long they were there, and even the transportation mode they used to get there and leave. A dependable test kit was rolled out in under three weeks using an artificial intelligence system with big data on pathogen and disease information. Between contact tracing and an aggressive approach to testing, South Korea arguably has the most complete view of the virus in the world—and they’ve been able to act swiftly because of it. In the words of Lee Sang-won, an infectious diseases expert at the Korea Centers for Disease Control and Prevention, South Korea has “acted like an army.” They brought data to fight the war.

This conversation is now playing out in Washington. During a recent Senate coronavirus hearing, funding for data modernization and the development of predictive analytics capabilities was a topic of interest.

To effectively respond to crisis, businesses should bring real-time insights into the company war room. Speed is of the essence, but fortunately, significant infrastructure investments and integration efforts aren’t a prerequisite to getting access to relevant insights. Databases, machine learning components and data automation tools can all be spun up in matter of minutes. Unlike more complex analytics projects with undefined parameters, if you know what KPIs to track, it’s just a matter of mapping your data to these pre-defined metrics.

Of course, this does assume that your data foundation is already in good shape. Ungoverned data requires significantly more time to prepare for analysis. A complete information governance overhaul is impractical when the insights you need are for a crisis scenario, so your best bet is to prioritize cleansing the source data you need to meet specific project requirements.

Key KPIs For Your Analytics War Room

  • FINANCIAL HEALTH – Real-time visibility into your liquidity position and net working capital can help you ensure the accuracy of your cash flow forecast and identify potential cash crunches before it’s an issue.
  • CAPITAL SPENDING – Do you know where your money is going? Monitor procurement costs and track delivery performance overall to identify cost savings and uncover anomalies. See how you’re tracking against individual project budgets as well as budget roll-ups to prevent overspending and resources are appropriately allocated.
  • OPERATIONAL HEALTH – Understand the efficacy of business processes and monitor overall business performance to identify inefficiencies and potential vulnerabilities.
  • EMPLOYEE HEALTH – Protect essential employees’ health through symptom monitoring and temperature tracking, and map compliance to following social distancing guidelines in the workplace. Track remote workers’ computer activity and time spent working to gauge productivity and performance levels.
  • CUSTOMER HEALTH – Insight into customer interactions will be critical to protecting revenue and increasing customer satisfaction. Is revenue going up or down? Are customer complaints on the rise? Are payments coming in on time and what our delinquency rate? Are you responding appropriately to customer contacts and unpaid bills? Access to these metrics can make the difference between losing a customer and keeping them.

 

Applying Data Analytics in COVID-19

Essential Business Application
Imagine a grocery store struggling to keep pace with demand as household cleaners and pantry staples fly off the shelves. The store may only be allowed to permit a few customers into the store at a time to protect customers from infection. Lines are long, and customers are reluctant to wait only to find that most desired products are missing from the shelves.

The company could capitalize on demand and thrive during these challenging times, but only with accurate, predictive insights.

What if that same store leverages point-of-sale transactions and sensors to collect data, such as: What products are in highest demand? Are customers at specific times of the day (e.g. senior hours) more in need of specific products? Are staples such as bread, eggs, and toilet paper most needed immediately following payday? Is the store becoming congested in particular aisles? How can they rearrange products to optimize customer flow?

By culling, centralizing, and analyzing data from in-store sensors and POS digital payments, the grocer can forecast demand, minimizing food waste and capturing full potential revenue.

Nonessential Business Application
Picture a professional services business which has asked its employees to work from home for the duration of the pandemic. The company is expecting decreased demand during the crisis—and uncertain how much liquidity it will need to bridge through to the recovery. Since it may be able to qualify for a forgivable loan through the stimulus package, the company wants to avoid layoffs if at all possible.

With collection of data on capital expenditures, the ability to forecast demand and analysis of the workforce’s productivity while working remotely, the management team may be able to make more informed determinations around: a. how much liquidity they need to procure, b. which costs to cut (e.g. would the company benefit from eliminating their lease and moving to remote only?) and c. how to pivot the business model by offering a new service or realigning talent around an offering with higher demand.

Crisis Moments Call for Evidence-Backed Decisions
The case for engraining data analytics into business decision-making has been longstanding. But in times of crisis when stakes are raised, time is of the essence and emotions run high, data analytics comes in where human judgement falls short: Turning information into insight, evaluating a wide range of potential actions and objectively predicting their consequences, both intended and otherwise.