Wednesday, October 26, 2011

SAP New GL and Cost Models

We've commented before about the increasing interest we're seeing from utilities in migrating to the SAP New General Ledger. In the context of SAP's recent announcement that ECC 6.0 will be supported until 2020, we expect to see even more interest—and action—since utilities are under no immediate pressure to upgrade. Instead, they can focus on a New GL migration independent of future upgrade plans.

That said, we also notice that some utilities are focusing almost exclusively on the migration itself, and not enough on their underlying cost model. Some aren't thinking about it at all, while others separate, uncoordinated initiatives in the works. This is a serious mistake. Not to discount the care with which a New GL migration must be undertaken, but it's essentially a technical procedure that can be handled smoothly with proper preparation and coordination with SAP. In contrast, there is far greater benefit potential from reassessing the cost model and transitioning from a cost center-centric to order-centric model—in other words, abandoning the approach adopted during 1990's deregulation, and going back to what most utilities did in the 70s and 80s (when they had no choice and regulation was the only business model). Here are a few quick reasons why this makes so much sense:

  1. Cost-centric models are ideal for what we think of as the trifecta of utility financials: budgeting, regulatory reporting, and possibly in the near future, IFRS.

  2. Using the order as the central point means evaluating activity type pricing and unbundling rates, such that the cost of labor going into each order is very close to the actual rate of pay.

  3. By documenting secondary costs in each order, they'll be fully supported and enable easier cost recovery. They will, as we like to say, provide one version of the truth.

We'll revisit this topic in November to discuss some realistic approaches to a managing a cost model project in conjunction with a New GL migration.

Monday, October 10, 2011

Mapping SAP New GL for FERC

Expanding on our post last month about the New GL and FERC data, today we're going to look at mapping the New GL for FERC, a serious consideration for utilities that are evaluating an SAP New GL migration. One immediate challenge is that all CO transaction codes for secondary movements have a single general ledger account assignment in the New GL. That would seem to be a limitation at first. Rather than focus on the GL account, however, a utility could use a pass-through GL account assigned to all secondary CO transactions, and then use SAP's functional areas to map to specific, four-digit FERC chart of account values.

Here's a practical example.  Let's say an internal order has primary costs of $100 and secondary costs of $30.  Both the primary and secondary costs are assigned the functional area of "583.0 Distribution Operations-Overhead Lines Expense." This could be shown (in an abbreviated way) as functional area "583.0 DM-Lines." We would then use a BAdI to add a long description through the New GL's extensibility features. The result of this functional area assignment is the posting to the correct FERC account via the CO object mapping. What's more, should the utility want to override the assigned functional area, it could simply change it during document entry. This flexibility would give corporate accounting the option to assign any natural account to any FERC account—with appropriate authorization and controls, of course.

Utilities looking to separate the core functions of supply, generation, transmission, and distribution into segments should also consider activating profit center accounting and segmentation.  Since most utilities running FERC have already assigned regulatory indicators to CO objects such as PM and internal orders, these existing assignments could be used to load the initial functional areas using our FERC conversion BAdI described above. In some cases, there might be thousands of CO objects to be mapped to functional areas.  Leveraging the existing regulatory indicators would make the conversion effort far less daunting a task than mapping each one individually.

Since segments are derived from profit centers, and profit centers are derived from CO objects, the building blocks would already exist to determine the correct segments.  For a utility wanting to convert to IFRS, we could consider segments to be equivalent to traditional lines of business. The CO design in place may already use assessments or settlements to determine the line of business. Given that, it would be important not to start from scratch, but rather to build on the current design and leverage the links already developed in the cost flow model in CO.