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
Ambition
$5B Revenue

and, expanding share of

... sustained through
Successful, long-term client wallet through
client delivery
relationships. collaboration with NTT
excellence
Group companies

Balanced Industry
Expertise
Services
Manufacturing
55% of
Workforce in low cost
~500
Enterprise Clients
Communications and Media locations
Financial
Heath & Life Sciences
Public Sector
 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 Technology Platforms ERP Tools Achievements / Certifications
ECC Netweaver Mobility Uptimizer
CRM BW/BI/ BOBJ HANA Hot Pack Analyzer
SW CMMi L5 and PCMMi L4 RUN SAP Certified
SCM, SRM MDM Cloud ArchivePac
Financials BASIS SPPED SAP Pinnacle Award : Challenger in Gartner ERP MQ
EPM / GRC Security SCEA Finalist/Winner for last 5 years in Leader in Forrester ERP report
HCM a row.
Process Aligned Competency
5 SAP BAIO certified Solutions excellence (PACE by SAP)
Key Project Stats SAP Gold Partner approach

More than 475 Implementations and 45+ Global roll outs

120+ Logistics Projects
675+ Upgrade planning and Analysis
225+ Upgrades Recognized as LEADER by
Forrester in the SAP Service
75 + Application Management & Support Providers wave report 2011
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
Adjustments Time Adjustments
Contract within project savings within project

Assignment of Project team using Lean

SAP Best
Staffing Practices

Time and expense management Standard/ Standard/

Add-on System Add-on System

Project with Percentage of Completion
Traditional With SAP
project 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 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
 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 = 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
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

1 with the end customer to provide services
Contract
2
Project Project is initiated in SAP,
8 resources are assigned
Customer
Receivables
pays
receivables 3
Onshore Time entry Resources perform work

Billing to end
7
customer
process 4
Invoice Time
Customer
5 approval Efforts are approved by
6 managers
Preparation of Billing based Time Hrs to
RRB
Controlling
on efforts and expenses by all
the resources
Approved hours posted to
Accounting
Offshore signs SOW with onsite legal entity to
provide services based on the agreed Transfer
1 Price
IC receivables are paid 8 Contract Offshore modifies the Project
2
and accounted for Receivables structure based on legal
Project
requirements

7
I/C
Offshore 3
Time entry
Resources perform
work
IC payable posted in Onsite
legal entity books Invoice process
6 4 Efforts are approved by
Intercompany Billing based on I/C Invoice 1 5 Time manager
Time to approval
Transfer pricing agreement
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/ 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-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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