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Top 5 Reasons Why Companies are Using Brazil version 3.1 to Transition off of on-premise solutions on to Hybrid Cloud and Managed Service Solutions

 

If you are managing Brazil compliance on-premise, did you realize you, not your provider, are staffing SD, MM, FICO Analysts, Business Users, Middleware Architects, Subject Matter Experts, ABAP developers just to maintain compliance in Brazil? Yes, just maintenance – no business innovation – just maintenance. Below are all the costs that you need to take into consideration when looking at the real cost of maintaining compliance in Brazil with an on-premise solution.


As Brazil is mandating a new schema (Brazil NFe 3.1), now is the opportunity to review your compliance strategy in Brazil.  Companies that are transitioning to Hybrid Cloud providers are reducing their maintenance costs in Latin America by upwards of 80%.  Below I cover many of the overlooked costs; however, if you would like a copy of the (Brazil NFe 2014 – TCO Calculator) that outlines your current cost structure as well as your upgrade costs – please feel free to reach out to me directly.


Costs always overlooked include:

  • Total Implementation Costs of Annual Updates
    • Research and implement the latest OSS notes from SAP – for most SAP companies they are not on the latest version, so this is not as easy as it may seem
    • SAP Functional Team – Orders To Cash, Procure To Pay, Financials
    • ABAP developer
    • Middleware Architect
    • Local user costs for testing
    • Project manager
    • Subject Matter Expert (Design and deploy SAP configurations based on the legislation – most companies spend weeks trying to figure out how to get their SAP system to work with government requirements and customer requirements at the same time)
    • Set up costs for the local provider to test your files
  • Overlooked data center costs
    • Cost of the middleware (for SAP PI this is usually the cost of non-SAP integration data charge)
    • Maintenance on middleware
    • Hardware for middleware
    • Hardware maintenance for middleware
    • Minimum deployment across a three –tier SAP deployment (PROD, TEST, DEV)
  • Ongoing Support costs to include
    • Annual cost for compliance server
    • Cost for Technical Support
      • Someone has to monitor and manage the middleware issues
      • Someone has to monitor and manage the SAP system – an invoice isn’t done until it is posted or acknowledged in the ERP system
      • ABAP developer
        • Changes based on the law 2-3 times per year, per country
        • Changes based on customer requests
          • Could affect SAP master data, middleware, PDF output or distribution rules
      • Annual cost to upgrade the system based on government changes
        • Look at a percentage of the functional analysts, middleware architect, project manager and SME (subject matter experts) for a time period each year
  • Financial Operation Costs
    • Cost of controllers to correct information prior to SPED reporting
    • Audit risks of non-compliance (~500 Reais per incorrect XML that is not valid and archived, 75% to 150% fines based on incorrect taxes)
    • Foreign Corrupt Practices issues – one High-Tech company is currently in a legal dispute over incorrect taxes with Brazil SEFAZ for almost 2.9 Billion US dollars
    • Account Payable staffing cost for manual data entry and supplier invoice processing: SAP PO and Goods Receipt – as you don’t want to pay mismatched invoices – you are responsible for the wrong taxes
  • Logistics – did you realize that Brazil Nota Fiscal legislation affects both your ability to ship outbound as well as receive goods at the warehouse
    • Outbound – if you do not have an automatic “contingency process” – you most likely have had your operations shut down for days (who can afford this during the World Cup, let alone the Olympics).
    • Inbound Receiving – leading organizations are reducing the cost of receiving trucks at their warehouse by over 40%.  This is done by taking advantage of the government process to automate data entry and matching within the SAP system.


So when you are looking to find dollars in tightened IT budgets, look at the total cost of operating your SAP ERP across your Latin America divisions. On-premise once made sense, as it was the only solution option. However, On-Premise solutions do not take advantage of the economies of scale of the government standardization. Are you in the business of being an expert on Brazil Nota Fiscal?


The answer should be no.


There are providers that operate new business models – Hybrid Cloud models. They offer the economies of scale of the network, but also solve the internal SAP customization support and maintenance issues with native SAP extensions.  This concept of Hybrid Cloud is key. It is the only business model that solves the end to end business problem and it’s why companies are turning away from On-Premise solutions.

Often in these articles, I describe the business process – but I wanted to look at Latin America E-Invoicing from an audit risk point of view.  Often when we look at the issues, our IT teams think about interfaces and archives, but we don’t always look at the financial risk of systems in these Latin America countries.  Remember, in Brazil, Mexico, Argentina and now Chile, the tax authorities have 100% real-time visibility into your invoice data.

 

Getting this wrong in Latin America means significant fines of 50% to 225% of the tax value on the invoices that are considered to be in violation. When you consider the tax rates in these countries, you can easily see fines in the hundreds of thousands to millions.  I was researching a company with a $90 million dollar revenue stream in Brazil the other day – and they are reporting a fine of almost $9 million for the year 2013 and I spoke to a company the other week that has already been fined $100K US dollars for 4 missing XML. That is right 4 XML caused a 6 figure fine as the XML is what is required for the audit and they were missing 4 of them which means their VAT deductions were too high as they couldn’t use that to substantiate their deductions.

 

Here are the top 3 reasons you could fail an audit in Latin America.

  1. You are manually validating your Inbound Account Payables invoices. When you consider that everyone makes mistake when typing (average is 3% data entry errors), why large companies with significant invoice volume from a procurement perspective do this manually will always amaze me. Remember, in VAT countries in Latin America, you pay your VAT remittances on the net of what you charge your customer minus what you pay your suppliers.  If you deduct too little, you won’t get your money back, and if you deduct too much you will pay fines. And most importantly, if you don’t have the XML that exactly matches what the government has to back up those deductions during an audit– you will definitely pay fines.  
  2. The goods you receive from suppliers don’t match the XML they sent – whether damaged in transit or some other area. Remember if you receive the goods, you are responsible for the tax obligation and the need to have a supplier update the XML. In the most severe cases, companies will do what is called “gating” in Brazil where they won’t let the truck enter their grounds until the NFe matches the PO correctly and has been validated to be commercially accepted.
  3. You report on data that is different from the government site. Two examples, in Argentina you do not want to post the accounting document until you have the government verification. And in Chile – there are two status messages that come back from the government. You want to be sure that you have received both for your eBills before you process your Libros reports – this is most important at the end of the month.

So as you evaluate the costs of your systems – don’t just look at the IT costs. Ask yourself one question – Would your systems pass an audit in Latin America?

It’s tough enough to keep up with the tax rates, you shouldn’t have to worry that the IT system and its gaps are exposing you to potential million dollar fines.

Top 5 Reasons Why Companies are Using Brazil version 3.1 to Transition off of on-premise solutions in to Managed Service Solutions


If you would like to access the previous series please click here for Part 1 and Part 2

 

In the third part of this series on using the Brazil Nota Fiscal version 3.1 changes to evaluate the strengths of cloud and managed services over on-premise solutions. I want to discuss the issues concerning SAP customization and maintenance. This is mission critical especially if your organization has a strategy of deploying a single instance of SAP ERP around the globe.

With so many complicated SAP issues, why do companies want to keep up with the legislation and constantly implement the changes--especially, when the requirements are predominately the same for all companies?  These are government mandates and standards after all. Managed Service providers provide two huge benefits over on-premise solutions:

  • First, Managed Services and more specifically hybrid cloud deployments can offer economies of scale gained across their install base, which turns into hard costs savings in annual support and maintenance costs.
  • Second, Managed Services and more specifically hybrid cloud deployments can buffer the global SAP Center of Excellence from changes. Some issues such as extended attributes and customer customizations are absorbed by the service provider. Additionally, some upgrades can be done without affecting the core SAP ERP platform. I found this quote to be intriguing from the Kellogg CIO in Latin America - Gustavo Lara, LA Regional CIO for Kellogg’s. “With {managed service provider) solution, our internal teams can focus on running our business rather than focusing on researching, implementing and reconfiguring our SAP system to meet the changes for Brazil Nota Fiscal and Mexico CFDI.”

By transitioning to a managed service, your internal teams can:

  • Avoid the burden of research, design and implementation

 

  • Eliminate Fire drills – most global SAP teams look at rolling out SAP ERP in waves across processes and countries.  They also tend to have a very rigid procedure for updating the SAP system. Often lead times to get on the COE calendar can be 6 to 8 weeks and in many cases the COE only wants to do major upgrades once or twice a year.  The pace of legislative change in Brazil is constant and is never timed to the SAP upgrade strategy. A managed service provider that guarantees your systems are maintained, eliminate unforeseen fire drills as they know when the legislative changes occur and coordinate the updates.

 

  • Reduce upgrade timing issues as many companies run N-1 maintenance strategy. It is common for the SAP maintenance teams to run at least one support pack behind the latest releases.  I work with customers that are still 4.7c and many who are in the process of upgrading to ECC 6.0 during 2014.  The issues arise when SAP releases new country requirements – logically they are released in the latest support packs. This can cause an issue with maintenance teams to decipher what is needed and how it will affect the SAP system they are running. Part of the managed service provider responsibility is to understand your company “Delta” to the legislation to assist with the changes. Why spend weeks figuring out the issue when it can be done in a 30 minute call?

 

  • Simplify problems with SAP customizations and extended attributes – These are the processes that are unique to your business and your customers. It is not always easy to get the data from your SAP configurations into the Nota Fiscal format.  Some of our customers sell “kits” and this unique packaging takes some unique manipulation to transform into the Nota Fiscal requirements. And for some cases, the data doesn’t come from SAP at all but are required transactions. For example, when you bring in goods to the country, by law you must declare the fiscal value of the goods sometime referred to as a Nota Fiscal Entrada. This information often comes from an extract from the Freight Forwarder you are using to import the goods.  It still needs to be transformed, validated and tracked.

 

  • Reduce the cost of maintaining compliance -In a recent article (in Portuguese), Alexandre Quinze, CIO América Latina da Philip, discusses the cost and productivity benefits achieved by transitioning off an on-premise software for Brazil Nota Fiscal compliance.
  • Reduction of annual maintenance costs by upwards of 80%
  • Increase in productivity of local Brazil business user by 25%

 

(Source: 19 de dezembro de 2013, Philips no Brasil quebra paradigmas com arquitetura global de TI baseada no ERP)

With the changes in Brazil set to take effect in December of 2014 and Chile mandates coming even earlier – November 2014, don’t forget about the other mandated countries – specifically Argentina.

 

There are currently more than 300,000 companies that were mandated to transition to electronic invoicing between April and August of 2014 and many others were mandated in previous years.  In these articles, I often discuss the technical requirements, but I wanted to take the time to discuss the process effect in finance and the SAP after the government approval.

 

You will often hear me describe “Dynamic Sequencing” – an important issue to get your invoices validated by the government web services. However, this is about getting the appropriate approvals.  Now the problem beyond sequencing for global SAP templates that is not often discussed is known as: Billing/Accounting Document Posting.

 

The law specifies that general ledger postings should not occur unless and until the ODN number has been confirmed and approved by the AFIP.  Considering this, it is not generally considered a good standard practice to persist the billing document and create the accounting documents in advance of ODN approval from the government.

 

This can be challenging for many companies because they often use the same SAP billing document types for multiple countries in the region, and corporate IT teams don’t want to setup special posting behavior just for Argentina.

 

In order to ensure your accounting systems comply with local best practices but also simplify your global SAP implementation, you should look for solutions in Argentina that include “parking/blocking logic” to prevent the billing document from generating accounting documents until the ODN number has been confirmed by the AFIP.

 

This way, once the “park” has been released, the customer can trigger its standard posting behavior and rest assured that the ODN reference number will always match the values populated in the accounting tables and need not be reversed or updated afterward. This approach allows companies to implement compliant behavior for Argentina where it’s needed without affecting other countries where the same billing document types may also be used.