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Agile CapitalizationFor Greater Business Value
Agile Management
Pat Reed
Agile Alliance
Director - Agile Accounting Program
Session Number AMX27S
@preed_pat#CAWorld
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About Pat Reed…
“It’s kind of fun to do the impossible”
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For Informational Purposes Only
This presentation provided at CA World 2015 is intended for information purposes only and does not form any type of warranty
and does not offer specific accounting advice, but represents a practical and viable Agile Accounting approach to capitalizing agile
project labor costs that is in practice at a number of major US corporations. However, each project is unique and company
policies may differ. Please consult with your technical accounting, financial reporting and internal audit staff to review relative to
your internal capitalization policies.
Content provided in this presentation has not been reviewed for accuracy and is based on information provided by CA Partners
and Customers.
Terms of this Presentation
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Abstract: Agile Capitalization for Greater Business Value
With disruptive technology advances, software assets play an increasingly important role in creating a competitive advantage. It’s time for organizations to recognize and manage business software as a strategic corporate asset.
To keep up with the speed of business, companies turn to agile practices to deliver better customer value faster.
Challenge: agile software development is too often misunderstood and misreported, impacting taxation, higher volatility in Profit and Loss (P&L) statements, and dramatic, unnecessary staff cuts in an economy where talent retention is paramount to foster innovation.
To avoid those negative implications, companies can evolve their financial reporting practices to leverage the financial advantage of agile so they can benefit from the significantly increased tax savings and investor interest associated with agile capitalization.
This session will unravel the benefits of agile capitalization and explain how to appropriately interpret and apply generally accepted accounting standard (GAAP SOP 98-1 and ASC 350-40) so your organization can increase its agile adoption to deliver more business value faster to customers.
Pat Reed
Agile Alliance
Director
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Agenda
REALITY CHECK
CHALLENGE
TECHNICAL REFERENCE MATERIAL
SOLUTION FRAMEWORK
CASE STUDY
DISCUSSION
1
2
3
4
5
6
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Tech Reality Check
Increasingly fast, disruptive change and unprecedented complexity
Unpredictable and evolving needs of tech savvy customers
Innovation: (IOT+), cloud, machine intelligence and emergence of smart, 3D personalized objects…
Every organization is a tech companyhttp://www.forbes.com/sites/techonomy/2011/11/30/now-every-company-is-a-software-company/
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Challenge: Disabling Pull of the Past
1980s – 90s: internal software investments
Mandatory accounting guidelines to ensure investor confidence
Designed around a phased, waterfall, gated delivery model
Today: Agile as the dominant development and delivery model. Inherent constraints, confusion friction and risk with legacy accounting practices and policies
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What’s the Problem? Organizations utilizing a traditional waterfall model can readily adapt their
labor and project costing to the guidelines
Agile orgs jumping to conclusion that IT managers must now estimate, allocate, track and report labor costs to internal IT projects based on project work done in three specific phases: Preliminary, Development and Post Implementation
In reality, to ensure compliance, we must interpret regulatory guidelines through an Agile Lens to consistently estimate, allocate, track, and report labor costs to internal IT projects based on project work done in three specific phases: Preliminary, Development, and Post Implementation.
Analysis
Design
Development
Testing
Deployment
Support
Post Implementation DevelopmentPreliminary
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Solution Framework
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Framework for Success
Reality Check: Start with “Why”
Engage the Right People
Apply Lean Systems Thinking
Design the Test First
Discover Simple Rules
Cocreate Your Solution
Share Knowledge & Empower Your People
1
2
3
4
5
6
7
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1 Start with Why
Collaborative, trusted partnerships between IT and finance, technical accounting, financial reporting, auditors
Reduce risks of over expensing, audit findings, reporting errors, inconsistencies, waste, over engineering
Increase SG&A efficiencies through better expense cost avoidance
Positive impact on earnings and bottom line valuation
Increase team productivity, focus and morale
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Engage the Right People
Technical Accounting
Finance, IT Finance
Financial Reporting
Audit
Compliance
Portfolio Management
Technical Leads, PrjMs, Scrum Masters, Financial Analysts
2
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Apply Lean Systems Thinking
See and optimize the whole
Separate authority from responsibility
Work as outcomes, connections and value flows
Systematically and continuously eliminate waste
Do only what creates value…and nothing more
Align on why, what and how
Systematically solve problems
Continuous Learn and improve
3
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Design the Test First
Agile practices and policies that are:– Defensible (effectively address guidelines)
– Auditable and consistent across all methods– Scalable (all projects, programs, portfolio, enterprise)– Agile in nature:
Easy to implement (light touch)
Easy to interpret (clear bright lines and simple rules)
Easy to administer (open information)
Reduces waste (people above processes)
Efficient (value focus)
Reduce the risk of over-expensing project costs Reduce the risk of audit findings and non compliance
4
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4 Simple Test Example…
Does this solution clearly address the 3 stages of an IT project?1. Preliminary – before the asset is defined and project is funded (expense)2. Development (capital except for administration, overhead, training and data
conversion costs)
3. Post Implementation (expense) Have we documented management authorization of funding? Have we assessed probability that the project will be completed and
resulting software used to perform the function intended? When do we define that the software is complete and ready for it’s
intended use? Would this provide a defensible, auditable, scalable and
sustainable solution? Would this achieve our goals and objectives?
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5 Discover Simple Rules
The nature of work performed in the Preliminary and Post Implementation phases is primarily Expense
The nature of work in the Development Phase determines whether Capitalized or Expensed:
Decision tree:
Expense vs. CapitalizationWhat HowPeople or Process-Centric Asset-CentricAdministrative TechnicalSupport Decision-AuthorityDiscretionary/Supplemental Asset-Critical
IF
And
And
CAPITALIZE
ExpenseElse
Minimum expected life of 3 years beneficial use New software functionality Design/build/test cost results in the creation of a new asset of at least $100K cost
Completion of preliminary (expense) phase with e-mail from TM or PM to finance approval as evidence of readiness for design storming (triggering the development/capitalization phase)
High probability that the product will be completed as planned Work effort is directly related to asset /product design, development , testing or
implementation/integration (except for administration, overhead, training and data conversion costs)
Then
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6 Cocreate Your Solution
Close collaboration with technical accounting and Finance is essential to ensure appropriate agile interpretation and to cocreate an internal capitalization policy and procedures consistent with gaapand identify appropriate agile control points
Technical, Accounting and
Financecreate the
interpretation and policy
IT provides SME Expertise
re: Agile principles and practices
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7 Share Knowledge & Empower Your People
Training is equally essential to ensure clarity in process and practice consistency and to empower PMOs, Project Managers, Scrum Masters, Project Financial Analysts and Technical Leads with practical knowledge of internal capitalization policy, practices and control points.
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Imagine If….
We work collaboratively to cocreatea sustainable, scalable, consistent
and defensible solution?
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Case Study
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Case Study
Over a four year transformation to Agile Software Development practices, the organization delivered continuous SG&A efficiency/cost avoidance across the project portfolio, primarily through resource deployment/capitalization; eliminating significant project labor resource expense, and equally increasing Internal Capitalized Labor (from 50% project expense to 7%).
Decreased External Resource Expense had a direct and permanent positive impact on both SG&A and Divisional Earnings. Increased Internal Capitalized Labor improved SG&A, while appropriately classifying the costs as components of depreciable assets and expensing them through ROD over the associated estimated useful life
Enablers of this shift:
Effective partnership with Finance and Technical Accounting to accurately interpret accounting guidelines and their application to Agile project practices (via GAAP; SOP 98-1)
Continuous process improvements re: expense management and improved focus on maximizing business value and minimizing or eliminating marginal value expense tasks
Planning Analyst - The PA role has absorbed tactical PM management tasks allowing PM’s to focus on higher value capital workProject Management - Increased internal PM’s and changed the way they are allocated
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IT and Finance Collaboration Develop a Standard Accounting Practice for Agile Project Costing:
– Defensible (effectively addresses the guidelines)– Auditable– Scalable (all projects, programs, portfolio, enterprise)– Sustainable & Agile in nature:
Easy to implement (light touch) Easy to interpret (clear bright lines and simple rules) Easy to administer (open information) Reduces waste (people above processes) Efficient (value focus)
Reduced the risk of:– Inconsistencies in project labor accounting and reporting– Distracting project team focus from development to accounting for time spent by task– Over-engineering a solution– Over-expensing or over-capitalizing project costs– Future Audit findings
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Background Historically, Project Manager (PM) and Release Manager (RM) labor had been over expensed under
the assumption that PM’s and RM’s are primarily providing administrative overhead support for projects; Note: SOP 98-1 language is somewhat vague re: overhead interpretation
With the implementation of Agile delivery practices, the PM and RM roles transformed from traditional administrative roles into delivery roles critical to the development and implementation of the project/asset with a high degree of interaction with the technical team
To increase PM and RM value and capacity, IT transitioned most expense tasks to the role of Planning Analysts
General guidelines: PM and RM labor was forecast and actualized as expense during the preliminary and post-implementation project phases; and primarily as capital (based on the nature of the work being performed as primarily asset-based and asset-critical) during the development implementation phase; with the exception of time spent on administrative, process or people-centric tasks which should continue to be reported as expense
IT documented and implemented a simple set of rules and guidelines to promote consistency and accuracy of coding across teams throughout the organization
IT Implemented controls and routine audits as a PMO responsibility IT conducted initial and annual training for PM, RM, Technical Lead and
Scrum Master
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Excerpt from Citrix Online Case Study from Dan R Greening, Senex Rex LLC
After Citrix Online converted to agile, software engineers were no longer assigned long-term to a single type of software development which created a labor classification challenge. Project managers were estimating percent time and categorizations for engineering labor done, risking adverse audit findings. Worried finance staff asked for detailed time sheets, but agile project managers feared that interrupting engineers to track time would result in productivity loss, especially under agile.
The company under-capitalized software development to avoid risking tax audits and earnings restatement. However, it missed tax savings opportunities and its earnings statements under-represented its investment in software.
Company had a locally dramatic shift toward higher capitalization, better reflecting its long-term investment intent for most of its software development work.
Discovered “non-regression bug fixing” work could be capitalized (because we were making functionality available that never worked).
Shifted $10 million of software labor costs, in the first year of policy implementation, from what would have been expense to capital, reducing overall expenses and enabling an increase in engineering staff.
With successive quarters, auditors gained much confidence, saying this was one of the most verifiable approaches to labor capitalization they had seen.
For more information: http://www.agilealliance.org/programs/agile-accounting-standard-program/
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SummaryA Few Words to Review
Key topics
Agile is the dominant method
Guidance is written in waterfall language
Technology is a differentiator
Agile Accounting is complex and requires collaboration between IT and Finance
Findings
Agility focuses on value
It’s feasible to dramatically and appropriately reduce expense to create permanent positive impact on both SG&A and earnings which could enable value creation and innovation
Experiences
Benefits include technical team morale through focusing on delivering value vs. distractions of tracking expense
Collaborative teamwork
Continuous SG&A efficiencies through expense reduction
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SummaryA Few Words to Review
Results
The impact of appropriately capitalizing software development expenditures can be significant, and has a
number of important benefits re: competitive health of the company, and also ensures consistent reporting
and capital allocation within and across organizations for investors and in compliance with GAAP. Applying
an agile interpretation of guidance can optimize and fuel your focus on value creation and innovation and is
one of the most quantifiable and compelling benefits of enterprise agility.
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Q & A
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Technical Reference Material
for additional information go to http://www.agilealliance.org/programs/agile-accounting-standard-program/
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When within the Project do we Capitalize?
Expense Only Capital and Expense
Quick StartTreatment & Pre-
project tasksDesign
StormingIt 0
It 1 ProjectStages
Cost allocation
Preliminary Project Application Development
What How
The Preliminary Project Stage: “What” (Ends In Inception at the beginning of Design Storming)
The Development Stage: “How” (Starts with Design Storming)
The Post Implementation Stage: “When” (Begins 72 hours after the last production implementation, when final user acceptance testing and Level 2 support or maintenance handoff is complete)
Releases
Final set of stories deployed
Expense
72 Hrs
Inception
Post Implementation
Costs can be Capitalized once the “Approval to Start” has been secured and end at the completion of the Application Development stage when the asset is in production for customer use
Capitalization BeginsCapitalization Ends
…
…
Release
It 2
ReleaseRelease Release Release Release
It nIt 3 It 4
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Simple Rules
Expense project labor costs during the preliminary (feasibility) phase
Once the asset is defined and budget authorized, project labor costs to create the asset are capitalized
Following production implementation and stabilization, maintenance costs and bug fixes are expensed
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Preliminary Project Stage
Costs incurred during the preliminary project stage should be expensed as incurred.
Examples of activities that are completed in the Preliminary Project Stage:
– Strategic decisions are made to allocated resources to initiate the project
– High level performance and systems requirements have been determined
– Vendors have demonstrated how their software will fulfill requirements (if a vendor or package solution is being considered)
– Alternative means of achieving specified performance requirements have been explored (i.e. buy vs. build)
– A vendor or consultant has been selected (if appropriate)
For Agile Projects: When the project team has completed feasibility analysis and developed high level “epic stories” and is ready to move on to explore “How” the project will be iteratively designed and developed, the preliminary project stage is complete (previously labeled design storming). This clear bright line marks the project funding, initiation and beginning of capital work.
The preliminary project stage is any time on the project conducting feasibility and preliminary requirements analysis (“What”) before the asset is defined and project funding is approved by management with appropriate spending authority
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Development Stage
Tasks that can be capitalized are:– Designing the chosen path, including software configuration and software interfaces
– Coding – Development and testing
– Purchase and Installation of hardware or packaged software
– Testing, including parallel processing
Examples of costs that do not qualify for capital treatment during this stage include:– Training costs
– Data conversion. However, the building of data conversion programs can be capitalized. The time needed to do the actual data conversion is expensed.
– General and administrative costs and overhead costs
The application development stage is completed after final user acceptance testing in production. At this stage, monitoring and support is typically transitioned to site ops, (usually 72 hours after deployment to production).
This is when the project has been deemed “substantially complete and ready for use”.
Project costs incurred to develop internal use computer software during the application development stage should be capitalized or expensed, depending on the nature of the tasks.
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Post Implementation Stage
The post-implementation stage includes:
– Completing documentation on procedures
– Conducting formal training
– Certifying the operational system
– Preparing for post-implementation review
– Collecting project data and analyzing process data
– Conducting facilitated process review
– Routine “maintenance” activities, including fixing regression bugs, routine security reviews, refactoring code
The post-implementation stage includes deployment support, training and evaluation. Internal and external project costs incurred during this stage should be expensed as incurred.
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Relevant GAAP Principles
Objectivity principle: the company financial statements should be based on objective evidence
Materiality principle: the significance of an item should be considered when it is reported
Consistency principle: The company uses the same accounting principles and methods from year to year (note: referenced by documented policies)
Conservatism principle: when choosing between two solutions, the one that will be least likely to overstate assets and income should be picked
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For More Information
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CA World ’15