EXECUTIVE SUMMARY
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SINCE SOP 98-1 BECAME EFFECTIVE IN 1999,
companies have begun to comply with its
requirements on accounting for internal-use
computer software. What some companies may not
realize is there are ways to leverage the
statement’s requirements to improve business
performance.
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APPROACHED CORRECTLY, SOP 98-1 IS A
CHANCE for companies to clarify and
solidify the value-adding role of information
technology. A company should use the statement
to enhance software asset management and
software development project management, not
just to capture the required data.
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BY ALLOCATING A SMALL PORTION OF THE
ANNUAL IT budget to assess existing
software, a company can keep its software assets
healthy and minimize the chances that software
limitations will snowball into business
limitations.
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COMPANIES CAN CAPITALIZE ON THE NEW
RULES BY improving both operational
processes and management systems, particularly
when they concern software. Companies should
conduct an inventory of existing software assets
and assess the business performance of each
application.
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BY TAKING THESE STEPS AS PART OF ONGOING
compliance with SOP 98-1, a company can
make sure its business–IT partnership is strong.
Some of these strategies can also apply to other
initiatives that do not have a large technology
component.
| WALTER DuLANEY is executive
vice-president and director of consulting for the
Concours Group, a Kingwood, Texas-based research,
management consulting and education company. His
e-mail address is wfdulaney@concoursgroup.com
. |
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.
Aggressive management of
information technology assets can save a company
an average of 13% of its total IT bill.
Source: The Gartner Group, Stamford,
Connecticut, www.gartner.com
. |
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
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Ensure the company launches the right projects.
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Encourage rapid and reliable project delivery.
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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.
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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.
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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.
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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?
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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.
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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. |