Case Study: Intercompany and Revenue Recognition process in SAP for a Professional Services Industry

Sandeep Bagchi and Rahul Raina

NTT Data at a Glance

Worlds sixth largest IT Service provider & systems integrator Founded in 1967 in Japan as the technology arm of the NTT Group Over $15B in annual revenues 60,000 professionals operating in 36 countries Serving 80 of the Global Top 100 organizations

NTT DATA Americas - at a Glance

over

1.4 billion
+
Annual Revenues

17,000
professionals ... sustained through client delivery excellence

Ambition

$5B Revenue

Successful, long-term client relationships.

and, expanding share of wallet through collaboration with NTT Group companies

Balanced Industry Expertise

Services Manufacturing Communications and Media Financial Heath & Life Sciences Public Sector

Workforce in low cost locations

55% of

~500
Enterprise Clients

NTT DATA Americas - at a Glance

Fast Facts 6500+ SAP Professionals 2400+ SAP Professionals are part of NTT North America Organization Balanced delivery model: Onshore, Near-shore, and Offshore Key industries: Manufacturing (Discrete & Chemical) , Communications & Media, Life sciences, Prof Services, Hi-Tech, Public Sector and Distribution Tools and Accelerators for ERP Lifecycle management Balanced Delivery Footprint Resource Locations Additional Projects

Competencies
Applications ECC CRM SCM, SRM Financials EPM / GRC HCM Technology Netweaver BW/BI/ BOBJ MDM BASIS Security Platforms Mobility HANA Cloud ERP Tools Uptimizer Hot Pack Analyzer ArchivePac SPPED SCEA Achievements / Certifications
SW CMMi L5 and PCMMi L4 SAP Pinnacle Award : RUN SAP Certified Challenger in Gartner ERP MQ Leader in Forrester ERP report Process Aligned Competency

Finalist/Winner for last 5 years in a row.

5 SAP BAIO certified Solutions

Key Project Stats

More than 475 Implementations and 45+ Global roll outs 120+ Logistics Projects 675+ Upgrade planning and Analysis 225+ Upgrades 75 + Application Management & Support 100+ Advisory Services Engagements and 75+ optimization Projects

SAP Gold Partner

excellence (PACE by SAP) approach

Recognized as LEADER by Forrester in the SAP Service Providers wave report 2011 Forrester Q1-11 IT Service Providers

LEARNING POINTS

Industry Best Practices for Billing and Revenue Recognition in Time & Material, Fixed Bid and Milestone contracts Intercompany billing and cost recovery with offshore, near shore and onside model Challenges with standard out of the box SAP solutions for Profession Services Industry and customizing solutions to overcome them

BEST PRACTICES

Service Contract with Fixed Price Billing Service Contract with T&M Billing Service Contract with Milestone Billing Commercial project inception with Project created automatically with Contract Assignment of Project team using Lean Staffing Time and expense management Project with Percentage of Completion

Adjustments within project

Time savings

Adjustments within project

SAP Best Practices Standard/ Add-on System Standard/ Add-on System

Traditional project

With SAP Best Practices

T&M Business Process Flow

T&M: Project Related Costs

Time
Posted to the respective WBS where the resources were assigned Approved by the Project Manager to post to Accounting Full Time Employees: hourly rate decided on the basis of AOP rates assigned to the employee based on his salary grade Subcon: Rate is based on the rate on the Purchase Order (PO)

Expenses
Payroll Cost: Directly posted to employees home cost center Travel Cost: Billable and Non Billable Costs were posted to the respective WBS where the resources are assigned Subcon Expenses posted to the WBS used in the PO

T&M: Project Related Costs (contd.)

Time Approved:
WBS (A/c Assigned) Employee Home Cost Center

YY

YY

Expenses - Approved
WBS (A/c Assigned) Employee/ Vendor (AP)

XY

XY

Expenses (Payments)
Employee/ Vendor (AP) Bank/ Cash)

XY

XY

T&M Contract All Project Costs

Billable Travel Cost

Billable Labor Cost

T&M : Resource Related Billing (RRB)

Used for managing consulting arrangements where detailed work planning and execution are not required RRB provided summarized data from defined sources, such as actual cost line items - using the dynamic item processor (DI processor) to facilitate customer billings Expenses in the billing request were flagged as billable or defer items for later billing It was independent of the cost incurred across legal entities (Onsite/Near shore/ Offshore) for customer billing

T&M : RRB (Billing Request)

Revenue Recognition based on billing request

Labor cost billed at selling rate Expenses billed at actuals

T&M : Billing and Revenue Recognition

Billing: Directly driven by the attributes on the T&M Contract Dependent on approved Time and Expenses Billing Request was used to create the SD Billing Revenue Recognition: Billing Request was used as the driver for revenue determination Account postings: Though Revenue recognition and Billing are independent events, the account postings were dependent on their sequence of execution

T&M : Billing and Revenue Recognition

Billing followed by Revenue recognition

Billing AR (Customer) Deferred Revenue Revenue recognition Deferred Revenue Trade Revenue

Revenue recognition followed by billing.

Revenue recognition Un-billed AR Trade Revenue Billing Un-billed AR AR (Customer)

T&M : Revenue Recognition

Revenue recognition posted to General Ledger

T&M : Billing Due List/Invoice List

Billing Due list

List of Debit memo requests, processed to generate customer billings Executed in the form of background job without manual intervention (Best Practice) Various attributes such as sold-to-party, contract type, etc were used in the project to generate the desired list

Invoice list
Used when different invoices for the same customer were required to be combined together and presented as a single invoice.

Fixed Price vs. Milestone Contract

Fixed price
Periodic billing with fixed monthly amount Revenue recognition dependent upon the billing date and amount in billing plan No Standard SAP solution for weekly revenue recognition WIP usually got cancelled at the month-end

Milestone
Billing as per milestone date on the contract Revenue recognition independent of milestone dates Standard SAP solution was used for weekly revenue recognition WIP did not get cancelled at the month-end

Milestone Business Process Flow

Milestone : Billing and Revenue Recognition

Billing: Directly driven by milestones dates in the contract Milestones were unlocked by the event resulting into billing Revenue Recognition: Percentage of Completion (POC) method used to calculate the revenue that could be recognized Actual cost accumulation with planned cost as base was used for POC calculations POC = Actual Cost/ Planned Cost * 100 Revenue = Contract Value * POC %

Milestone : Revenue Recognition (POC)

Contract Value: $50,000 Planned Cost : $25,000 Milestones: 1. Business Blue Printing (BBP) : $20,000 2. Realization : $30,000

Actual cost (as of today) = $11,000 POC Revenue as per POC Revenue to be recognized

= 44% ($11,000/$25,000 *100) = $22,000 ($50,000 * 44%) = $22,000

Un-Billed AR

Trade Revenue

$22,000

$22,000

Milestone : Billing vs. Revenue Recognition

Contract Value

Planned cost

Billing vs Revenue Recognition Milestone

Total Actual Cost

Milestone : Billing and Revenue Recognition

POC

Revenue to be recognized

Milestone : Revenue Recognition

Fixed Bid : Business Process Flow

Fixed Bid : Billing and Revenue Recognition

Billing: Directly driven by Billing Plan in the Contract Billing Plan specified the billing date and amount to be billed Revenue Recognition: Revenue recognition was separated from billing and performed before or after the billing. Custom solution was used to recognize revenue on a weekly basis

Fixed Bid : Billing and Revenue Recognition

Fixed Bid Contract

Contract value

Fixed Bid : Billing and Revenue Recognition

Debit Memo Request : 1

Revenue recognition: 1

Fixed Bid : Revenue Recognition

Debit Memo Request : 2

Revenue recognition: 2

Intercompany Process Billing

1 Contract 8 Customer Receivables pays receivables 7 customer Invoice 6 RRB

Onsite company enters into a contractual agreement with the end customer to provide services
2 Project

Project is initiated in SAP, resources are assigned

3 Time entry

Billing to end Customer

Onshore process
5 Time Hrs to Controlling

Resources perform work

4 Time approval

Preparation of Billing based on efforts and expenses by all the resources

Efforts are approved by managers

Approved hours posted to Accounting Offshore signs SOW with onsite legal entity to provide services based on the agreed Transfer Price
2 Project

IC receivables are paid and accounted for

8 Receivables

1 Contract

Offshore modifies the Project structure based on legal requirements Resources perform work

IC payable posted in Onsite legal entity books

7 I/C Invoice

Offshore process
4 Time approval

3 Time entry

6 Intercompany Billing based on I/C Invoice 1

Transfer pricing agreement

5 Time to Controlling Approved hours posted to Accounting

Efforts are approved by manager

Intercompany Process

A company code has an engagement with the external customer, executes the project with onsite employees and also involves employees from different company codes (near shore/offshore) Time and Expenses were collected for all employees in the project Time and Expenses that were not incurred in the executing company code were billed at a specific transfer price during intercompany billing Project Revenues were accrued in the executing company based on the invoice received for the employee expenses from the other company code

Intercompany Process : Master Data

Inter-company process dealt with two types of customer masters: End customer Inter-company customer An inter-company vendor master was created in the executing Company Code Inter-company customer and Inter-company vendor master records were set up with a corporate-wide company ID in the Trading partner field to represent the affiliated companies Trading Partner, an attribute in the account posting for Intercompany transaction, was used for IC reconciliation and elimination during legal consolidation

Intercompany Process : Billing and Revenue

Challenges with Out of the Box SAP Solution

Revenue Recognition for bundled serviced offerings/ multielement contracts SD Revenue process Results Analysis Inter-Company Billing with Onsite and Offshore model represented by separate legal entities with total cost recovery plus mark-up Inter-Company Resource Related Billing Customer billing with RRB for Sub-contractors time using service entry sheet Resource Related Billing

Challenges with out of the box SAP Solution

Weekly revenue recognition in case of Fixed Bid contracts with monthly billing plan SD Revenue process Location wise Revenue Recognition and Revenue Realization based on local legal requirements in some offshore countries like India. Resource related Inter-Company Billing

Customized Business Solutions

Inter-Company Billing with Onsite and Offshore model with total cost recovery A custom program which collected all the costs incurred at offshore entity with Intercompany markup Intercompany (IC) Revenue and IC AR posted systematically to offshore books along with the IC AP and COS in the Onsite entity Billing services from Sub-contractor on T&M basis Resource Related Billing enhanced to bring the Employee number and number of hours of Subcontractors time from the service entry sheet

Customized Business Solutions

Location wise Revenue Recognition and Revenue Realization based on local legal requirements Custom program posted the Inter-Company revenue based on location details (Profit Center) Weekly revenue recognition in case of Fixed Bid projects A Custom program created to generate weekly DMR for Revenue Recognition based on the service acceptance date

KEY LEARNINGS

Resource Related Billing program collects resources Time and Expenses systematically for Customer Billings. No custom program is required Though Billing and Revenue Recognition processes are independent events in SAP, the account postings may vary based on the sequence of their occurrence Driver for Revenue Recognition process for each contract type in SAP is different Trading Partner (affiliated companies) field is a useful attribute for Intercompany reconciliations and eliminations

Contact Information

Sandeep Bagchi
Global Director, SAP Solutions Email: Sandeep.Bagchi@NTTData.com

Rahul Raina
Principal Consultant, SAP Practice Email: Rahul.Raina@NTTData.com

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