TurboTax For The Multinational Liquid Engines sells software that helps big companies pay less to the government. If it's popular enough, the company's own tax bill should be rising soon.
(Business 2.0) – Here's a math fact that not just bleary-eyed corporate accountants can appreciate: A company with only 15 subsidiaries can be organized a trillion different ways. The scale of that number is important to understand because how much a company pays in taxes boils down to how it arranges its various units to minimize the bite.
Should a new unit be a limited liability company or a special-purpose entity? Should it be domiciled in Delaware or Nevada? With product sourced from Singapore or Bangalore? Considering that most Fortune 500 firms are divided into a mind-boggling number of accounting units--General Electric, for example, has tens of thousands--the level of complexity produces rampant tax inefficiencies (industryspeak for paying more tax than necessary). It's not that big corporations don't want to conquer this problem. It's that they just can't.
At least they couldn't until last year, when Arti Arora and Ed Lazear started selling a kind of TurboTax for conglomerates. Like Intuit's popular home PC program for finessing Form 1040, Liquid Engines's software presents what-if scenarios. Except that this is TurboTax on steroids, combining higher-plane math with complex economic analyses of tax codes, pending legislation, transfer pricing, and other arcana of the tax accounting demimonde to give companies a powerful planning tool.
Unlike the $29.95 TurboTax, Liquid Engines costs $250,000. That's a trifling amount, says Lazear, the company's chairman, when you consider that "we've found cases where annual corporate taxes can be lowered by 10 percent." Given that a large company might pay $200 million or more in taxes, that's a significant savings--and it recurs each year. "The return on investment is immediate," Lazear crows.
The technology, the first of its kind for tax planning, has attracted top-notch VC firms, which have pumped more than $20 million into the private venture, based in Sunnyvale, Calif. "It's rare to find a market that's not being exploited," says Steve Baloff of Advanced Technology Ventures. The promise of this white space has also persuaded Nobel Memorial Prize-winning economist A. Michael Spence and former Internal Revenue Service commissioner Charles Rossotti to serve on the board, as well as a number of tax accounting rock stars.
Since the product's launch last March, Liquid Engines has signed up four clients, including the conglomerate Tyco and sports equipment maker Brunswick. Companies are loath to discuss the specifics of lowering their tax bills. (There's nothing illegal in what they're doing, yet they worry that it puts them in a bad light.) But Brunswick spokesman Dan Kubera says the $3.7 billion company, now in acquisition mode, uses the software to model mergers. "If we structure it this way, what's it going to cost? Or if we structure it that way, what's it going to cost?" he says. "It helps us with our analysis."
This strategic aspect of tax management is a key selling point. "If you've got 200 legal entities and you're acquiring 100 more, you need to know what to do with the overlap," says Arora, Liquid Engines's chief technology officer. Or if a company is expanding, the software divines the tax consequences of doing business in one city over another. That makes it very useful for siting plants or moving headquarters. Says Tyco spokeswoman Gwen Fisher, "It lets us quickly calculate the impact on the company."
Right Place, Right Time
It's no coincidence that Tyco is one of Liquid Engines's early adopters. After two years of corporate scandal, regulator-wary CEOs want to know what's in their books because they have to sign off on them personally. "Even knowing where all their accounting units are is a nightmare," Lazear says. Liquid Engines's software supplies greater transparency by automating, recording, and organizing a company's accounting decisions and strategy. And companies won't have to blindly rely on the outside auditors. "Customers are going for the visibility of this," Arora adds. "That's where the fear and uncertainty is today."
The ideas that led to the creation of Liquid Engines had nothing to do with accountancy. In 1999, Arora, a recent MBA graduate from the University of Rochester, was trying to develop a software model to allocate labor more efficiently. She stumbled on research by Lazear, a Stanford professor of human resources management and economics. Arora cold-called the professor, they compared notes, and eventually the two collaborated on a program that more efficiently matched job openings with job seekers. Their algorithm weighed and indexed the accomplishments of potential employees and matched them to the characteristics of openings, which naturally would be of huge value to any large corporation or job clearinghouse like Monster.com. Best of all, Lazear says, "you can apply it to any kind of market."
So they did, first developing another "optimizing engine" that applied the same logic to online markets. Their hope was to sell the matching technology to the many companies then setting up virtual marketplaces, but they shelved that plan after the dotcom bubble burst. Luckily, serendipity soon gave them an even better idea. In 2001, while waiting for a flight out of the San Jose airport, Lazear struck up a conversation with an oil company executive. "His job was to match tax deductions with the right department," Lazear says. "It's the same problem as matching the right worker to a company. We realized firms didn't have a way to look at the allocation of their accounting units, or even understand their legal entities." So they retooled the model again. "Through a variety of nonlinear programming and other optimization techniques," Lazear explains, "we created a way to combine these units in an optimal way instead of just trying it by brute force."
In other words, in about 200,000 lines of programming code, the software (four patents are pending) determines what is important to a company--for example, how much it pays in taxes vs. lower costs vs. consolidated operations--and matches those priorities with the various tax codes. That's no small feat, since each state and major municipality alone adds about 50 new tax rules a year. The algorithm wades through the matches and determines the top possibilities, spitting them out into a spreadsheet for a tax expert to interpret. For the first time, that accountant is transformed from lowly bean counter into bona fide strategic planner.
This sort of empowerment helps Arora win over corporate tax departments on sales calls. She's been out the past few months pitching 40 big companies on the virtues of a new international tax analysis tool. (Because companies stretched across the globe face an even greater number of variables, multinational taxation is, naturally, an even bigger headache.) Arora says Liquid Engines expects to double sales, and its 25-person workforce, this year.
Then it's back to pick up some of those dotcom-era dreams. Arora says Liquid Engines is applying its algorithms to other complex business problems, such as currency exchange, strategic cash-flow management, and even far-flung supply-chain operations. "It's all one great connective problem," she muses. And one great opportunity.