2. IT Products & Services
TP Module 2008
Table of Contents
1
2
Introduction and Executive Summary ............................................................... 3
Scope and Abbreviations.................................................................................. 3
2.1
2.2
3
Transactional Analysis ..................................................................................... 4
3.1
3.2
3.3
3.4
3.4.1
3.4.2
3.4.3
3.4.4
3.5
3.5.1
3.5.2
3.5.3
3.5.4
3.5.5
4
Purpose and Scope ............................................................................................................ 3
Abbreviations ...................................................................................................................... 3
Introduction to the Transactions ......................................................................................... 4
«Company»’s IT organization ............................................................................................. 4
The ICT Steering Committee .............................................................................................. 5
Functional Analysis............................................................................................................. 5
Introduction ................................................................................................................................................... 5
Functions ...................................................................................................................................................... 5
Risks............................................................................................................................................................. 7
Assets........................................................................................................................................................... 7
Transfer Pricing Principles and Methodology ..................................................................... 7
Choice of transfer pricing method for the fixed price services provided by the IT Department ....................... 7
Applying the Cost-plus method – cost base .................................................................................................. 7
Applying the Cost-plus method – mark up ..................................................................................................... 8
Allocation of the cost base to the various services rendered by the three units ............................................. 8
Conclusion .................................................................................................................................................. 10
Appendix ........................................................................................................ 11
4.1
Appendix I - Typical cost base of services provided ........................................................ 11
TP Documentation 2008
2
3. IT Products & Services
TP Module 2008
1
Introduction and Executive Summary
The purpose of this module is to give an overview of intra-group IT products and services
transactions within the «Company» Group. The module will describe the covered
transactions and describe the involved parties` respective contributions to the transactions.
Furthermore the module will provide a description on how the intra-group prices are
determined and a comparability analysis defending the prices charged for the transactions.
2
2.1
Scope and Abbreviations
Purpose and Scope
The present module pertains to the following categories of intra-group IT products &
services transactions within the «Company» Group of companies:
ERP (Enterprise Resource Planning system (SAP))
Portal services
PC workstations
Telephony
Infrastructure services
Application management services
This module analyses and documents the service providers’ functions in relation to the IT
products & services supplied and the cost plus methodology applied in determining the
arm’s length fee payable by the service recipients.
The module pertains to the fiscal year 2008.
2.2
Abbreviations
The following abbreviations and acronyms are applied in this module:
Abbreviation
IT
ITK
ITC
ITD
SLA
ICT
SAP
ERP
CIO
BU
TC
PG
MARCO
Servicedesk
Explanation
The entire IT & Process Innovation Department of «Company»
The Customer Service Center, a unit within IT & Process
Corporate IT services, a unit within IT & Process
IT Infrastructure and Workplace Services, a unit within IT & Process
Service Level Agreement, an agreement between two parties to supply and
receive services at a pre-determined quality and cost
Information and Communications technology
Provider of ERP software, as well as the name of the ERP system in use by
«Company»
Enterprise Resource Planning. ERP systems can have functionality for
accounting, procurement and logistics, etc
Chief Information Officer, the head of the IT & Process Department
Business Unit within «Company»
Trading and continental operations, a business unit
Power generation, a business unit
The system in which «Company» tracks and monitors risk
A function with IT, also known as Helpdesk. However, it is also an IT system in
TP Documentation 2008
3
4. IT Products & Services
TP Module 2008
Abbreviation
3
3.1
Explanation
which this particular function manages its work.
Transactional Analysis
Introduction to the Transactions
«Company» has established a centralized IT and Process Innovation department (IT) in
«Company» AS in order to provide standardized IT services to the «Company» Group.
The main objective is to ensure that the «Company»group has well functioning and
competitive IT solutions and services to support the core business processes in the Group.
The contractual basis for providing IT services is a Service Level Agreement which is
entered into between «Company» AS and the various Group companies.
3.2
«Company»’s IT organization
The IT and Process Innovation department is organized as follows:
TP Documentation 2008
4
5. IT Products & Services
TP Module 2008
The organizational units within the IT and Process and Innovation department which
provide these services covered in this module are:
ITD – IT infrastructure and workplace services
ITC – Corporate IT services
ITK – Customer service center
The description of the IT organization will therefore be limited to these three units, the units
inside the red frame above.
These three units are staffed with about 40 specialized IT personnel, both full time
employees and consultants. There is no duplication of functions performed between IT
and departments / personnel in other Group companies.
Please note that the service rendered from the other units shown above, are priced based
on hourly rates or distributed aspart of the Intra Group Services. Please refer to the
relevant transaction modules for the pricing methods. For an overall description of the IT
department, please refer to the legal entity description of «Company» AS.
3.3
The ICT Steering Committee
The ICT steering committee is chaired by the head of the IT department and consists of
representatives from the Groups main operating units and members of the IT management
team.
The committee, which has no formal power, is used by the IT management team for the
purpose of strengthening, communicating and obtaining feedback on strategic directions as
well as for certain operational issues experienced by the customers.
As such, with regards to products and services and their pricing, the committee is
presented with an overview of said items. Feedback from the committee is typically
reflected before implementation.
3.4
3.4.1
Functional Analysis
Introduction
The purpose of the Functional Analysis is to identify the characteristics of the functions
performed, risks carried and assets applied related to the transactions.
3.4.2
Functions
3.4.2.1
Description of functions performed by ITD
ITD provides the operational, maintenance and support functions for the following
ITinfrastructure and telephony services:
Operation and availability of processing power (servers)
Storage, including operation of databases and backup/restore functionality
Telecommunications, network and telephony services
Monitoring of all IT infrastructure services to prevent downtime of data and
information exchange
Platform for integration of data between different corporate systems
TP Documentation 2008
5
6. IT Products & Services
TP Module 2008
3.4.2.2
Description of functions performed by ITC
The ITC unit performs the operational, maintenance and support functions for the following
services:
ERP services(i.e. SAP)
Provides access to the different modules of the Enterprise Resource Planning system SAP
used by the «Company» group (Finance, HR, Procurement/Logistics). Access gives the
user the ability to perform transactions and extract reports based on user privileges.
Portal services (The portal, i.e. the intranet solution)
Gives the user access to various services on the intranet solution used by the «Company»
Group such as: News and information, Archiving solutions, Recording worked hours etc.,
Various reports (finance, HR, etc), Travel expense reports, Procurement, Dictionaries,
Access to software, Your employment contract and salary information, HR information,
«Company»’s governance system.
Application management services
Operation, maintenance, and further enhancements/development of the following business
solutions:
Tridon
Maintenance Job Tech
Interface Job Tech/SAP
Cash Management module
3.4.2.3
Description of functions performed by ITK
The ITK unit performs the following functions:
PC workstations
The users can choose between the following categories of workstations:
Stationary
Portable
Thin client
Mobile
The service includes access to e-mail and standard office software such as Microsoft
Office. Included are safety measures such as anti-virus and firewall to mention a few. The
PC is owned by «Company» AS.
In addition, the following services are included in the price of a workstation:
Service Desk
The service desk typically handles the following requests from users:
Error situations experienced using IT systems and hardware
Ordering new services
Requests for changes to IT systems and user access
The service desk either handles the requests themselves or passes it on to experts with
specialized knowledge, in order to handle error situations, with IT systems or hardware.
TP Documentation 2008
6
7. IT Products & Services
TP Module 2008
User management
This is part of the service desk responsibilities. User management starts when a new
employee starts his or her work. The service desk establishes the user in the IT systems
with the privileges determined at the time. It also deals with changes to user access and
privileges, as well as deletion of users at the time of employment termination.
3.4.3
Risks
The IT department has a significant responsibility in order to manage and mitigate risks
incurred by providing IT services.
However, the Service Level Agreements with the customers (the other companies within
the Group) eliminate/reduce the finance risk related to the supply of the services mentioned
above. The Service Level Agreements do not penalize the IT organization financially if a
potential threat should be inflicted upon one or more of our customers due to failing IT
services.
Hence, the operational risk is not priced into our services. Risks are managed through a
separate process with the help of an IT system called MARCO. There are also financial
risks on the cost side of providing services to our customers, however, these risks are
always there, and in fact given the fact that our prices are cost-based, we do have an
option to adjust prices (up, or down) to reflect a changed cost base over the year.
However, this will always be presented to the ICT Steering Committee in advance.
3.4.4
Assets
To provide the services mentioned under ITC, ITK and ITD, the following assets are used:
Personnel
Office facilities and related infrastructure
Hardware (servers, network equipment)
Office equipment
Software and licenses
Know-how (IT understands «Company» business processes)
All assets are owned and operated by «Company» AS the company IT & Process is part
of.
3.5
3.5.1
Transfer Pricing Principles and Methodology
Choice of transfer pricing method for the fixed price services provided by the IT
Department
To determine the arm’s length price of the services mentioned under chapter 3.4.2 above,
the IT Department has applied the Cost-plus method. Please refer to the Masterfile for a
description and the reasons for selecting this method.
3.5.2
Applying the Cost-plus method – cost base
The cost-base used for the pricing of the services consists of the unit’s total wages and
salaries, in addition to standard personnel related costs such as training, mobile phone
usage etc. Additionally, product service related costs such as license/hardware
maintenance fees and communication costs are included as well asdepreciation expenses
related to IT projectsand hardware purchases.
TP Documentation 2008
7
8. IT Products & Services
TP Module 2008
These costs are tracked against the various services performed and represent the cost
base for each service.
3.5.3
Applying the Cost-plus method – mark up
Due to the limited riskon the provider side, see chapter3.4.3 above, and the fact that the
major part of the cost base consists of external costs, a markup of 3% is applied on the
cost base in order to determine the arm’s length price of the various services rendered by
the IT department to other group companies.
3.5.4
Allocation of the costbaseto the various services rendered by the three units
Please see the flowchart that follows in chapter 3.5.4.4 below.
3.5.4.1
Provided by ITD
The cost base of ITD is distributed based on the number of servers used in
support of thefollowing services described in this document:
Telephony services
ERP services
Portal services
Services for various applications
PC workstation services
The cost base pr user of telephony services is then established by dividing the
cost baseof Telephony services by the number of telephony users.
3.5.4.2
Provided by ITC
The cost base of ITCincluding the infrastructure cost transferred from ITD is
distributed based on the personnel resources used to run each service.
For ERP and Portal services, the cost base pr user is calculated based on the
total cost divided by the registered users of each service.
For the application services, the cost base for each application service is the total
cost allocated to the application.
3.5.4.3
Provided by ITK
The cost base of ITKand the infrastructure cost transferred from ITD is distributed
to the various PC workstation categories.
The cost base of each PC Workstation category is determined based on the
depreciation cost of each category of PCs and onthe number of personnel
resources needed to run and maintain the service.
The cost base pr user of each PC workstation category is then determined by
dividing the cost base by the registered users of each PC workstation category.
Within«Company» AS the cost of the various services are transferred to the users with no
mark-up. A mark-up of 3% is added to the invoicing of the services to users in other Group
companies.
TP Documentation 2008
8
9. IT Products & Services
TP Module 2008
The cost/prices are presented to the ICT Steering Committee in the beginning of the year,
and cost transfers/invoicing takes place on a monthly basis. The invoicing is based on
signed agreements with the relevant Group companies in «Company».
3.5.4.4
Flowchart showing interactions between IT units in delivering services to
customers
TP Documentation 2008
9
10. IT Products & Services
TP Module 2008
3.5.5
Conclusion
In the opinion of «Company» AS, the above cost-base and mark-up used demonstrates
that the fixed prices of the IT services rendered within the «Company» Group are in
compliance with the arm’s length principle.
TP Documentation 2008
10
11. IT Products & Services
TP Module 2007 - Appendix
4
4.1
Appendix
Appendix I - Typical cost base of services provided
Most services use a larger or smaller part of the typical operational expense cost items of
the budgets of the service provider units ITC, ITK and ITD.
Cost item
Wages and salaries (including corresponding social costs)
Depreciation expense
Freight costs
Electricity
Housing rent and other related expense (security, snow clearing,
etc)
Software licenses and maintenance costs
Repair and maintenance of hardware
IT consulting services
Office supplies
IT hardware components
Mobile phones
Magazines and newspapers
Training for employees
Telephone (including mobile phones) and fax
Communication costs (ADSL, LAN, WAN, etc)
Travel expense including lodging and food
Meetings and seminars including entertainment expense
Advertizing
Expensed project costs
Office services
IT services
Purchase of personnel from other parts of the «Company» Group
TP Documentation 2008
11