Transparent Cost Structures

Feature Article | June 23, 2003 by admin

“We provide four tires, a chassis, a steering wheel and an engine” – potential car buyers would no doubt be horrified by such an offer. In the IT sector, however, it is still standard practice to supply customers with services in piecemeal fashion and to invoice these separately. Because this form of invoicing lacks transparency for the customer, services today are often defined with the help of Service Level Agreements.
SLAs are agreements between the service provider and the customer about a precisely defined service package. Examples range from updating an operating system on a PC to host operation for complex IT environments. They involve defining simple parameters that give customers control over their IT costs.

Invoicing and controlling problems

However, the service provider has a number of obstacles to overcome when it comes to invoicing and internal cost control of Service Level Agreements.

  • The data to be invoiced comes from different sources such as SAP systems or third-party solutions and needs to be combined in one system.
  • As a rule, in Service Level Agreements, basis amounts have already been defined for certain basic uses of services. It is therefore necessary to divide up the services to be invoiced into a basis amount element and an additional on-demand element.
  • To allow the service provider to compare the costs with the revenues at component level, e.g. server or database, an analysis must be performed before assigning the services to establish under which SLA the billing is to take place.
  • It must be possible to bill SLAs both on the basis of expenditure, e.g. for installing a PC, and as a flat rate, e.g. a maintenance flat rate for web hosting.
  • For transparency reasons, it is necessary to show the services to be invoiced grouped according to their SLAs. Basis and on-demand amounts must be shown combined in the invoice.

End-to-end process

Invoicing process with IT CoInS

Invoicing process with IT CoInS

In order to perform these tasks, the IT service provider arvato systems – a subsidiary company of arvato AG – developed the IT CoInS system (IT Controlling and Invoice System) for SLA invoicing in SAP R/3. With this system, the company uses two programs which it has developed itself, the ILV Wizard and an analysis tool. Several functions have also been added to the SAP print program. This system provides an end-to-end invoicing process which takes data from different upstream systems and processes it right through to the printout of the invoices. Reporting via SAP Business Information Warehouse (SAP BW) allows comprehensive controlling.
In the first stage of the process, the services are collated. Various upstream systems determine all the services performed for a particular task. These might include IP traffic, disk space held in reserve, SAP transactions or consultancy services. The parties providing the services are each clearly allocated to a cost center. Depending on who is providing the services, the data relating to the services is generally augmented by further information such as the employee name, server name or database technology. The upstream systems contain only the required invoicing data and no information about rates or prices.

ILV Wizard and analysis tool make the data SAP-compatible

In the second stage, the data which has been aggregated to include only those features relevant to invoicing is transferred to the SAP system as files. Then the ILV Wizard and the analysis tool process the data. SLA-specific invoicing rules are defined in the ILV Wizard, such as the value of a stored basis amount. For a Service Level Agreement in which a basis amount of, for example, 200 quantity units is stored but 300 are actually used, the ILV Wizard generates two service rates, one for the 200 quantity units which are defined in the SLA as being for basic use, and one for the 100 quantity units which has been provided additionally on demand. The ILV Wizard transfers these service rates for invoicing.
The analysis tool then prepares the data so that it can be processed in the SAP Standard. As well as the data analysis, this tool also performs a “theoretical” run-through of the invoicing process. This run-through fulfils a dual role. On the one hand, it checks that the stored master data is complete. On the other, it identifies the sales material which is stored in SAP and under which the invoices are generated. When invoices are generated for the customer for “on demand” services, the sales material is identical with the services provided. If a Service Level Agreement exists, the system allocates the corresponding agreement to the service rate using the stored sales parts list. This links the service rate to the sales material, which in turn allows the allocation of costs and revenues at a later point.
When the data has been prepared, the system adds any non-existent master data as far as possible and then posts the data. Data requiring subsequent processing e.g. blocked master data is transferred to an error pool.

Internal assignment of services in SAP R/3

Service data is posted in a batch process via internal assignment of services (ILV). During this stage of the process, the cost centers are credited and the project structure plan elements (PSP elements) in the project system (PS) of SAP R/3 are debited. The project numbers supplied by the upstream system ensure the correct allocation.
At this stage, project structures can also be stored. These might involve categorizations based on different project elements or a distinction based on people-related and infrastructure-related services. In this case however, the data must be supplied in the required granularity or accumulated accordingly during the first stage of the process, when the services are collated.

Invoices and printing

Services can then be invoiced according to a wide range of different criteria such as work done, fixed price or tiered discounts. For invoicing according to work done, a special function is available (Dynamic Item Processor DP91) which has been considerably extended since SAP R/3 4.6. For all other criteria, the corresponding pricing mechanisms in the SAP R/3 sales functions (SD) apply. Invoice generation starts with a description of the services or with the invoicing of a contractually agreed service.
The invoices are printed using a modified standard SAP printing program. Additional functions allow Service Level Agreements to be shown in accordance with the requirements. One important point is that related services are listed together. For example, an invoice relating to an SLA includes a note to the effect that the 200 quantity units already defined as being for basic use are already included in the price. The next line shows an additional 100 quantity units that have been used and need to be invoiced on an “on demand” basis. For the printout, the project structure can be transferred to the invoice layout and the services thus presented in accordance with the International Accounting Standards (IAS). The transfer of the data to SAP R/3 FI in the last process stage is described in the SAP Standard.

An end-to-end information flow facilitates reporting

The whole process is accompanied by extensive reporting in SAP BW. An end-to-end information flow is essential for this. The information that augments the process, such as the name of the server, is carried right through to the invoicing stage so that information about results of even the smallest unit can be deduced at any time. The stored relationship between the services provided and the product sold then allows a comparison between the revenues at Service Level Agreement level and the services received at cost level. This makes differences between the planned amounts from the SLA parts lists and the values of the provided services transparent, which in turn makes it possible to draw up a planned/actual comparison. The cost structures are made transparent.

Dr. Siegmar Moltzahn

Dr. Siegmar Moltzahn

Slawomir Krolik

Slawomir Krolik

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