Case Study: Intercompany and Revenue Recognition process in SAP for a Professional Services Industry. Sandeep Bagchi and Rahul Raina

Transcription

1 Case Study: Intercompany and Revenue Recognition process in SAP for a Professional Services Industry Sandeep Bagchi and Rahul Raina

2 NTT Data at a Glance World s 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

3 NTT DATA Americas -at a Glance $1.4 billion Annual Revenues over 17,000 + Ambition professionals $5B Revenue Successful, long-term client relationships.... sustained through client delivery excellence and, expanding share of wallet through collaboration with NTT Group companies Balanced Industry ~500 Expertise Services Manufacturing Communications and Media Financial Heath & Life Sciences Public Sector 55%of Workforce in low cost locations Enterprise Clients

4 NTT DATA Americas -at a Glance Fast Facts SAP Professionals 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 Competencies Balanced Delivery Footprint Resource Locations Additional Projects Applications ECC CRM SCM, SRM Financials EPM / GRC HCM Key Project Stats 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 : Finalist/Winner for last 5 years in a row. 5 SAP BAIO certified Solutions SAP Gold Partner RUN SAP Certified Challenger in Gartner ERP MQ Leader in Forrester ERP report Process Aligned Competency excellence (PACE by SAP) approach 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 Forrester Q1-11 IT Service Providers Recognized as LEADER by Forrester in the SAP Service Providers wave report 2011

5 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

6 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 Adjustments within project Time savings Adjustments within project Assignment of Project team using Lean Staffing SAP Best Practices Time and expense management Project with Percentage of Completion Standard/ Add-on System Traditional project Standard/ Add-on System With SAP Best Practices

7 T&M Business Process Flow

8 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 employee s 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

9 T&M: Project Related Costs (contd.) Time Approved: WBS (A/c Assigned) YY Employee Home Cost Center YY Expenses - Approved WBS (A/c Assigned) XY Employee/ Vendor (AP) XY Expenses (Payments) Employee/ Vendor (AP) XY Bank/ Cash) XY

10 T&M Contract All Project Costs Billable Travel Cost Billable Labor Cost

11 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

12 T&M : RRB (Billing Request) Revenue Recognition based on billing request Labor cost billed at selling rate Expenses billed at actuals

13 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 Billingare independent events, the account postings were dependent on their sequence of execution

14 T&M : Billing and Revenue Recognition Billing followed by Revenue recognition Billing Revenue recognition AR (Customer) Deferred Revenue Deferred Revenue Trade Revenue x x x x Revenue recognition followed by billing. Revenue recognition Billing Trade Revenue Un-billed AR Un-billed AR AR (Customer) x x x x

15 Revenue recognition posted to General Ledger T&M : Revenue Recognition

16 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.

17 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

18 Milestone Business Process Flow

19 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 %

20 Milestone : Revenue Recognition (POC) Contract Value: $50,000 Planned Cost : $25,000 Milestones: 1. Business Blue Printing (BBP): $20, Realization : $30,000 Actual cost (as of today) = $11,000 POC = 44% ($11,000/$25,000*100) Revenue as per POC = $22,000 ($50,000* 44%) Revenue to be recognized = $22,000 Un-Billed AR Trade Revenue $22,000 $22,000

21 Milestone : Billing vs. Revenue Recognition Contract Value Planned cost

22 Billing vs Revenue Recognition Milestone Total Actual Cost

23 POC Milestone : Billing and Revenue Recognition Revenue to be recognized

24 Milestone : Revenue Recognition

25 Fixed Bid : Business Process Flow

26 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

27 Fixed Bid : Billing and Revenue Recognition Fixed Bid Contract Contract value

28 Fixed Bid : Billing and Revenue Recognition Debit Memo Request : 1 Revenue recognition: 1

29 Fixed Bid : Revenue Recognition Debit Memo Request : 2 Revenue recognition: 2

30 Intercompany Process Billing Billing to end Customer 8 Customer Receivables pays receivables 7 customer Invoice Preparation of Billing based on efforts and expenses by all the resources 6 RRB IC receivables are paid and accounted for IC payable posted in Onsite legal entity books 1 Contract Onshore process 7 I/C Invoice Intercompany Billing based on Transfer pricing agreement Onsite company enters into a contractual agreement with the end customer to provide services 5 Time Hrs to Controlling 8 Receivables 6 I/C Invoice 1 2 Project Approved hours posted to Accounting 4 Time approval Project is initiated in SAP, resources are assigned 3 Time entry 1 Contract Offshore process 5 Time to Controlling Resources perform work Efforts are approved by managers Offshore signs SOW with onsite legal entity to provide services based on the agreed Transfer Price 2 Project 4 Time approval Offshore modifies the Project structure based on legal requirements 3 Time entry Resources perform work Efforts are approved by manager Approved hours posted to Accounting

31 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

32 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

33 Intercompany Process : Billing and Revenue

34 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-contractor s time using service entry sheet Resource Related Billing

35 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

36 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 Subcontractor s time from the service entry sheet

37 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

38 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

39 Contact Information Sandeep Bagchi Global Director, SAP Solutions Rahul Raina Principal Consultant, SAP Practice

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