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SAP IT Convergence is About Business Focused Integration

August 15th, 2011 by
SAP IT Convergence for ROI

SAP IT Convergence

The problems with Enterprise SAP IT organizations are they are focused on SAP and IT.  They lose sight of their purpose which is to support and promote the broader objectives of the enterprise.  In an SAP centered IT organization this means your whole existence is about ensuring business benefit, focusing on enterprise goals, strategies, and objectives.

Somewhere between the SAP sales cycle and the SAP go-live the concept of business benefit gets lost and is never found again.  By the time you go live with the SAP application the entire IT organization becomes narrowly focused on the care and feeding of the new system.  Everything is all about the “new” ERP application and the business is left holding an empty bag –, the money is gone but the business now has to struggle through getting their operations stabilized just to continue doing business.

The entire IT organization’s existence must focus on enabling business.

Today’s enterprises will no longer pay the premium prices for SAP or IT organizations which exist in a silo.  To continue with this old way of doing SAP or IT support will turn those internal services into very expensive commodities to be outsourced to the lowest cost provider(s).  If you want to do more than survive, but rather to thrive, you must build a converged SAP or IT organization.  Without IT convergence you can expect budget cuts and more outsourcing pressures.

Research Shows a Business Focus Produces SAP Results Needed for IT Convergence

Successful SAP projects require the management and measurement of expected benefits and the purpose for the project throughout the entire SAP life-cycle (Holland and Light, pg. 1630-1636, 1999).  To gain business benefits from an ERP package like SAP you will need serious discussion of goals, direction, objectives, and what the business software can do in those areas.  After that, coordination of key resources from both business and IT is also required to create business to IT alignment (Willcocks and Sykes, pg. 33-38, 2000).  This business to IT alignment produces some great results but is just the beginning.

[F]irms that invested more heavily in business process redesign and devoted more of their IT resources to increasing customer value (e.g. quality, timeliness, convenience) had greater productivity and business performance (Hitt, Wu, and Zhou, pg. 3, 2004 citing Brynolfsson and Hitt)…   [A 1999 study on] the impact of ERP systems on self-reported company performance based on a survey of 101 US implementers of SAP R/3 packages [showed]… companies reported substantial performance improvement in several areas as a result of their ERP implementation, including their ability to provide information to customers, cycle times, and on-time completion rates (Hitt, Wu, and Zhou, pg. 5-6, 2004).

In the 2004 study just cited they also referenced compiled research by Gattiker and Goodhue (2000) which identified four broad categories of ERP benefits including (1) better information flows, standardization, integration, communication and coordination; (2) centralization of administration activities like, AP, payroll, etc. (i.e. “shared services”); (3) reduced IS maintenance costs and improved ability to deploy new IS functionality; (4) a move to “best business practices” around business processes.

Some of the additional and very interesting findings (Hitt, Wu, and Zhou, pg. 18, 2004) include:

  • Greater sales employee performance
  • Higher profit margins
  • Better return on assets including greater asset utilization
  • Higher inventory turns
  • Greater receivables management (including better “cash to cash” cycles)
  • More revenue generated per unit of input

This is impressive but notice these benefits are nearly all operational business performance results.  They certainly appeal to the CFO and improve market valuation making them meaningful. However, as operational benefits they are nearly all focused on lagging indicators of business success.  Shareholders approve of these results with the valuations of companies who implement ERP systems like SAP being “worth approximately 13% more than their non-adopting counterparts, controlling for assets, time and industry” (Hitt, Wu, and Zhou, pg. 20, 2004).  So implementing SAP has a positive impact on stock values.  While the focus on operational results generally produces good results, a focus on business and marketplace results can produce disruptive results.

Today’s SAP Enterprise Can Realize Even More Through SAP IT Convergence

All of these benefits and gains from roughly a decade ago are not enough today.  While the study from Hitt, Wu, and Zhou (as well as the others reviewed here) showed tremendous benefits for SAP they were based on studies at least 10 years old.

In the last decade the entire global landscape has dramatically changed –, the Internet and the pace of technology change has disrupted every value proposition model relied upon by business.  No area of the enterprise is off limits–, business is in the midst of a global and dynamic transformation of operations, innovation, and customer focus.  To thrive in our modern business era we will all have to move past the IT to business alignment model and push into IT convergence.

Your SAP Enterprise Can No Longer Avoid Full Business to IT Integration (i.e. “Convergence”)

The business benefit focus has been difficult for SAP or IT leaders trying to quantify returns from their investments.  Even though SAP has been at the forefront of addressing this message it is slow to catch on.  Over a year ago I highlighted SAP’s “value delivery” and value focus to implementing their software:

Studies have shown that there is a critical disconnect between projected benefits in business cases for IT investments and actual value achieved, because so many firms focus on going live with a project rather than its value delivery. An SAP / ASUG best-practice survey on the ability to capture the projected benefits of an IT project found that 73% of companies do not quantitatively measure value post-implementation (SAP Executive Insight Series, pg. 7, 2009)…  Critical business benefits for an SAP project require taking a hard look at the enterprise and its goals or direction…  (see A New SAP Implementation Methodology and Implementation Steps).

And while all of this is critical for realizing SAP ROI from your investment there is still more to do.  With this groundwork focusing on the need for business benefit, or measurable ROI, we can take the next step and start to explore full IT convergence around your SAP endeavors.

Next week we will look at some methods to create SAP IT convergence.

=========================

Gattiker, T., and Goodhue, D. Understanding the plant level costs and benefits of ERP: Will the ugly ducking always turn into a swan? In: R. Sprague, Jr. (Ed.), Proceedings of the 33rd Annual Hawaii International Conference on System Sciences ( CD-ROM), Los Alamitos, CA: IEEE Computer Society Press, 2000.

Hitt, L., Wu, D.J., and Zhou, X. ERP Investment: Business Impact and Productivity Measures.  Wharton School at U of P (2004).

Holland, C. and Light, B. Critical Success Factors Model for ERP Implementation.  IEEE Software. May / June (1999).

Willcocks, L. P. and Sykes, R. The Role of the CIO and IT Function in ERP.  Communications of the ACM, Vol. 43, Iss. 4 (2000).




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Will Next Generation IT Finally Transform Business

April 18th, 2011 by

Technology Enabled Business TransformationNew IT Value Propositions – Moving from Operations to Customers and Innovation

Throughout everything I do as a consultant I try to categorize my activities into the three key value proposition areas of business–, operations, customers, or innovation.  Even though I have been working primarily in the supply chain areas of SAP since 1994 (SD – Sales and Distribution, MM – Materials Management, and PP – Production Planning) I have been focusing more and more on the key value areas of customers and innovation.  The big driver for my focus on customers and innovation is because that is where business is done.

By focusing only on processes, operations, and cost reductions business and IT efforts result in mass commoditization.

Certainly every company must contain, control, and reduce costs to stay competitive in the marketplace.  More and more however the companies who are able to ensure long term success are those with a more balanced focus on retaining and acquiring customers while innovating new products or services.

Where IT has been and Where IT is Going

The last 30+ years the business and technology “revolution” has focused on operations and done little to directly address the customer or innovation.  It is almost as if technology organizations only understand Henry Ford’s assembly line mentality with business processes.  The operations focus can be seen in ERP applications (like SAP), EDI or interfaces, machine logic controllers, wired and then wireless data transfer, the Internet, or any other number of technological advances.

Today’s leading companies are integrating their IT operations into the fabric of the business.  Today’s leading companies are focused on innovation and customers.

Today, innovation is about much more than new products. It is about reinventing business processes and building entirely new markets that meet untapped customer needs. Most important, as the Internet and globalization widen the pool of new ideas, it’s about selecting and executing the right ideas and bringing them to market in record time.

In the 1990s, innovation was about technology and control of quality and cost. Today, it’s about taking corporate organizations built for efficiency and rewiring them for creativity and growth. [FN1 – excerpted from “The World’s Most Innovative Companies,” see the footnote link below.]

In announcing the recent list of innovative companies, MIT noted these companies are “setting the agenda in an increasingly important market, on the verge of disrupting an established market, or creating an entirely new market.” (BostInnovation Feb 22, 2011 citing an MIT study of innovative companies).

The Operations IT Focus Has Turned All Products Into Commodities

This better, faster, cheaper automation paradigm has worked well when processes were mostly manual and labor intensive.  As more and more processes have been automated and streamlined further technological advances provide less and less return at higher costs.  Along with that, the cost-cutting chase, and the speed of automation and process improvement has dramatically accelerated the rate of commoditization of products and services.

As just one example of how dramatic this transformation is, I personally own an iPhone.  On that iPhone I have a free application that: a) uses the phone camera to capture and process product bar codes, and then b) goes online to immediately price-compare that product to local and online sources.  My wife loves it.  She can be out shopping and do real-time price comparisons.  What does this mean? 

Every major product seller is now a commodity outlet.  Every product can be comparison shopped in real time making it a commodity also.

As a product supplier, your customer does not have the option of you re-numbering, or using a different SKU.  Why?  Because the very same ability to search for the lowest price is the same tool that finds your product to begin with.  Changing the SKU would be more counterproductive to sales than engaging in the commodity-based price wars.

The future of technology and business integration provides the two areas of business most neglected by IT or ERP or technology to focus on–, innovation and direct customer interaction.  While I personally believe we are in the early “Wild West” era of social media tools, their hype and popularity is proof enough that the marketplace as a whole recognizes a gap in customer interaction that must be filled.  The real question is what will tomorrow’s successful social media business models look like after all of the hype and snake oil sales are finished.

Next Generation Enterprises – Will They Transform Business?

Already we are beginning to see seeds of transformation being sown.  All around the globe companies are beginning to focus more directly on innovation and customer focus through technology integration.

The hype around social media and Web 2.0 is beginning to give way to a few practical applications.  The same can be said for “cloud” computing even though it is still heavily immersed in the “hype” phase.

These are all IT solutions.

What about business integration?

What are the details of how technology and social media will bring about a revolution in customer focus and innovation?

——————————-

[FN1]  The World’s Most Innovative Companies (Bloomberg)
http://www.businessweek.com/magazine/content/06_17/b3981401.htm




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Where do you Start with SAP Return on Investment or SAP ROI?

July 19th, 2010 by

SAP Return on Investment or ROI

See PART 1SAP Implementation is an Investment NOT an Event

How much is it going to cost and how long is it going to take?  That is the classic approach to SAP implementations.  Today it’s not enough and the marketplace is demanding more from their IT dollars.  Now there are questions about measuring cost reductions, process improvements, as well as customer retention and customer acquisition. These are all important discussions.

Your money has to work for you in your business and it should work for you in your SAP investment as well.

If you’re looking to buy a new stock, or mutual fund, or some other investment you do your homework.  If you’re looking at a capital purchase in your business you want to understand the justification and the payback so you build a business case.  If you’re looking to implement SAP then define the business reasons for the implementation and do your homework! 

Take the time and do some research to understand how to avoid many of the sales scams, pitfalls, and ridiculous system integrator tactics.

SAP Cost Based Indicators, Total Cost of Ownership, and Return on Investment

Lagging Indicators and SAP Supported Process Cost Reduction

Using the stock investment analogy, the cost-based ROI component can be seen as the dividends paid by a stock–, generally known, stable, reliable payback, quantifiable and tangible.   In an SAP implementation the “dividends” would represent lagging indicators of performance.  There is a fairly reliable history to consider for the dividend payout. You have a pretty good idea of a number of your costs (or can find out what they are), such as:

  • current legacy systems cost,
  • you know what your man hours are (staffing, personnel, benefits, overhead, etc., etc., etc.),
  • process cycle times,
  • per transaction costs for things like purchase orders, sales orders, production orders, etc.,
  • competitor transaction cost benchmarks,
  • current application license and maintenance costs,
  • etc., etc., etc.

These are all lagging indicators and they are all cost based, cost improvement focused portions of an SAP implementation.

Same Old, Same Old, Everyone at Least Pays Lip Service to Cost Based Process Measures

EVERYONE tries to do this to some extent.  It is not always structured, clearly defined, and then measured after the system is live, but there is a general expectation of improvement.  Even for those companies who buy into this paradigm during the sales process but never see it realized, it is still part of the system integrator pitch.  You are always promised “improvements” by the system integrators.  You always expect processes to speed up and process costs to go down.

The process improvement, automation, and cost reduction approach is no different than everyone in the marketplace who does SAP or some other ERP application–, it is the old “operational excellence” model of business.  It does little or nothing to address the key components that grow business or improve revenue.  And after an initial cost reduction boost it does little to increase profits.  

Leading Indicators, SAP Value Proposition and SAP Value Realization

Unless you are in a commodity market, or have clearly “broken” or significantly inefficient processes, the cost reduction or operational excellence approach to ERP should not be your only focus.  Considering your SAP implementation as an investment for ROI purposes you would understand that this is the first step in a long term system investment program.  After you get the system in, you should press your IT organization to move from an operational excellence paradigm into how to use the system to support corporate innovation and sales growth.

If you want value realization from your SAP or other business application implementation it takes a more rounded and tangible business centered approach or, a real SAP value proposition.  Using the stock analogy, the value realization comes from stock appreciation together WITH the cost saving dividends that are paid.  In your SAP implementation both lagging and leading indicators are used to finally realize value.

This new investment paradigm must focus a significant amount of attention on the end state after the business has started operating in the new SAP world.  And that “end state” focus on value realization from your SAP implementation should begin  before you write your RFP.  This entire site is dedicated to help you transfer critical knowledge needed for success from SAP value proposition all the way through value realization.

Marketplace Winners and Losers in SAP and ERP Investment

Innovation is one of the key and critical value proposition areas that separates winners from losers in the marketplace.  And even though your initial implementation may only consider the initial operational excellence areas that is just the beginning of the journey.

Does your system integrator have any ideas or methods for improving engineering, design, and delivery collaboration efforts?  Maybe you are not there yet, and that is fine, but it must be considered as part of your initial assessment of the path you are on with SAP.

Ask your system integrators how to use your SAP implementation to improve concept to market cycle times and for other innovation methods that will impact your marketplace.  Drill into the details, don’t accept “sales fluff,” ask for specifics and don’t settle for less. 

SAP Implementation Measurement of Return on Investment

To this day I am still surprised by how few companies define success criteria for their SAP implementations.  Fewer still do the up front due diligence to determine where they will have business benefit in terms of cost based lagging indicators:

  • process improvements,
  • cost reductions,
  • automation,
  • reduced transaction processing costs,
  • reduced licensing for legacy systems,
  • reduced system maintenance for legacy systems,
  • improved cycle times,
  • etc.

Even if there is some consideration of these categories or classes of cost savings, few companies quantify them and try to understand current costs and how they might be improved BEFORE bringing in a system integrator. 

During the selection process few companies ask the tough questions and demand the details of their integrators to validate their saving assumptions, and then even fewer hold the integrator accountable for them.  Few businesses attempt to tie incentives, compensation, or other means of achieving these results to their system integrator contracts. 

Talk about caveat emptor, or buyer beware!

Some companies consider legacy systems, and the cost savings for eliminating them, but beyond that there is not a lot of due diligence done to support long term cost reductions.  Key details are generally lacking.

Few companies, and fewer system integrators ever consider leading indicators of business performance such as:

Customer retention

  • service processing
    • reducing overall service requests / requirements,
  • repair and response turnaround times,
  • first time fixes,
  • solution databases,
  • interactive response forums,
  • etc., etc., etc. (come on, you didn’t expect me to tell you ALL the secrets of an ERP customer retention program did you?)

Customer acquisition

  • target markets
    • by geography,
    • product line,
    • customer strata,
    • customer segment,
  • promotion options
    • special product mixes,
    • offers,
    • promotion execution,
    • promotion cost tracking,
    • buy “x” get “y” at a discount or free,
    • buy “xyz” product mix and get “abc” mix at discount or free or both,
    • etc., etc., etc. (again, feel free to contact me if your system integrator has NO IDEA how to do all of this in the BASE SAP ERP system ;)  It is possible!)
  • Customer analysis
    • stratification,
    • buying analysis,
    • product mix / popular combinations,
    • promotion integration,
    • segmentation
      • by region,
      • dollar value,
      • product mix,
      • product line,
      • customer group or product line profitability
    • overall profitability,
    • etc., etc., etc.  (again, feel free to contact me if your system integrator has NO IDEA how to do all of this is the BASE SAP ERP system ;)  It is possible!)
  • And MANY more options…

Why is this lacking?  Because you, as the customer, do not demand it of the system integrators.  As a result the system integrator develops technicians.  And the cheaper they can develop those “technicians” rather than experts the greater their margins are. 

System integrators generally have little interest in promoting the idea that you should actually see a genuinely measurable business improvement.  If they did, those system integrators would be forced to bring in more competent, more highly skilled, and more seasoned veterans who understand business as well as the technology.  See for example, CRM, ERP, BI, and IT Investment — Where Do You Find the Business Benefit?  Using mostly a CRM example for illustration, that post helps you gain some insight on the types of consultants and insight you need for business success.

Short Term (operational excellence), Mid-Term (innovation), Long-Term (customer focus)

Relying on the investment analogy, your SAP portfolio should include several items or components of the application to implement.  And just like stock market investments, there must be some short-term, mid-term, long term, and business hedges built into a healthy implementation. 

Some items, such as “Wave II” or add-on functionality may be planned for at a later date but should be considered from the beginning.

For a long term successful SAP implementation it must become part of a business program, not just a system installation.

What does this mean?  This means that your thinking about SAP and its role in your enterprise must change.  As I’ve written before, Change How You Look at SAP to Create ROI.  SAP must be seen as a tool that enables the enterprise to change, to grow, and to spot opportunities and execute on those opportunities sooner than your competitors.  To do so requires a change in culture and thinking that companies often struggle with, however, SAP can enable these changes when SAP is seen as a business investment requiring regular adjustment, focus, balancing and change.  Just like your stock portfolio.

Use a Business Focused SAP Implementation for Business Transformation

If you want to see true competitive advantage it will take adding a real business imprint, real business insight, and key success metrics to create a long term business program.  That long-term business program is business transformation with SAP enabling the enterprise to be more competitive, more agile, and more robust.

At the the end of the day if you do not define what you want from SAP to consider it a SUCCESS, and if you do not have a focus on business drivers you will NEVER see the success you want from your implementation.  Worse still, if you don’t focus on these items from the beginning you will not have a good baseline to evaluate your system integrator or SAP implementation partner in the early RFI or RFP project stages.  Without that critical evaluation you may end up sinking your budgets in a “money pit” where you will NEVER see a return on investment.  Worse still, without these critical measures you may end up having a long term negative return that is dangerous for your long term prospects.  And it is NOT a shortcoming of the software!




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