This blog post is part of the “How to Build the S/4HANA business case blog series”. Check out the other blogs here: Part II and Part III.
SAP S/4HANA recently reached a significant milestone: 1,000 live customers, and while each customer’s path is unique, their journey all started at one point with a business case that helped secure internal funding and executive sponsorship for the solution.
But how exactly do you go about building a business case for S/4HANA?
This might come across as a trivial question for readers who are skilled in building business cases for IT and software investments. Yet for others who are new to this exercise, the concept of creating a business case might be a little foreign. If you are in the latter category, this blog is for you.
This blog is part of a blog series. Make sure to check out the other blogs in the series:
A quick path to a comprehensive S/4HANA business case for your organization
One quick and easy way to build an S/4HANA business case is to participate in an S/4HANA Value Discovery workshop. During the workshop, SAP consultants and architects conduct a series of deep-dive interviews and working sessions with your line-of-business and IT executives to uncover pain points rooted in the IT and technology constraints of legacy ERP systems. In addition, a benchmark analysis of critical business process KPIs in areas such as finance, order to cash, procure to pay, and plan to product can also be performed to pinpoint opportunities for improvement. The end result is a business case that clearly articulates and quantifies the value that S/4HANA can bring to your organization.
These workshops can be very beneficial for customers that have a fair level of understanding of S/4HANA and are ready for more detailed value-based conversations. But what if you are not there yet? Maybe you are still unsure of whether or not S/4HANA is right for your organization. Or perhaps you just want to test the waters first before committing to a full multi-day, onsite workshop.
Whatever the reasons may be, if you are not ready for the discovery workshop, then here are four steps you can take to start laying a foundation for a business case assessing the value of S/4HANA for your organization.
Step 1: Identify your pain points
The first and most critical step of the process is identifying and prioritizing business issues that you need to solve. Remember, because S/4HANA is not a technical upgrade or a database migration, the business case must revolve around real business pain points.
There is plenty of insightful material out there that provides detailed information on the latest capabilities of S/4HANA and the business pain points they address. In addition, the S/4HANA Business Scenario Recommendation tool and the SAP Transformation Navigator tool can be useful if you are an existing SAP ERP customer and want to zoom in quickly on the S/4HANA enhancements that are relevant to your specific business. Once you have an understanding of your business pain points and become familiar with the capabilities of S/4HANA you can start connecting the two together.
In the image below you will find 3 examples of real world business pain points that are common among customers and their corresponding S/4HANA solution enablers.
Figure 1: Connecting Business Pain Points with Solution Enablers for S/4HANA
Step 2: Quantify the monetary cost of your pain points
Once you have identified your top business challenges, you can then start to calculate the monetary cost of each issue to your business. There are different ways of doing that, one of which is benchmarking your company against industry peers either by using publicly available information, such as annual statements and analyst reports, or by leveraging a benchmarking tool like the SAP Value Lifecycle Manager.
Let’s take the manufacturing pain point identified in the previous step as an example. In this case, manufacturing cycle time can be used as a measurement that helps quantify the financial cost of suboptimal manufacturing and production scheduling. By comparing the manufacturing cycle time against peers in the industry and multiplying that number by the company’s operating margins, you can quickly gauge the financial impact of suboptimal manufacturing cycle time on the company’s bottom line.
Imagine a company has a manufacturing cycle time of 8 days and the average cycle time of the top 25% of companies in the industry is 5 days. In addition, the company’s operating margin is 8% with an annual revenue of US$1 billion, and the business is operational 240 days a year. For this hypothetical scenario, the suboptimal manufacturing cycle time is costing the business $1 million:
(8 days -5 days) x 8% x ($1 billion/240 days) = $1 million
We can apply that same approach to other metrics and KPIs such as inventory costs. Sticking with the hypothetical $1 billion company, imagine that the average annual inventory sitting on its balance sheet is 15% of annual sales and that its inventory carrying cost is 20% of that value. Assume also that the average inventory of the top 25% of industry peers is only 10% of annual sales. In this case, high inventory levels are costing the business $10 million:
[(15 – 10)/100] x $1 billion x 20% = $10 million
Another approach to quantifying pain points identified in step 1 is to calculate productivity loss from a particular inefficient process. For example, the manual reconciliation of ledgers impacts employee productivity in the finance area. Let’s say our hypothetical company has 15 full-time finance employees who are responsible for closing the books. Of course, they do other jobs too, so let’s assume that only 30% of their time is spent on ledger reconciliation and that the average salary of an employee in the company is $75,000. In turn, the finance team spends $337,500 annually on manual reconciliation:
15 x $75,000 x 30% = $337,500
That is time and money that could be leveraged elsewhere resulting in reduced spend on contractors, less overtime during month end close and a better work-life balance for finance employees.
Figure 2: Quantifying the Monetary Value of the Business Pain Points
Step 3: Estimate potential improvement range from S/4HANA
The third step of the business case is to estimate the value of improvements that a move to S/4HANA can have on the monetized pain points calculated in the previous step. These improvement figures may vary from one company to the next depending on company size, industry, region and the maturity of the existing IT systems and business processes before adopting S/4HANA. For this reason, it’s a good practice to build a “conservative” estimate model that assumes only minor improvements and a “likely” estimate model that assumes more moderate improvements.
To come up with these improvement estimates, you can rely on the experiences of other customers that are using S/4HANA and have shared their results publicly. The S/4HANA customer reference flipbook is a good starting point, providing quantifiable benefits such as decreased inventory turnover, days sales outstanding, production planning runs, order fulfillment times …etc. Plus, other resources such as Webinars hosted by SAP Insider and Americas’ SAP Users’ Group as well as SAPPHIRE NOW replays feature customers who have shared their S/4HANA implementation story and quantifiable benefits. If you couldn’t find the specific KPI you were looking for in these links, you can also contact your SAP account executive or partner to schedule a meeting and speak directly with a customer reference from your specific industry and region.
For example, several S/4HANA customers featured in the flipbook have reported lower inventory levels ranging from 4% at Seforge Limited, 30% at Alliance Contract Manufacturer, and 40% at Farme-Tek. These numbers can be used as a framework to measure the potential inventory reduction and corresponding financial impact on the $10 million inventory pain point identified in step 2.
Other featured customers reported faster financial closing times and reconciliation efforts of between 30% and–50% at FARYS, 37% at Asia Caunon Technology, 40% at BundesDruckerei, 60% at Huvitz, and even 90% at Beijing GeoEnviron Engineering. Along the same lines, these numbers could be used to construct a framework of potential benefits that can be applied to the $337,000 finance pain point above.
Figure 3: Calculating Potential Improvements Based on S/4HANA Customer Experiences
Step 4: Put it all together
Now you are ready to take all of this information and create your business case. Keep in mind that the improvement numbers shared by other S/4HANA customers are only starting points for your analysis. At the end of the day, you need to consider the maturity level of your current IT environment and business processes and decide the appropriate range of benefits that you feel comfortable using in the business case. Once you are satisfied with these numbers, apply them to the monetary impacts calculated in step 2 to come up with the potential gains. For the purpose of this exercise, I will just choose the min and max S/4HANA customer reported benefits as my “conservative” and “likely” benefits.
Figure 4: Applying the Potential Improvements to the Monetary Impact
Final thoughts
Hopefully, at this point, you now have a better sense of how to lay the foundation for a business case that provides guidance on realizing financial benefits from S/4HANA. Of course, this is not the end of the road. This is what I call a “Hello World!” type business case.
More analysis should be done to further refine the business case, such as building value maps and decomposing the identified pain points into sub processes and further analyzing these and bench-marking them. For example, the high days-in-inventory rates could be the result of a suboptimal product return process, a slow picking and packing warehousing process, or a combination of both. In this case, a deeper dive can be done to determine the root cause and refine the financial impact metric.
There are also some benefits that can be trickier to quantify, such as the impact of faster order fulfillment on customer satisfaction and repeat purchase. These may not be straightforward to measure but shouldn’t be ignored in the final business case.
In all cases, if you find yourself thinking about these types of things then congratulations you are now ready to move to the next step and engage in an S/4HANA Value Discovery Workshop.
Lets Connect
If you’ve been involved in building an S/4HANA business case then I’d love to hear about your experience. [Private Information Removed by Moderator
Source: https://blogs.sap.com/2017/11/02/how-to-write-your-first-hello-world-sap-s4hana-business-case/
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