DOES16 London - Pat Reed - Mind the GAAP: A Playbook for Agile Accounting
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Mind the GAAP: A Playbook for Agile Accounting Pat Reed, Principal Consultant, iHoriz Inc. With disruptive technology advances, software assets play an increasingly important role in creating competitive advantage through effectively managing business software assets. As organizations leverage agile practices to deliver better customer value faster, they consistently fall into process traps that block success because agile labor cost accounting is misunderstood and misreported, impacting taxation, higher volatility in Profit and Loss (P&L) statements, and sometimes even dramatic, unnecessary staff cuts in an economy where talent retention is vital to innovation. This session shares a practical playbook to avoid common pitfalls and gain awareness of what you can do to evolve accounting and reporting practices to leverage the financial advantage of agile and benefit from the significantly increased tax savings and bottomline benefits available with agile capitalization. This session will unravel the pitfalls and 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. DevOps Enterprise Summit London 2016
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DOES16 London - Pat Reed - Mind the GAAP: A Playbook for Agile Accounting
- 1. Pat Reed An Agile Accounting Playbook 0 GAAP
- 2. “It’s kind of fun to do the impossible” Agile Community of Practice 1 Pat Reed
- 3. Headline Key topics Increasingly urgent re: technology as a differentiator Agile Accounting is complex – with adverse impacts to org agility and bottom-line profitability Requires collaboration between IT and Finance Impacts Lack of understanding is key blocker to Enterprise Agility Missed opportunity to dramatically reduce risk and expense; create sustainable positive impact on earnings and enable value creation, growth and innovation Opportunities Intangible benefits include technical team productivity, morale and focus on value vs. distractions of tracking expense Collaborative community Applying playbook to related challenges
- 4. Why a Playbook on Agile Accounting & Capitalization? • Reality Check: Disabling Pull of the Past • Blocking Enterprise Agile, DevOps & Benefits • Breakthrough Mental Models & Agile Capitalization Playbook • Significant Benefits: - Reduced expense - Reduced risk - Enterprise Agility Accelerator - Improve value delivery 4
- 5. When within the project do we capitalize? • The Preliminary Project Stage: “What“ • The Development Stage: “How “ • The Post Implementation Stage: “When” Expense Only Capital and Expense Quick Start Treatment & Pre-project tasks Design Storming It 0 It 1 Project Stages Cost allocation Preliminary Project Application Development What How Releases Final set of stories deployed. Expense 72 Hrs Inception Post Implementation Capitalization Begins Capitalization Ends … … Release It 2 ReleaseRelease Release Release Release It nIt 3 It 4
- 6. When within the project do we capitalize? • The Preliminary Project Stage: “What“ • The Development Stage: “How “ • The Post Implementation Stage: “When” Expense Only Capital and Expense Quick Start Treatment & Pre-project tasks Design Storming It 0 It 1 Project Stages Cost allocation Preliminary Project Application Development What How Releases Final set of stories deployed. Expense 72 Hrs Inception Post Implementation Capitalization Begins Capitalization Ends … … Release It 2 ReleaseRelease Release Release Release It nIt 3 It 4 Reality Check: Most labor costs capitalized
- 7. Reality Check1: Profit = Revenue - Expense Agile Accounting capitalizing asset $50m 2010 IT cap budget AND $100m revenue 2010 profitability = $90m ($100m-$10m) vs. 2010 profitability = $50m ($100m-$50m) 2011 profitability = 2011 rev - $10m+ 2011 profitability = 2011 rev – 2011 expense 2012 profitability = 2012 rev - $10m+ 2013 profitability = 2013 rev - $10m+ 2014 profitability = 2014 rev - $10m+ Note: significantly increasing IT Capital Budgets = significantly increasing bottomline impact
- 8. Reality Check #2: No need to track hourly tasks We work collaboratively to co-create a sustainable, scalable, consistent and defensible solution? 8
- 10. Agile Accounting & Capitalization Playbook Start with “Why” Engage the right people Apply Lean Systems thinking Design the test first Discover simple rules Co-create your solution Share knowledge & empower your people 10
- 11. 1. Start with “why” • Complex, Adaptive Challenge • 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 efficiencies through better expense cost avoidance • Positive impact on earnings and bottom line valuation • Increase team productivity, focus and morale 19-Jul-16 12
- 12. 2. Engage the Right People • Technical Accounting • Finance, IT Finance • Financial Reporting • Audit • Compliance • Portfolio Management • Technical Leads, Project Managers, Scrum Masters, Financial Analysts 19-Jul-16 13
- 13. 3. 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 19-Jul-16 14
- 14. Option Tools & data Sustainable & Scalable GAAP Compliant Auditable & Defensible Agile In Nature Dependencies Can we use this solution across the organization & sustain it over time? Have dependencies been remediated? Can we collect the data that will identify the Cap/Non Cap Costs? Will the solution satisfy Compliance and Audit? Ask them! Are we holding true to the lean principles? 15 4. Design the Test First
- 15. 5. Discover Simple Rules 1. The nature of work performed in the Preliminary and Post Implementation phases is primarily Expense 2. The nature of work in the Development Phase determines whether it will be Capitalized or Expensed 3. Decision tree: IF 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 AND 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) AND 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) Capitalize ELSE Expense Expensed Capitalized What People or Process-Centric Administrative Support Discretionary/Supplemental How Asset-Centric Technical Decision-Authority Asset Critical 17
- 16. 6. Co-Create Your Solution Close collaboration with technical accounting and Finance is essential to ensure appropriate agile interpretation and to co-create an internal capitalization policy and procedures consistent with GAAP and identify appropriate agile control points Technical Accounting and Finance create the interpretation And policy IT provides SME Expertise re: Agile principles and practices 18
- 17. 7. Share Knowledge & Empower Your People Training is essential to ensure clarity in process and practice consistency and to empower PMOs, Project Managers, Scrum Masters, Project Financial Analysts, Auditors and Technical Leads with practical knowledge of internal capitalization policy, practices and control points. 19
- 18. One More Problem…..and Proposed Solution Does bringing back infrastructure from the cloud really contribute to gross margins? Are we asking the right question…..or is this another example of the pull of the past……focusing on cost vs. value? Imagine if we apply this playbook to find the answer?
- 19. The Agile Triangle Value (Releasable Product) Quality (Reliable, Adaptable Product) Constraints (cost, schedule, features) Source: Jim Highsmith
- 20. Summary A Few Words to Remember 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, It also ensures consistent reporting and capital allocation within and across organizations for investors and in compliance with GAAP. Applying an agile interpretation of guidance via proposed playbook can optimize and fuel your focus on value creation, impact profitability and innovation and is one of the most quantifiable and compelling benefits of enterprise agility.
- 21. Here’s the help I’m looking for: • How can we extend the playbook to help create a network and community to support organizations to remove these types of blockers to effective DevOps and Enterprise Agility?
- 22. Q&A 24
- 24. Mind The GAAP (Generally Accepted Accounting Principles) • Objectivity : the company financial statements should be based on objective evidence. • Materiality : the significance of an item should be considered when it is reported. • Consistency : The company uses the same accounting principles and methods from year to year (note: referenced by documented policies) • Conservatism : when choosing between two solutions, the one that will be least likely to overstate assets and income should be picked AXP Internal19-Jul-16 27
- 25. Case Study: Specialty Retail Fortune 200 Company Challenge: Bimodal Capitalization Objectives: Agile Imperative Urgent Replatform Reduce Expense Accelerate Profitability Approach: IT, Finance & Tech Accounting Partnership Continuous Learning Test First: Value Focus Results: Significant (50%) reduction of expense Reduced risk of audit findings Improved collaboration Key Learnings: Teamwork and Continuous Improvement 28
- 26. Evaluate Options Option #1 Scalable & Sustainable Auditable & Defensible Agile In Nature GAAP Compliant Dependencies Tools & data Option #2 Scalable & Sustainable Auditable & Defensible Agile in Nature GAAP Compliance Dependencies Tools & data Option #3 Sustainable & Scalable Auditable & Defensible Agile in Nature GAAP Compliance Dependencies Tools & data Option #4 Sustainable & Scalable Auditable & Defensible Agile In Nature GAAP Compliant Dependencies Tools & data Option #5 Sustainable & Scalable Auditable & defensible Agile in Nature GAAP Compliance Dependencies Tools & data Investigate further Fail test Pass test 29
- 27. International Financial Reporting Standards Principles • Fundamental qualitative characteristics of financial information: - Relevance - Faithful representation • Enhancing qualitative characteristics include: - Comparability - Verifiability - Timeliness - Understandability
- 28. Useful References • https://www.agilealliance.org/wp-content/uploads/2016/02/Accounting-for- Capitalization-of-Agile-Labor-Costs.pdf • https://www.rallydev.com/blog/agile/top-10-pitfalls-agile-capitalization • https://www.brighttalk.com/webcast/6505/194903/agile-capitalization-for- greater-business-value-1pdu • https://www.infoq.com/articles/agile-capitalization • http://www.accountingcoach.com/blog/capitalize AXP Internal