Case Study: Intercompany and Revenue

Recognition process in SAP for a Professional

Services Industry

Sandeep Bagchi and Rahul Raina

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

NTT DATA Americas - at a Glance

Successful, long-term client

relationships….

... sustained through

client delivery

excellence…

and, expanding share of

wallet through

collaboration with NTT

Group companies…

Balanced Industry Expertise ~500

Enterprise Clients

ServicesManufacturingCommunications and MediaFinancialHeath & Life SciencesPublic Sector

55% ofWorkforce in low costlocations

over

17,0001.4 billion $Annual Revenues

+ Ambition $5B Revenue

professionals

NTT DATA Americas - at a Glance

Key Project Stats

Balanced Delivery Footprint

• 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

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

Achievements / Certifications

• RUN SAP Certified

• Challenger in Gartner ERP MQ

• Leader in Forrester ERP report

• Process Aligned Competency

excellence (PACE by SAP)

approach

Resource Locations Additional Projects

• 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

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

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

Standard/

Add-on System

Standard/

Add-on System

SAP Best

Practices

Adjustments

within project

With SAP

Best Practices

Traditional

project

Time

savings

Adjustments

within project

T&M – Business Process Flow

� 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

T&M: Project Related Costs

� Time – Approved:

• Expenses - Approved

• Expenses (Payments)

T&M: Project Related Costs (contd.)

WBS (A/c Assigned) Employee Home Cost Center

YY YY

WBS (A/c Assigned) Employee/ Vendor (AP)

XY XY

Bank/ Cash)Employee/ Vendor (AP)

XY XY

T&M Contract – All Project Costs

Billable Labor Cost

Billable Travel Cost

� 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 : Resource Related Billing (RRB)

T&M : RRB (Billing Request)

Revenue Recognition based on billing request

Labor cost billed

at selling rate

Expenses billed

at actuals

� 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

� Revenue recognition followed by billing.

T&M : Billing and Revenue Recognition

AR (Customer) Deferred Revenue

x x

Deferred Revenue Trade Revenue

x x

Billing Revenue recognition

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

x x x x

Revenue recognition Billing

T&M : Revenue Recognition

Revenue recognition posted to General Ledger

� 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.

T&M : Billing Due List/Invoice List

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

� 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 : Billing and Revenue Recognition

� 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

Milestone : Revenue Recognition (POC)

Contract Value: $50,000

Planned Cost : $25,000

Milestones:

1. Business Blue Printing (BBP) : $20,000

2. Realization : $30,000

$22,000 $22,000

Un-Billed AR Trade Revenue

Milestone : Billing vs. Revenue Recognition

Contract Value

Planned cost

Billing vs Revenue Recognition – Milestone

Total Actual Cost

Milestone : Billing and Revenue Recognition

Revenue to be

recognized

POC

Milestone : Revenue Recognition

Fixed Bid : Business Process Flow

� 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 : 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

Efforts are approved by manager

Approved hours posted to Accounting

Intercompany Billing based on Transfer pricing agreement

1Contract

Offshore signs SOW with onsite legal entity to provide services based on the agreed Transfer Price

2Project

Offshore modifies the Project structure based on legal requirements

3Time entry

Resources perform work

4Time

approval 5

Time to Controlling

7I/C

Invoice

8Receivables

IC receivables are paid and accounted for

IC payable posted in Onsite legal entity books

6I/C Invoice 1

1Contract

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

2Project Project is initiated in SAP,

resources are assigned

3Time entry

4Time

approval Efforts are approved by managers

5Time Hrs to Controlling

6RRB

7customer

Invoice

8Receivables

Customer pays receivables

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

Resources perform work

Approved hours posted to Accounting

Onshore

processBilling to end Customer

Offshore

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

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

� Revenue Recognition for ‘bundled serviced offerings/ multi-

element 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

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

Challenges with out of the box SAP Solution

⊗⊗⊗⊗

⊗⊗⊗⊗

� 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

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’

Customized Business Solutions

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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