agile capitalization for greater business value

1 © 2015 CA. ALL RIGHTS RESERVED.@CAWORLD #CAWORLD

Agile CapitalizationFor Greater Business Value

Agile Management

Pat Reed

Agile Alliance

Director - Agile Accounting Program

Session Number AMX27S

@preed_pat#CAWorld


About Pat Reed…

“It’s kind of fun to do the impossible”

http://home.disney.go.com/index




http://agile.community.pmi.org/

http://agile.community.pmi.org/

http://www.google.com/imgres?imgurl=http://www.deadlinehollywooddaily.com/wp-content/uploads/2007/05/nbc-logo-72rgb-pos_jpeg.jpg&imgrefurl=http://www.deadlinehollywooddaily.com/urgent-shakeup-at-nbc-ben-silverman-replacing-kevin-reilly/&h=288&w=288&sz=36&tbnid=jaMKafFJWqAJ::&tbnh=115&tbnw=115&prev=/images?q='nbc+logo'&hl=en&sa=X&oi=image_result&resnum=2&ct=image&cd=1

http://www.google.com/imgres?imgurl=http://www.deadlinehollywooddaily.com/wp-content/uploads/2007/05/nbc-logo-72rgb-pos_jpeg.jpg&imgrefurl=http://www.deadlinehollywooddaily.com/urgent-shakeup-at-nbc-ben-silverman-replacing-kevin-reilly/&h=288&w=288&sz=36&tbnid=jaMKafFJWqAJ::&tbnh=115&tbnw=115&prev=/images?q='nbc+logo'&hl=en&sa=X&oi=image_result&resnum=2&ct=image&cd=1


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


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


Agenda

REALITY CHECK

CHALLENGE

TECHNICAL REFERENCE MATERIAL

SOLUTION FRAMEWORK

CASE STUDY

DISCUSSION

1

2

3

4

5

6


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/


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


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


Solution Framework


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


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


Engage the Right People

Technical Accounting

Finance, IT Finance

Financial Reporting

Audit

Compliance

Portfolio Management

Technical Leads, PrjMs, Scrum Masters, Financial Analysts

2


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


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


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?


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


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


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.


Imagine If….

We work collaboratively to cocreatea sustainable, scalable, consistent

and defensible solution?


Case Study


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


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


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


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/


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


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.


Q & A


Technical Reference Material

for additional information go to http://www.agilealliance.org/programs/agile-accounting-standard-program/


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


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


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


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.


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.


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


For More Information

To learn more, please visit:

http://cainc.to/Nv2VOe

CA World ’15

http://cainc.to/Nv2VOe

http://bit.ly/1wbjjqX