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

Successful, long-term client

relationships.

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

17,000
professionals

... sustained through

client delivery
excellence

55% of

Workforce in low cost

locations

$5B Revenue

Ambition

and, expanding share of

wallet through
collaboration with NTT
Group companies

~500
Enterprise Clients

NTT DATA Americas - at a Glance

Fast Facts

Balanced Delivery Footprint

Resource Locations

Additional Projects

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

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

RUN SAP Certified

SAP Pinnacle Award :

Challenger in Gartner ERP MQ

Finalist/Winner for last 5 years in

a row.
5 SAP BAIO certified Solutions

Key Project Stats

Leader in Forrester ERP report

Process Aligned Competency

SAP Gold Partner

excellence (PACE by SAP)

approach

More than 475 Implementations and 45+ Global roll outs

120+ Logistics Projects
675+ Upgrade planning and Analysis

Recognized as LEADER by
Forrester in the SAP Service
Providers wave report 2011

225+ Upgrades
75 + Application Management & Support
100+ Advisory Services Engagements and 75+ optimization Projects

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

Traditional
project

Standard/
Add-on System

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)

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

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

Revenue recognition

Billing
AR (Customer)

Deferred Revenue

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
Un-Billed AR

$22,000

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

= $22,000 ($50,000 * 44%)
= $22,000

Trade Revenue

$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

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

1
Contract
8
Customer
Receivables
pays
receivables

Billing to end
Customer

Onshore
process

7
customer
Invoice

Preparation of Billing based

on efforts and expenses by all
the resources

2
Project

5
Time Hrs to
Controlling

6
RRB

3
Time entry

4
Time
approval

Resources perform work

Efforts are approved by

managers

Approved hours posted to

Accounting

IC receivables are paid

and accounted for

IC payable posted in Onsite

legal entity books

Project is initiated in SAP,

resources are assigned

8
Receivables

7
I/C
Invoice

6
Intercompany Billing based on I/C Invoice 1

Transfer pricing agreement

1
Contract

Offshore signs SOW with onsite legal entity to

provide services based on the agreed Transfer
Price
2
Project

Offshore
process

Offshore modifies the Project

structure based on legal
requirements

3
Time entry

4
Time
approval

Resources perform
work

Efforts are approved by

manager

5
Time to
Controlling Approved hours posted to Accounting

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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