See PART 1 – SAP 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,
- reduced transaction processing costs,
- reduced licensing for legacy systems,
- reduced system maintenance for legacy systems,
- improved cycle times,
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:
- 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?)
- target markets
- by geography,
- product line,
- customer strata,
- customer segment,
- promotion options
- special product mixes,
- 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
- buying analysis,
- product mix / popular combinations,
- promotion integration,
- 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!
- how long does it take to see a return on an erp investment