Have you ever watched a witness that takes the stand to recount a terrible event in which they were personally involved? An event that may have caused some irreparable harm. The witness is just filled with overwhelming emotions of pain and sorrow of having to relive the incident. Someone please hand that witness a tissue. Having to watch as someone relives a difficult event just evokes very strong empathy in us all. And getting a positive verdict seems to ease all that pain that has been caused.

The SR&ED audit is not much different. It is one of the most emotionally draining processes that your team is ever to be put through. It is just a killer.

Any project which you select for an SR&ED claim, will likely have had its fair share of angst and turmoil. It often starts with things not working in the way that they were expected to work. This, despite all of your best efforts to identify the unknowns ahead of time. But the reality of most development projects is that, you don’t know what you don’t know, until you are smack in the middle of it.

And that is when all the fun starts. Deadlines are missed. Development staff may have to be added or removed. More development tools may need to be added or changed. More contact is occurring with the support staff for the underlying tools, components, or interfaces that you are struggling to use. All of a sudden, there is no shortage of uncertainty. And then you begin to really know what you don’t know.

Once you finally resolve that cornucopia of uncertainties and get to a happy project completion, it is best that you don’t relive it. Except for the fact that there is this SR&ED program. If you recount all your trials and tribulations and share those development hardships, there will be an SR&ED refund for you to ease all that pain that you had to endure. And that may be the case. Unless there is an audit.

An SR&ED audit effectively puts you on the witness stand. Presenting your claim to a technical reviewer will require you to relive the chronology of your development efforts through all of its most miserable parts. The only thing that makes it all bearable is the comfort in the fact that you have persevered. You have overcome everything thrown at you, and you have completed the project.

Unfortunately, the role of the technical reviewer is to stir the pain in your toughest development efforts, and then to question whether there was really any pain at all. This is emotionally tough for everyone. It is natural to have a strong emotional connection with the development feats that you have made. Having them cast in doubt can cause quite an emotional unraveling. And when things get emotional, it just throws you off.

If you are going to have an SR&ED audit, you must prepare yourself as best you can, for the arduous process that is to take place. Going into the process with an unwavering conviction of your technological accomplishments is not enough. You need to be prepared for how to cope with the process when all of that subtle, and not so subtle berating begins. Unfortunately, the technical reviewer is not there to show support for your technological achievements.

There is a fundamental mismatch between the mindset of the engineer and the framework of SR&ED. Perhaps it is something that is best illustrated with some humor from a popular engineer-scientist joke.

An engineer and a scientist both agreed to take part in an experiment, and were sat down at one end of a room. At the other end the room was a beautiful a beautiful woman, leaving nothing to the imagination. Think Lady Godiva. The person conducting the experiment advised them that every 30 seconds they would be allowed to travel half the distance between themselves and the woman. The objective was to see how long it would take each of them to reach the woman. The scientist immediately withdrew from the experiment and claimed it to be futile. The engineer on the other hand, anxiously said “Start the clock”. To which the scientist responded, “You don’t get it. The series in infinite. You can never actually reach her.” And the engineer happily says: “That’s ok. I will get close enough for all practical purposes.”

So what’s the big insight? Engineers are pragmatic. They are focused on getting to the end result. Getting the project completed. Getting it to work. In embarking on their projects, they need to figure out what is working, and what is not. To focus any energy on developing deep understandings of why something does or doesn’t work, is just a sideline distraction. On the other hand, scientists and the SR&ED mindset, are consumed by the need to understand why.

Engineers just don’t believe in failed experiments. They have a “can do”, “will do” attitude. They take enormous pride in being in the field that truly advances technology. Given enough time and money, any problem can be solved. There is no uncertainty. And they gloat over projects that they have completed, where others said it just couldn’t be done. Just don’t ask them too much about why things turned out the way they did. They are never too concerned about the “why”, just that they did.

Unfortunately this winning mindset that is prevalent amongst our beloved corps of engineers is something that undermines the ability to fit their work into an SR&ED claim. It really is no different than trying to mix oil and water. It comes down to the fundamental fact that there is a force of attraction between the molecules of the same liquid, that is greater than the force of attraction between the two different liquids. Hence the engineer’s thinking has a tough time to mix with the SR&ED framework.

If you are an engineering type, the challenge in creating SR&ED claims is to be able to step out of your skin. Follow your regular way of doing things, yes – but still being able to look at your work like a scientist would. It’s not easy. It’s not natural. But you must recognize your innate way of doing things must also be parlayed in a way that can yield the rewards that are there; i.e. the SR&ED funding.

Inventors are a special breed. Their quest to create something new, driven as much for the self-fulfillment of pulling it off, as for the commercial gain, is much to be admired. There are many great stories but one that that really grabs me is that of Robert Kearns, the inventor of the intermittent windshield wiper. I remember first hearing his story over the car radio during a rainy day, where the DJ purposefully picked up on the tidbit of news that Robert Kearns had died. This, after a career lifetime battling to prove that his invention was patentable.

What is interesting about his plight is the parallels and insights to the SR&ED audit process.

The crux of the story is that Robert Kearns had designed and patented the intermittent windshield wiper. Naturally, he shopped the idea around to the auto manufacturers. But, their engagement was of a very unscrupulous nature, and Ford was the first to simply copy his design. They had already been working on their own design, but just couldn’t get this intermittent thing to work reliably and consistently.

Robert Kearns was a man of principle and was driven with the purpose to set the record straight. He embarked on a legal battle that consumed him for the rest of his career.

It is the legal argument that has a good parallel with the SR&ED audit process. Ford’s defense was on the basis that the intermittent windshield wiper was not something that was patentable (even though patents has been issued by the US Patent Office). Their claim was that the design did not meet the patent standards for originality and novelty. Ford deemed that the solution was obvious, because it did not use any new components in the underlying design.

This process is very much akin to what happens in the SR&ED audit process. The SR&ED technical reviewer is driven to subdivide all activities into their most basic set of activities. And then comes with the assertion: “This is what you guys do every day”; and: “There is no uncertainty or advancement in completing these tasks”.

Robert Kearns’ defense was that it made no sense to look at the components that were used. That part did not matter. What really mattered, was in how those components were combined in order to accomplish something that had not been done before. In the movie dramatization, Flash of Genius, he uses the analogy of taking a single word out of the dictionary. Plucking any set of words out of the dictionary does not make a great work of literature. It is how those words are combined that can yield a literary masterpiece.

It really doesn’t seem that hard to understand. Inherently, it is possible to break down any product, system, process or material, into some set of building blocks. And each of those building blocks may form part of a base set of knowledge. If you are a developer, it is your job to know the building blocks that are there for you to develop. And surely, it is reasonable that as a developer, you know how to combine the building blocks in order to create something greater than the sum of the parts. And to a degree, this is true.

But just because the project can be subdivided into a base set activities, does not mean that there is no risk and uncertainty in combining those activities. And with SR&ED audits, winning this argument has become harder than it should be. Unless you are prepared for the audit strategy used against you, it will be tough go.

Hint: don’t look in the dictionary. As developers in Canada know, it is quite a nebulous thing. And in fact, the question seems to come with increasing frequency as one goes through an SR&ED audit. The more explanation that takes place, the greater is the struggle to understand it. The process of trying to understand it deteriorates into a process of explaining what one thinks it may be, followed by the question “Is this it?”

Well, why don’t we just scrap the whole phrase “technological advancement”? Advances in technology today are all about how we combine existing technologies in new ways. There are many real advancements occurring in this way. As Geoff Colvin describes in his recent Fortune column titled “Welcome to the era of Lego innovation”, breakthrough products are being created without creating new underlying technology.

Technology builds technology. But we are at a stage where there are so many “lego” pieces, that the opportunity and challenge clearly is in exploring how the different “lego” pieces can be fit together. We don’t necessarily need new lego pieces, to achieve advancements. We have so much of it. Hardware. Software. Sensors. It really is about how it can be combined and harnessed to better solve problems or introduce benefits that just could not previously be economically created.

Advancements largely do not occur in quantum steps. Rather they are mostly incremental. This shouldn’t be surprising to anyone who has searched through prior art. That exercise sheds light on the true nature of advancement; i.e. many incremental advances building a previous knowledge.

So what does it all mean? Clearly, we are in an age of progress where advancements are tied to the ability to be both imaginative and creative in the combination existing technologies. And certainly there will be some uncertainty that innovators must work through. All of this will be bring new economic growth and further advancement of both skills and knowledge.
Now for the uninitiated, they may believe that this all sounds like SR&ED. Unfortunately, that is not the case. The SR&ED process in Canada is continuing to get more difficult in establishing successful claims, for many projects that are making real advances and delivering on all those economic benefits that we cannot live without. The SR&ED administrators are gravitating to a purest state, where their orientation seems to be much better aligned with the university experiment, as opposed to real experimental development. As I see some great advancements that are belittled and claims that are drastically slashed, I can’t help but worry about the effect. Entrepreneurs who have made huge personal sacrifices feel that they are being crushed by the SR&ED program, rather than supported.

It really does signal that we are at a point in time where the SR&ED criteria should be changed to capture the true gains that we are trying to achieve. But don’t hold your breath. The outcome of the last major review in 2011 has not resulted in any improvements.

So where does that leave all the great potential claims? For starters, you cannot afford to have an over-zealous conviction that your work will qualify for SR&ED. It may not. You must learn about the process that the SR&ED auditor will follow in reviewing your claim, and how you need to present it. You need to really understand what you are getting into, before you invest considerable time and effort in all the prep work. Just as there are uncertainties in the development cycle, there are many interpretation uncertainties in administering the SR&ED criteria. If there were not, the SR&ED auditor would not have to conclude the audit with the phrase “In my opinion”.