Capitalizing Software and Creating Business Value

ew accounting standards often require companies to collect information they have never collected before. The information that businesses must now routinely assemble and report to comply with those standards also may be the very data executives need to make certain internal management decisions.

Take, for example, the corporate world’s experience with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, issued by the AICPA in March 1998 for compliance in 1999. At first perceiving the statement to be simply a policy clarification, senior executives quickly realized the SOP required them to look closely at how their companies accounted for internal-use computer software. If those methods did not align with the SOP, companies had to make changes in their accounting and information technology (IT) practices.

What changes have companies made so far? How can companies and their CPAs best leverage the requirements of SOP 98-1 to improve business performance? Here are some answers based on the experiences of a seasoned technology consultant.

PUT THE RULES TO WORK

SOP 98-1 requires companies to capitalize internal-use business software (except research and development) unless the costs in question are immaterial (unlikely in most cases) or difficult to determine (a bad sign). (For more details on the requirements of SOP 98-1 see JofA, Sept.98, page 95.) Companies have been taking one of two approaches to deal with the new rules:

The don’t. Treating the rules only as a bookkeeping exercise and consequently not using new data to drive cost-saving efforts. This practice creates conditions under which accounting is seen as an incremental cost and technology can be perceived to fail even when a company has followed sound practices.

The do. Seizing the rule changes as an opportunity to improve financial performance, business process performance and relationships between business and IT professionals. Approached correctly, SOP 98-1 is a chance for companies to clarify and solidify the value-adding role of both the IT function and IT performance measurement.

A company should use SOP 98-1 to enhance the process it uses to manage its software assets as well as how it manages software development projects—not just to capture required financial data. Business-focused implementation can

• Ensure the company launches the right projects.
• Encourage rapid and reliable project delivery.
• Prompt an active approach to IT asset management.

If a company does regular and accurate project postmortems, it can collect the data it needs to satisfy the accounting requirement in the SOP and provide the feedback needed to continuously improve business process performance, thus creating business value.

SOFTWARE ASSET MANAGEMENT

To gain maximum advantage, companies should manage their business software not as a series of standalone, single-purpose departmental applications but, rather, as a corporate asset the company can reuse to create new business systems as rapidly as needed. As a joint business–IT activity, a company should focus its software asset management on aligning IT application software projects with the company’s strategic objectives, deploying solutions that meet the timing needs of the business and providing high-quality, cost-effective applications support.
Concours Group client research confirms the findings of the Gartner study (see graphic) that few companies leverage IT asset management to reduce costs. Why are so few companies achieving the savings that can result from aggressive IT asset management? Such management requires a disciplined and collaborative business–IT governance process for software investments. The exhibit lists the primary activities a company should undertake to implement governance and software asset management processes. Companies can use their full compliance with SOP 98-1 as a means of establishing such processes and to help them implement best practices in executing them:

• The implications of making new software investments are fundamental. SOP 98-1 delivers the message that a company should not budget significant IT expenditures on the basis of entitlement—based on a department’s fair share. Rather, IT expenditure requests should be identified with the specific business benefit streams they can create. To ensure a project delivers the promised benefits, companies should test each proposed investment to make sure it is aligned with the company’s long-term business strategy. To minimize the risks of nonperformance, companies should assign someone the specific responsibility for measuring benefits.
• Proper measurement can help companies realize benefits. If a company takes steps to measure the business process performance of its IT investments, it can achieve above-average results. Benefits measurement techniques will be helpful in guiding a company in adjusting IT investments to changing conditions. By implementing an active benefits measurement program, a company can ensure it is using scarce funds to maximum advantage.

SOP 98-1 also has important implications when a company is managing existing investments and retiring underperforming assets. Unfortunately, organizations rarely retire software as long as it still works and has not been replaced by another program that does exactly the same thing. This practice leads to an excess of obsolete software assets and resulting inefficiency. The quickest way for a company to reduce its IT costs is to retire aging, underused software. By doing so you eliminate the need for specialized hardware and operations, maintenance programmers and complex applications interfaces.

Companies should implement a procedure for regularly reviewing new software systems after they have been installed. In one case, we found a college recruiting recordkeeping program that had not been retired when the organization implemented a new human resource system. Retaining that obsolete program—essentially an e-mail service—prevented the organization from retiring a computer that cost them $10,000 a month in maintenance.

SOP 98-1 delivers the message that companies need to adapt their software development and use to suit changing business conditions. By allocating a small portion of the annual IT budget to assess existing software, a company can keep its software assets healthy and up-to-date. This will minimize the chances that software limitations will snowball into business limitations.

LEVERAGING SOP 98-1

Now that companies have met the initial challenge of implementing the requirements of SOP 98-1, how can they get the most out of the information they need to collect for ongoing implementation? CPAs can use the information collected to comply with the SOP to

• Raise awareness among business partners and the executive staff of the management opportunities and operating implications of these accounting rules. For example, change the annual budgeting rules. Start at a zero base, and ask managers to justify software development expenditures. A more aggressive strategy would be to undertake a zero-based budgeting exercise for all IT uses—not simply to find cost-cutting opportunities but also to educate management on how investments are deployed.
• Position the business to capitalize on the new rules by initiating improvements in both operational processes and management systems (especially asset management and software project performance reporting). Conduct an inventory of existing software assets to eliminate underused or redundant systems. For example, what special requirements justify a company’s having multiple inventory control and order processing systems? At a minimum, assess the business process performance of each software application. Eliminate the systems for which users cannot demonstrate verifiable cost savings or customer benefits.
• Enroll selected business partners in new (or refocused) “pathfinder” projects—business software development initiatives that explore and pilot the best ways to deploy and manage software assets. Make sure to cast such projects in terms of business outcomes. For example, what operational improvements is the company committed to and what are the forecasted financial benefits?
• Include both project sponsors and executive management when stating the specific business outcomes expected for major software projects. How will the software enable the business to operate better? Ascertain that participants take responsibility for ensuring the software delivers the promised results. Establish a leadership culture where projects’ business cases are not “put on the shelf” once management approves project funding. A project’s business case instead should be a management tool for defining success for the business–IT endeavor. Management should demand that the project team and software users demonstrate that the software has delivered the benefits described in the business case.
• Introduce a software project benefit evaluation as a new component of the overall management process. Start with the five most critical software initiatives from a business perspective, monitor project delivery and conduct postimplementation benefit realization studies three months after completing each project. Summarize the study results into a business value scorecard. Use the scorecard results to learn from each project and to set improvement goals. A company should introduce the practice of value reporting wherever it has made material resource investments, including initiatives that do not require the use of technology.

A STRONG PARTNERSHIP

Is your company’s business–IT partnership as strong as it should be? Are your major software projects considered business–IT joint ventures? These are key questions CPAs must make sure their companies ask as part of the ongoing implementation of SOP 98-1. Businesses complying with the standard can seize the opportunity to turn IT value management into the shared responsibility it should be.