What are some of the implications – and unintended consequences – of funding agile projects?
Innovation is rapidly becoming part of everyday business vernacular; if you look around at a rapidly accelerating business world, it’s everywhere.
The impetus for a business to adapt to a fast-paced environment is accelerating with an increasing number of organisations adopting an “innovation culture” as their response.
According to businessweek.com , innovation has become “…the rallying cry of every product manager, the pursuit of every design consultant, the autocomplete of every press release writer.”
So as business embraces the concept of innovation and the reality of funding agile projects, what are some of the implications and considerations of innovation projects and – in some cases – the unintended consequences?
What Does Innovation Need to Look Like for the Business?
Innovation tends to be focused on the process of introducing something new for the business: starting from the origination of an idea through to the transformation and implementation of that idea and then taking into account the system upon which the process unfolds.
At the heart of innovation is the reality that the likelihood of success is an “unknown” at the start and as such we see more and more businesses adopting a “fail fast” approach to innovation projects.
Some organisations may need projects to execute to a strategy that has highlighted missing capability. Stakeholders need to recognise that there is likely to be a need to test the waters and adopt a ‘failure is OK’ philosophy to enable change to come through.
Fail fast does not imply lack of commitment to a mission or goal rather it indicates a willingness to:
- Experiment in the process
- Learn quickly from the results, and
- Make adjustments to better achieve an enhanced customer experience.
The traditional Research & Development function is probably where the capability to deal with failure is paramount.
An organisation needs to recognise that innovation, idea formulation and testing is an integral part of its success, it can then set aside the funds to allocate to these agile, swift to outcome (pass or fail), projects.
Portfolio Management and the “Innovation Fund”
Traditionally organisations create a slate of projects they wish to implement for any given period. The projects are prioritised and then funded through a formal funding process based upon available Capital and Operational Budgets.
In order to obtain funding and to be prioritised some form of Portfolio Management attribution is undertaken usually including factors such as:
- Return on Investment
- Strategic Alignment and
- Compliance.
This approach sits well with waterfall and iterative projects where the outcomes are clearly defined and to a certain degree predictable. But what happens when the project is more attuned to a ‘walk in the fog’ where outcomes are largely unknown and execution is very much by experimentation (i.e. “fail fast”)?
This is where typical Portfolio Management becomes problematic.To address this dilemma some organisations create an innovation fund where a slice of the pie is set aside to support the innovation initiatives. This fund is just that – a pool of funding available to innovation. Drawing down on it normally has a separate set of processes to traditional Portfolio Management.
The Accounting Implications of ‘Failing Fast’
The accountants among us will advise that for the costs of a project to be capitalised and sit as an asset on the balance sheet of the business, the costs much have been incurred in creating or constructing an asset that has enduring value i.e. a useful life of greater than one year.
Once the asset is complete, then it is amortised over its predicted useful life, typically 3-5 years.
There are several questions that arise when it comes to the costs associated with experimentation, for example:
- If we fail fast, does that mean we immediately write off the costs as an expense for each failed experiment? And reduce the organisation’s profit?
- At what point in innovation projects do we know we have created an asset?
- What happens if the costs to create it straddle fiscal periods?
The key take out here is that innovation projects run the risk of being treated as expenses and if so hit the bottom line of the business. There is an argument to be made that innovation projects and R&D are aligned and as such, businesses may be able to access Australia’s R&D tax incentive scheme.
However it’s imperative to get the right advice to ensure that the business understands how R&D works from a tax perspective as well as an accounting one.
Taxation Implications – Could We get Some Money Back?
According to Glenn Cosgrave, director of Sydney accounting firm Bates Cosgrave, research and development should be considered as part of tax strategy for any business that is undertaking innovation projects.
“Businesses often don’t understand that what they are doing is R&D work,” he says.
“The reality is that when business seeks out innovation, and is testing and trialling processes – there’s an inherent risk that it might fail – then it’s likely that work is R&D. There are tax incentives that businesses can – and should – take full advantage of.”
Eligible R&D activities are categorised as either ‘core’ or ‘supporting’. Core activities are experimental in nature where the outcome is unknown and whose primary purpose is to create new knowledge that might result in a commercial outcome. Supporting activities are those that support core activities and the business needs to understand and be able to substantiate the difference.
“We always recommend that any business with innovation programs seek advice about their tax situation before commencing the work to ensure a) that it’s eligible for the offset and b) to ensure it is properly documented. The recent changes reinforce that view,” says Glenn.
In the 2014 Federal Budget, the Australian Government tightened access to R&D support. The government also signalled that it would consolidate various R&D programs under the Entrepreneur’s Infrastructure Program.
In short, like most things in life, it’s a case of “buyer beware” when it comes to innovation projects.
Should your organisation embrace innovation make sure that your funding models and accounting rules are clear and agreed up front to avoid any nasty surprises (bottom line hits) and you have the ability to take advantage of opportunities (R&D incentives) where they may exist.
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