Cherry Bekaert Business Leaders Survey on Innovation and ......Cherry Bekaert’s Credit/Accounting Methods (C/AM) team helps companies identify, document and substantiate innovation

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BUSINESS LEADERS SURVEY ON INNOVATION AND GROWTH

OCTOBER 2019

PAGE 3

C herry Bekaert is excited to be in our fourth year of partnership with the

Washington Business Journal on our joint Innovation & Growth survey! The survey taps business leaders throughout the Washington region for a look at how business thinks about and encourages innovation, as well as its impact on growth.

We opened up this year’s survey to include executives from smaller companies. As a result, our latest survey highlighted different trends and observations from prior years and undoubtedly included additional fast-growing and innovative companies.

This year’s survey revealed that innovation remains a key priority for D.C.-area businesses, both large and small, and that innovation and growth are closely aligned. A culture of innovation is seen as the primary characteristic for fast-growth companies.

Some of the key takeaways from this year’s survey are evident in several case studies presented. These stories demonstrate how innovative companies can take better advantage of their innovation, creativity and technology. This approach will uncover and maximize benefi ts and savings

Helping Companies Innovate and Grow!

WASHINGTON D.C. PARTNERS

Best wishes,

to increase cash fl ow, thereby helping to fund innovation and growth, and attain competitive advantages and success.

Growth and innovation do go hand-in-hand. To achieve and sustain growth, companies require advisors who fully comprehend how innovation creates disruption and change that can lead to business risk, uncertainty, issues and new opportunities.

For more than seven decades, growth has been at the forefront of our Firm’s efforts. Cherry Bekaert takes pride in advising companies with both short- and long-term growth opportunities.

Whether you’re a global corporation, private business, emerging fi rm or start-up tech company, Cherry Bekaert is ready to serve as your growth partner.

EXECUTIVE HIGHLIGHTSINNOVATION AND FAST GROWTH COMPANIES SURVEY

Factors Contributing to Rapid Growth & Barriers to Achieve GrowthIn 2018, a culture of innovation was named as the top contributor to rapid growth. This year, entrepreneurial leadership was the top contributor. Question: What do you think are the most important contributing factors for rapid growth at a company/organization? Select up to 3.

The top internal barriers to achieving higher growth are lack offi nancial resources, increased competition and attracting and keeping customers. Question: Which of the following constraints are keeping your organization from achieving higher growth? Select all that apply.

ABOVE: Firms with fewer than 1,000 employees name internal entrepreneurial leadership and a focus on quality products and services, whereas those with 1,000+ employees say an innovative culture and their organization’s customer-centric foundation drive innovation.

ABOVE, RIGHT: In last year’s survey, lack of talent was identified as the top internal barrier to achieving growth. In this year’s survey, only 21% of companies indicated a lack of talent as the top internal barrier. We were surprised by this; during interviews with companies nominated for this year’s Fastest Growing 75 Companies awards, the war for talent was by far the No. 1 concern.

Entrepreneurial leadership within the company

A focus on quality products and services

A culture of innovation

A foundation as a customer-centric organization

A strong strategic growth plan

An ecosystem of partnerships and investors

A strong digital presence

An ability to quickly analyze their business metrics

Investment in cutting edge technology

Other

Financial resources

Increased competition

Attracting/keeping customers

Existing organizational culture

Cash flow

Lack of talent

Customer knowledge

Lack of leadership

Government regulation

Inadequate technology

Economic slowdown

Tax policy

Other

46% 33%

30%

29%

29%

12%

10%

9%

10%

4%

14%

16%

21%

23%

42%

38%

38%

36%

23%

16%

13%

10%

4%

Planned Areas of InnovationBased on 2018 projections, both Customer Experience and Products increased, with signifi cantly less focus on Services, Supply Chain & Channels to Market, and Technology. Question: In which of the following areas is your organization looking to innovate in the next year? Choose all that apply.

It is no surprise that for the past four years of our survey, respondents have emphasized Customer Experience as one of the primary innovation areas they plan to focus on. Companies can make significant gains in their customer experience, which leads to growth.

IOT and AI/ML are advancing

rapidly with >50% of organizations

actively exploring or implementing

them. Businesses are prudently

identifying scenarios that will drive

appreciable return-on-investment.

2017 20192018

Business model

28%

19%

36%

Customer experience

51%

32%

50%

Products

40%

17%

34%

Services

45%41%

58%

Supply chain and channels

to market

14%13%

26%

Systems & processes

(int and/or ext)

45%

37%

46%

Technology (int and/or ext)

46%

33%

56%

Adoption of technologyQuestion: Please indicate the stage your company is in using these technologies.

Gathering information Not reviewed yet Not applicableIn use Testing

Smart Technology / Internet of Things

26%32%

11%

19%

Artificial Intelligence / Machine Learning

17%

28%

16%

21%

Innovation BudgetThe majority of companies allocate less than 20% of their budgets to innovation, and the proportion investing more than 40% of their budget to innovation decreased signifi cantly between 2018 and 2019. Question: What percentage of your budget do you allocate to innovation? Your best guess is fi ne.

Most companies plan to maintain or increase their innovation budget in the next year. However, more companies than last year anticipate a budget reduction. Question: In the next year, do you think the percentage of your organization’s budget allocated for innovation will…

0%

1%–9%

10%–19%

20%–29%

30%–39%

40%+

3%8%

2018 2019

2018 2019

60% of companies with government contracts say their budget will increase, versus only 41% of those without government work.

26%

29%

9%

9%

24%

36%

Increase57%

52%

25%

Stay the same

42%44%

14%

Decrease1%

5%

6%

11%

12%

18%

PAGE 4 PAGE 5

Innovation Sources & BarriersThough slightly lower than any previous year, in-house innovation is still the most prevalent process. Question: Which of the following describes how your organization innovates? Choose all that apply.

The top internal barriers to innovation are fi nancial resources and organizational culture, although culture continues to be less of a concern than the previous year. Question: Which of the following constraints is limiting your organization from being more innovative? Select all that apply.

SAMPLE SUGGESTIONS TO IMPROVE INNOVATION SUCCESS RATE

HOW LOCAL GOVERNMENTS CAN ENHANCE REGIONAL INNOVATION

Question: What is one thing you’d change about your organization’s innovation process that would improve its success rate? How would that change help?

2018 2019

Most respondents believe tax reform has had little to no impact on their business. Question: What impact if any, has the Tax Reform Act had on your business decisions in regards to investing in growth and innovation?

We haven’t seen the full impact of the aspects of the tax bill that were intended to fuel growth. Daunted by the act’s complexity, many businesses have not taken advantage of the new rules. We recommend that they make the most of these opportunities once clarifying guidance is issued by the IRS.

Helped increase growth

Led to increased investment in capital expenditures

Led to increased investment and innovation

Little or no impact

Hindered company growth

65%

13%

5%5%

12%

76%

65%

72%

64%

52%

33%

59%

53%

62%57%58%

46%

Innovating and developing primarily

in-house

Working with external partners

Customer feedback

20172016 20192018

Firms are less likely to rely on tax credits at a federal or state level, or on local government incentives, than in previous years. Question: Are you planning to apply for or receive any of the following public fi nancial supports for your organization’s innovation(s)? Select all that apply.

Federal & Local Government Roles in Fostering Innovation

It is not very surprising that few companies are taking advantage of tax credits and local incentives. Companies with formal innovation processes are more likely to receive government support for innovation.

32%

12% 13%

20%

10%

16% 15%

Federal tax credits

12% 13%

26%

State tax credits

18%21%

24%

Grants

15%

12%

23%

Local government incentives

20172016 20192018

43%

38%

Financial resources

41%

30%

Existing organization

culture

21%

28%

Lack of talent

23%

18%

Inadequate technology

22%

18%

Lack of leadership

15%

10%

Other

“Make it part of our DNA instead of an appendage to our normal operating processes.” – VP/C-Suite, Technology, $500MM+

“Dedicated innovation resources. Folks who are tasked with innovation are typically stretched across a number of projects and are unable to apply the focus required to successfully execute and grow new products.”– Director, Media & Publishing, $500MM+

Question: What is the one thing local government can do to enhance innovation in this region?

“Make more R&D information publicly available.” – President/CEO, Other Professional Services, <$10MM

“Convene local innovators across sectors in order to encourage networking, knowledge sharing, and continuous development; create a sector that attracts new talent and new opportunities for that talent; create community models designed to attract new residents and workers to the region; incentivize small businesses through more funding, grants, and support programs.” – President/CEO, Technology, <$10MM

“Would like to see stronger partnerships between corporations and universities or startup hubs to drive talent development and innovation.”– Director, Media & Publishing, $500MM+

Capturing Tax Benefi ts to Fund GrowthCherry Bekaert’s Credit/Accounting Methods (C/AM) team helps companies identify, document and substantiate innovation and processes that qualify for federal and state R&D credits. We also assist in fi ling amended returns to claim the credits and generate signifi cant refunds from prior years while establishing guidelines to claim the R&D credit moving forward.

Startup Healthcare Technology Realizes $498K in R&D Tax Credits • The Situation: A startup company building smart technologies has developed several custom software solutions, as well as an integrated operational management platform. Although the startup has little taxable income, it had incurred signifi cant costs, including payroll taxes. Cherry Bekaert offered the startup a complimentary scope. Our C/AM team went onsite and discovered even more qualifi ed costs, such as wages and cloud computing, that expanded the tax benefi ts 57 percent beyond those of the initial scope.• Results: The startup company received a $498K dollar-for-dollar offset against taxes paid, resulting in an 805 percent ROI.

Surprisingly, companies are less likely now than in previous years to rely on federal or state tax credits and incentives or

on local government incentives, according to the results of our 2019 survey. We believe credits and incentives should be integral to companies’ tax strategies, because they can fuel growth and innovation while providing valuable exposure to local governments and the business community.

R&D tax credits, explained and simplifi edResearch and development activities fuel the innovation that drives economic growth. So it’s worth keeping in mind that the tax code includes R&D tax incentives, which apply lower tax rates on profi ts generated through patents, research, innovation or other creative activities.

Who can claim an R&D tax credit?If your business involves applied research or practical and technical problem solving, it may qualify for an R&D tax credit. Even small, evolutionary improvements in products or processes could qualify.

Unfortunately, less than 30 percent of eligible companies realize they qualify. And companies that do claim the R&D credit don’t always claim the full amount to which they’re entitled. If your company is working on any item below, you’ll likely qualify for the credit.• New materials or technological concepts• Prototypes and models• New or improved products, software

applications or processes

How is the R&D tax credit different from a deduction?The credit is a dollar-for-dollar offset against taxes owed or paid. Although computing the credit can be complex, most companies receive a credit equal to 9 to 14 percent of total qualifying expenditures (most of which stem from wages paid to employees participating in qualifying activities). If your company engaged in qualifi ed research activities for the last several years, you may be eligible to retroactively claim R&D tax credits.

FUELING INNOVATION AND GROWTH

• CASE NO. 2: A government contractor creates 250 full-time technology jobs in Virginia to service a new contract.

• RESULT: The contractor receives a discretionary Virginia Jobs Investment Grant for the expansion of essentially $800 per new job.

• CASE NO. 1: A health technology company with offi ces in the District expands due to innovation and job growth.

• RESULT: The company benefi ts from D.C. Qualifi ed High Technology Company tax credits worth $90,000.

HOW CHERRY BEKAERT CAN HELP

Cherry Bekaert’s State Credits & Incentives practice has secured signifi cant benefi ts for many small and mid-sized companies. We helped them recognize and apply for credit and incentive opportunities – benefi ts that provided cash to fund operations, hire employees, purchase assets, and invest in R&D.

STATE CREDITS & INCENTIVES

PAGE 7PAGE 6

For over three decades, THInc.IT, a Cherry Bekaert LLP company, has provided world-class technology solutions to organizations throughout the Mid-Atlantic region. THInc.IT helps organizations capture, manage, secure and deliver information to meet strategic goals and objectives. Below is an example of how THInc.IT offers innovative solutions to give businesses a competitive advantage. Leverage our expertise: thincit.com

THInc.IT: Providing Solutions to Encourage Innovation and Growth

• THE CHALLENGE: With each acquisition, a private equity fi rm’s data management activities become exponentially more diffi cult. Unfortunately, the increased complexity doesn’t temper the expectation that decisions will be made in a timely manner.

• How THInc.IT Provided a Solution: THInc.IT is working with private equity fi rms to automate the process of collecting and analyzing fi nancial data from its portfolio companies. The creative application of cloud-based technologies dramatically improves the reporting cycle, facilitating timely decision making and enhancing their ability to visualize consolidated fi nancials. Combining prescriptive guidance and emerging technologies, Cherry Bekaert and THInc.IT are helping PE fi rms improve performance by making timely, data-informed decisions.

Private Equity Firms Leveraging Data Analysis

Are D.C. government contractors innovative and fast growing?A s in 2018, our 2019 survey

shows that a culture of innovation is the top

contributor to rapid growth. So it’s understandable why more than three quarters of this year’s Washington Business Journal 75 Fastest Growing (private) Companies are government contractors who stress innovation.

This year’s survey revealed that sixty percent of government contractors plan to increase their innovation budget this year, with half having formal innovation processes and a dedicated individual to drive the process.

The government’s most profound technological breakthroughs have resulted from partnerships with private

industry and academia. Expanding these partnerships is vital for increasing the government’s collaboration and innovation, while also addressing the nation’s most pressing challenges.

Federal agencies have often viewed Silicon Valley tech companies as more innovative than traditional government contractors. However, that perception, which many prominent D.C.-area companies believe is inaccurate, is changing.

Contractors should bear in mind that the government can be hesitant to abandon time-tested partners in favor of new contracts-- The solution? Emphasize innovation.

While government procurement

remains a diffi cult process, we see federal agencies using new methods to attract private companies and to encourage modernization and effi ciency.

Throughout our Firm’s participation in the Fastest Growing Companies list and this survey, we’ve interviewed and learned about numerous innovative companies in Greater Washington. These interactions, combined with our survey results, make two things very clear: there is a defi nite link between a commitment to innovation and rapid growth, and many of the companies experiencing the greatest increases are utilizing that innovation to actively participate in Government Contracting.

The results of the innovation and growth survey aligned with technology and innovation trends in most large domestic cities. However, examining a few data anomalies will help our commercial sectors make effective use of both mainstream and emerging technologies.

First, companies clearly have more innovation and technology choices than they can research and adopt. As evidence, fewer companies this year are fully consuming their innovation budgets as compared to 2018. In addition, most companies allocate less than 20 percent of their budgets to innovation, and the proportion of companies allocating more has decreased. And while most companies plan to maintain their innovation budgets in 2020, a growing number anticipate a reduction.

The data also reveals that most innovation initiatives are conceived and executed in-house, with lesser innovation catalysts being external partners, customer feedback, intellectual property, and university/professional research.

Companies need help choosing and implementing innovative technology

Organizations need help parsing the myriad technologies and innovative approaches, and guidance on understanding and choosing the few innovative solutions that have an identifi able and quantifi able ROI. In short, innovative processes and technology must be practical, and they must predictably improve our productivity and fi nancial performance.

Thankfully, we have help.

According to our survey, companies are increasingly inclined to invest money and effort in “smart” technologies and the Internet of Things (IOT). Why? Because these technologies can be adopted and deployed in bite-size chunks that will shorten implementation and more quickly achieve ROI.

THInc.IT, a division of Cherry Bekaert, is helping businesses identify and address problems through the creative use of

IOT, artifi cial intelligence and machine learning. In commercial real estate, the elixir of IOT, AI and ML provides smart buildings that dynamically address security, space management and environmental concerns at a cost savings in excess of 25 percent. Using ‘digital twins,’ THInc.IT is helping commercial contractors digitally transform their business models to provide comprehensive building management solutions.

Similarly, the creative application of AI and machine learning to contracting and documentation is substantially automating many audit, review and legal processes. It has enabled several clients to begin automating manual processes that had been historically been very time-consuming.

Innovation is alive and well. But as organizations have learned, its iterative application is necessary in order to create appreciable ROI, which in turn drives continued investment.

OUR CONCLUSION: INNOVATION FOR INNOVATION’S SAKE IS A BANKRUPT IDEA.

QOZ QUICK FACTSF orty-eight percent of the companies that responded to our recent survey are still unfamiliar with the tax advantages of investing in Opportunity Zones (OZ). Here’s another disconcerting fi nding: Only two-fi fths of the respondents have considered

investing in OZ and are either exploring them locally or learning more about them. Finally, only a quarter of respondents are actively reviewing an OZ project or have already invested in one.

Goals and Financial Benefi tsOpportunity Zones were established as part of the 2017 Tax Cuts and Jobs Act (TCJA) to incentivize long-term, private-sector investments in low-income urban and rural communities nationwide. In addition to encouraging economic growth in those communities, OZ provide a new tax deferral and savings opportunity with respect to realized gains.

An Opportunity Zone Fund investment allows taxpayers to defer capital gains by reinvesting such gains into a Qualifi ed Opportunity Fund (QOF), and to exclude potential future capital gains on the appreciation of investments within the zone. Investors also can diversify into other asset classes, such as real estate, without the attendant capital gain tax consequences.

To take advantage of the full benefi ts, an investor must defer capital gains into a QOF by December 31, 2019. The good news is that investors are still able to receive the benefi t of the tax deferral and savings even if the investment is made in 2020 or future years.

In the Washington metropolitan area (DMV), there are 88 designated Opportunity Zones. Last March, D.C. rolled out several new programs geared toward maximizing the benefi t of OZ, including:

• $24 million set aside to support affordable housing, workforce development and small business support programs in the zones

• An “OZ Community Corporation” to help businesses within the zones secure pro bono legal advice

• An online portal to give businesses or developers an easy way to submit their projects for consideration for OZ fund investment

Cherry Bekaert has been a leader in helping business owners, investors and the broader D.C.

business community understand Opportunity Zones. Our guidance helps them develop creative and innovative OZ Funds that will improve underdeveloped areas, create jobs and provide signifi cant tax benefi ts for investors. For instance, Cherry Bekaert has advised a local developer, The Menkiti Group, with a history of developing real estate in neighborhoods within Opportunity Zones.

What are the Tax Implications?

Greater Washington Zones

OZ CASE STUDYThe Menkiti Group is an integrated real estate services fi rm intent on transforming lives and communities. The company’s Neighborhood Investment Model (NIM) uses residential sales and redevelopment, neighborhood commercial development and the creative investment of capital to turn emerging neighborhoods into economically vibrant environments. These transformations improve quality of life for residents and business owners and create jobs.

Deploying the Neighborhood Investment ModelTM in Qualifi ed Opportunity ZonesBy incentivizing longer investment cycles, the federal QOZ program gives NIM time to fully realize the benefi ts at the neighborhood level, making individual investments more successful and neighborhood more sustainable.

Result: Virtuous Cycle of Sustainable DevelopmentCherry Bekaert is working closely with The Menkiti Group, providing needed guidance and education in several key areas, including tax advantages related to the Opportunity Zone Provisions, support for property qualifi cation requirements to comply with relevant regulations, and tax compliance and oversight services to address testing and reporting requirements.

• Qualifi ed Opportunity Zones are low-income census tracts nominated by state governors.

• 8,766 OZ have been designated in the U.S. and U.S. territories.

• 35 million people with a median income of $42,000 live in OZ.

• OZ contain 1.6 million businesses and 24 million jobs.

• The average unemployment rate in OZ is currently 14.4%.

1. Tax Deferral: Invest in QOF

2. Tax Reduction: Invest in QOF for fi ve or seven years

3. Tax Elimination: Invest in QOF for 10 years

OPPORTUNITY ZONES WORTH EXPLORING, UNDERSTANDING




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Susan MoserManaging Partner, Washington D.C. [email protected]

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Documents

Cherry Bekaert Business Leaders Survey on Innovation and ......Cherry Bekaert’s Credit/Accounting Methods (C/AM) team helps companies identify, document and substantiate innovation