February 12, 2020
Six Tips to Optimize Accounting in SAP for Utilities
Once a utility has been on its ERP for a number of years, it’s not surprising that accounting processes and the financial data they generate become taken as givens. “That’s the way we do it,” is often heard when consultants ask about a utility’s way of using SAP Financials.
Disrupting this current state to realize improvements for Finance, Rates, Operations, and Management is best achieved with a cross-functional group of stakeholders sharing their respective points of view:
- What processes are frustrating?
- What data is not easily understood?
- What are our priorities and how much organizational change can we take on?
- What quick wins can we achieve, and what will take longer to accomplish?
Depending on the outcome of such an internal assessment, one or more of the following accounting optimization tips may be most relevant to your utility:
Tip 1: Unbundle benefits and taxes from labor rates, and use fixed rates for overheads
Utilities that rely on labor rates that include allocated costs of employee benefits and the employer portion of payroll taxes—often referred to as fully loaded or “bundled” rates—often experience regulatory reporting challenges. When bundled rates are charged to orders, the labor charge to the order loses the identity of the burdens. This makes compliance with regulatory reporting requirements—in which labor burdens must be charged to separate accounts—far more difficult. Unbundling labor to get a “pure” rate by job class, to which overheads are applied using fixed rates, results in valuable transparency that not only helps project planners estimate (and control) job costs, but also enables regulatory filings to use SAP reports from Controlling (CO) as support for regulatory accounts.
Tip 2: Stop charging cost centers
Charges to cost centers are less transparent than charges to work orders, and therefore make understanding, explaining, and justifying regulatory-relevant costs far more difficult. In addition, tracing costs from cost centers to work orders to regulatory accounts doubles the processing time for the regulatory accounting close. We’re big advocates of direct charging whenever possible: for example, charging work orders directly speeds up the FERC trace and simplifies the close. Lastly, charging cost centers makes labor rates more difficult to calculate because non-labor is also in the cost center, in amounts that vary by cost center. In contrast, excluding non-labor costs from cost centers allows labor rates to be set uniformly across cost centers for similar roles.
Tip 3: Eliminate unnecessary assessments and settlements
Utilities are often frustrated with reports that are difficult to understand. We hear the same questions everywhere: Where did these overhead costs come from? How were they calculated? Why do amounts vary inexplicably every month? If you’re asking these questions, too, then it’s likely that your cost flow model overuses or misuses assessments, which leads to “bucket dumping” costs in order to close the books. Doing so without considering the confusing effects on field operations can defeat the benefits of cost accounting to control spending. As part of our cost flow streamlining services, we help utilities identify and phase out assessments and settlements that aren’t required; as a result, their cost models become much easier to understand and explain.
Tip 4: Retain allocations and settlement in SAP
Some utilities we’ve supported over the last decade have moved allocations and settlements from SAP to a third-party asset accounting solution, and they all lament that decision loudly. Performing core accounting functions outside the ERP makes the cost flow more complex and less transparent. It also increases latency between the time at which direct costs were incurred and when overheads were applied.
Tip 5: Let Controlling do its proper job…but don’t hijack it for FERC
Retaining allocations and settlements in the SAP Controlling module increases visibility into true costs for comparing job estimates to actual spend. In addition, as utilities move towards achieving a “daily P&L” in the coming years, proper use of CO will be even more important. CO can apply overheads more efficiently than just once a month—even daily if desired—and we advocate that utilities think carefully about running them at least after each payroll.
That said, some designs go too far and inadvertently “hijack” Controlling for regulatory reporting purposes. This often occurs when the consulting team leading a utility’s SAP Financials design does not have adequate FERC experience. If your system relies on settling costs to “FERC cost centers,” you may not be getting the most out of Controlling because it can’t be used for its intended purpose of managerial reporting. FERC cost centers needlessly lengthen and obscure cost flows. There are more effective ways to meet regulatory reporting requirements while freeing up Controlling for better alignment of budgeted to actual costs.
Tip 6: Modernize your approach to regulatory accounting
The traditional, delivered approach to regulatory accounting on SAP only utilizes Finance (FI) module documents—which contain primary costs—to derive regulatory account data. One of the inherent limitations of this design is that Controlling (CO) and FERC do not reconcile at the cost object level, which makes preparing for rate cases and responding to regulatory interrogatories far more difficult.
The solution to this challenge is to adopt a “CO-centric” regulatory reporting model on SAP ECC, or a line item model on SAP S/4HANA. Doing so eliminates reconciliation between natural and regulatory views of the business, creating one version of the truth all the way from net income down to individual transactions. Utegration’s team has unmatched experience helping utilities realize these far better designs, including at Salt River Project, FirstEnergy, Rochester Public Utilities, and elsewhere.
Want to Optimize Accounting in Your Utility?
Utegration can help. Our team has decades of experience facilitating holistic reviews of cost models and regulatory reporting practices. Customers value our deep understanding of utility accounting and our expertise in SAP, which enables us to zero in on root causes of challenges, identify a number of potential improvements, and build consensus across your team.
You can also hear directly from David Callen of NRG in our on-demand webinar, NRG Optimizes Property and Lease Accounting in S/4HANA. Click here to view.