SAP & ERP Consulting from the Customer Point of View

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 like them 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.

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.

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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).

Related Posts:

• Integrating Business Stakeholders as Part of SAP IT Convergence
• Steps to Achieve SAP IT Convergence
• What are SAP Best Business Practices Anyway
• Why Indexed KPIs are Critical for Business Performance and Success
• Using SAP to Improve Revenue and Profitability

Use SAP Best Business Practices For Commodity Processes But More Carefully Evaluate Competitive Processes

The debate and discussion around SAP best business practices usually assumes an “either-or” mindset.  Either you use the SAP best business practices as they are or you abandon them (for more background on SAP’s “Best Business Practices” see What are SAP Best Business Practices Anyway).  Several commentators suggest you should not do a software vendor’s “best practices” because you are adopting the “herd” mentality and will not be competitive in the marketplace.  They completely ignore the reality that some processes do not need huge development investments.  SAP provides a number of tools and resources to evaluate its solutions for your enterprise’s business processes (see Using SAP Solution Composer for SAP Scope – Process Alignment).

Commentators who are broadly against “best practices” have failed to recognize that there are different types of business processes.  One type are what I call “commodity processes” or the things you must do to run business, that everyone does, but adds little or no value to reducing cost, increasing revenue, or improving margins.  The other type are “value added” processes where the process itself (not ancillary manual steps) directly aid in reducing cost, increasing revenue, or improving margins.  Some business processes justify custom development when a standard solution will not do certain business critical processes (see e.g. Lower SAP Application Support Costs – TCO – by Reducing Custom Solutions).

Value added processes must directly contribute to market share or address a specific pressure from a competitor or they are commodity practices which are good candidate for “best practices.”  By reducing costs or increasing revenue and margins you are directly affecting your competitive posture in the marketplace.

What Are Value Added Processes in the SAP Organization?

Let me clarify one thing here, a “value added” process can be any process in a company.  In one company or environment a process may be a commodity process, however in another company, or industry, that same process may be a value added process.  The test for a “value added” process is whether or not it adds to your business marketplace competitive advantage.  That generally means it has to reduce cost or increase revenue in more than a minimal way.  As an illustration ask yourself, if you significantly increase your margins on a slow moving, outdated, low volume product or service is it worth a huge amount of time and effort?  Was the investment worth it?

Management’s primary responsibilities are to increase revenue, reduce cost, and improve margins

A value added business process will generally have some type of reporting requirement attached to it.  Some way to measure its performance because the process is critical to the organization’s mission.  If you have developed KPI’s, goals, metrics, or reports for a particular portion of your business processing you can be sure it is a good candidate for special attention as a “value added” process (see Why Indexed KPIs are Critical for Business Performance and Success and Using Key Performance Indicators for Building a Strategy Focused Organization).

What are Commodity Processes in the SAP Organization?

In most companies “commodity” processes would include purchasing, warehousing, inventory, distribution, or other routine processes.  Commodity processes and those business functions that do not have a direct impact on your competitive position.  If you are a third-party logistics provider then your competitive processes would include warehousing and distribution.  It is the core of your business and what you do.  However in other businesses those would be commodity processes.  If you are a consumer products company then sales and marketing processes would be value added where purchasing and inventory would be more commodity processes.

Worse still, in recent years IT has been seen as a “commodity” resource to be outsourced.  As IT and technology functions have become more and more focused on cutting costs and shaving pennies from a few process areas they are finding smaller and smaller returns at more and more cost.  As new technology is rolled out and it stabilizes the business and senior management see IT as more and more of an expensive cost center with functions that can be performed elsewhere at a lower cost.  IT organizations everywhere must begin to aggressively focus on business integration and value realization or become prey to outsourcing themselves (see IT Outsourcing, Off Shore Support, Cost Cutting and IT Department Changes).

SAP Software Best Business Practice Processes

While I have long advocated for business process engineering rather than software engineering there are times when custom development is justified.  The key to understanding when you might choose one approach or the other is related to whether a process (or sub-process) is a “commodity” process or a “value added” process.

Considering cost, revenue, and margins separated from marketplace competitiveness is misplaced.  Unless there is some significant competitive advantage or directly aligned business driver then only standard functionality should be used.

When you consider your SAP software investment it would provide the greatest business benefit to pay special attention to value added processes. Do not waste time or development effort on commodity processes.  Spend the time, effort, and money on change management for commodity processes because after the initial change cost ongoing Total Cost of Ownership (TCO) for these SAP processes will be the least expensive (see Where do you Start with SAP Return on Investment or SAP ROI?).  Regression testing, patches, fixes, new functionality, and all of the other things you do with SAP business applications will be easier and less expensive for the commodity processes.

Related Posts:

• Using SAP to Improve Revenue and Profitability
• Competitive Pressures and Value Propositions, Is Lean the Answer?
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• SAP Development Landscape and Systems: Misguided Practices Carry Huge Costs

SAP Best Business Practices

Over the last couple months I’ve seen a few posts developing a debate around the use of software “best business practices.”  The basic takeaway is that if everyone uses the standard delivered “practices” there is no competitive advantage.  While this may be true for many software applications there are two things with SAP which causes this idea to be misleading.

Many of these commentators fail to recognize that SAP refers to different things as “best business practices.”  The key types of SAP best business practices involve the processes included in the SAP software itself– software supported business processes.   Then there is the management and integration practices around software alignment to business — or the whole Business to IT Alignment dynamic which focuses on business value. [FN1]

The posts and comments complaining about “best business practices” I refer to are the ones where the authors complain about software supported business processes.  The common denominator I find in all of these authors’ complaints is they have little or no exposure (let alone experience) with SAP.  Their commentary is a bit misleading because of the depth and breadth of options available to any SAP customer.

SAP Best Business Practices for Business Software Integration

Few of the “best business practice” detractors are aware that SAP best business practices are far more than just the software business processes you put in scope and implement.  SAP’s best business practices include structured decision making and governance around applying software solutions to business (shocking isn’t it!) [FN2].  The whole idea behind these types of “best business practices” are to find ways to gain tangible benefits from the application of technology.  By identifying value based governance and project criteria you can achieve measurable Return on Investment (ROI).

Use of SAP’s Best Practices for Speeding Time to Benefit [FN3]

Best-practice value identification, transformation, and measurement approaches include:

- Incorporation of business case objectives throughout the project lifecycle
- Communication and documentation of process objectives and project success criteria
- Use of both existing and new program-specific financial and operational key performance indicators, based on the business case objectives, to measure project success.

The points above come from the SAP literature.  If you look at what SAP is proposing in those points you will see a company that is encouraging accountability to the business in the implementation and integration of its software.  Unfortunately few of the SAP implementation vendors or partners encourage this type of accountability.

SAP as a business software company spends over $1 BILLION Euros a year on Research and Development (R&D) (or over $1 Billion US).  That is to support both types of “best business practices” and is more than nearly all of SAP’s competitors generate in gross revenue each year [FN4].  Is it any real surprise that most of these complainers do not work with SAP?  Many of them are from competitors.

SAP Software Supported Best Business Practice Process Design and Setup

The SAP software supported best business practice processes generally refers to a broad type of functionality that the application contains.  For example, in the automotive sector, on the materials management side, it means that you have special functionality for JIT (Just in Time) or Forecast schedule agreements.  Along with that it also includes “sequencing” for automotive manufacturers and suppliers to guarantee that components and assemblies are delivered to the production line in exactly the order the OEM manufacturer builds them.  This is industry specific business process functionality.

In that one small example, what is not “understood” by many of the best business practice software process detractors is that there are literally dozens, if not hundreds of individual and granular system setup options for how each step of that process works.  On top of that there are also dozens, if not hundreds of master data points between the vendor, materials, pricing, and other possibilities that directly influence how the steps of that process are carried out.  So in a generic sense you have SAP “best business practices” processes in the form of industry accepted JIT and Forecasting along with automotive specific sequencing.  The details of how you execute that functionality can be finely controlled along the way without custom coding.

Conclusion on SAP Best Practices for Business Processes

The example just provided above is one small processing example of hundreds of processing options, within one single industry vertical.  SAP supports over 20 major industry verticals covering industries as diverse as Chemicals, Public Sector (government), Retail, Pharmaceuticals, Consumer Goods, Healthcare operations, Hi-Tech, Services, Aerospace and Defense, etc.

Even though SAP offers a “best practice” setup library with documentation on system settings to support specific business processes, they are a starting point.  The SAP documentation and resources do not cover all of the fine details of setup that only experience brings.

The ability to finely tailor or “tweak” system settings to meet a particular need or requirement, with hundreds, and in some cases thousands of variations, means that two companies using the exact same functionality can create entirely different processes to support different business strategies.  Together with that you have dozens or even hundreds of master data settings which rely on this system setup to create a virtually unlimited set of options.  And then before building some completely separate, stand-alone application there are user exits (or enhancement points in ECC versions) to program very specific requirements.

In the end an experienced consultant can guide you through the process of making the finely detailed adjustments to handle nearly any requirement with a minimal amount of custom coding.  And that is where true “best business practices” intersect with IT. Combine the right consultants with proper project or task governance and you have an optimal solution for the least Total Cost of Ownership (TCO).  Together with reduced TCO you gain real Return on Investment (ROI) with the application of “best business practices” surrounding good governance to create business solutions with IT (rather than IT solutions for business).

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[FN1] This site focuses more on “best business practices” related to business and technology alignment. There are any number of great resources for the business process related topics so another site would add little benefit.  In fact I’m not sure anyone could compete with SAP’s own “SAP Community Network” (or SCN, http://scn.sap.com ).

[FN2] SAP Executive Insight Series (September 7, 2009).  Accelerate Value Creation: The Virtuous Cycle of Using Technology to Maximize Business Value.  http://www.sdn.sap.com/irj/scn/index?rid=/library/uuid/70fa08b0-cf81-2b10-a396-89d18932fbd0&overridelayout=true (retrieved 4/23/2010).

[FN3] SAP Executive Insight Series, pg. 6, 2009.

[FN4] SAP Annual Report for 2009.  Review of R&D Operations.  http://www.sapannualreport.com/2009/en/annual-report-2009/review-of-operations/research-and-development.html (retrieved 3/05/2011).

Related Posts:

• Tactics, Strategy, ROI, TCO and Realizing Business Benefit from SAP
• Using SAP to Improve Revenue and Profitability
• SAP Implementation is an Investment NOT an Event
• Competitive Pressures and Value Propositions, Is Lean the Answer?
• Where do you Start with SAP Return on Investment or SAP ROI?