SAP ROI — Enterprise Architecture & Business Solutions

Key Performance Indicator

The key performance indicator acronym (KPI) is used so much that it has come to be associated with any type of business measure.  Everything is called a KPI and it is a silly distraction from an important business tool.  Not every measure is a KEY Performance Indicator, only those measures that are critically important to making a difference in the marketplace are truly KEY to your company health and performance.

Because of this confusion around Key performance indicators the wrong measurements are often used.  Too often a KPI is used to measure discrete components of an organization and are frequently focused on lagging indicators.  

If the KPI can not be used to steer your company, to plot course changes into the future, then they should not be called a KPI.

A proper KPI is:

1. KEY to your business health (lagging) or growth (leading)
2. Focused on your PERFORMANCE in the marketplace
3. And an INDICATOR of your success in delivering customer value.

If your KPI does not fall into these broad categories as the “instrument panel” to keep your company on track then it is not an appropriate KPIs.

I chose those analogies carefully to line up with the 3 key business value proposition areas of process, innovation, and customer focus.  The first two, the way I have defined them are more closely aligned to process and innovation while the last one is exclusively linked to the customer focus.

What Should a KPI or Key Performance Indicator Measure – What is a KPI?

A true KPI should represent an underlying business need that addresses your company’s position in the marketplace–, not a single discrete process measure as so many use them today.  It should be directional in nature providing guidance to broader business activities but it is not a specific organizational performance measure.  However, a good KPI will generally be an index of several organizational performance measures or, more appropriately, several goals from various organizations and activities all rolled together.

Too Many Goals are called KPIs

Many commentators, consultants, and other professionals confuse KEY Performance Indicators with more discrete goals and the metrics to support those goals.  As you move further away from the top level of the KPI to address more discrete elements of operational performance you are no longer looking at KPIs.  Your company does not need a KPI for every metric.  In fact, the most effective KPI will generally be an index of several metrics or several departmental goals, properly weighted to correctly address marketplace competitive pressures.

Key Performance Indicator Alignment

KPIs should align with one or more of the three value proposition areas of operational excellence, customer focus, or innovation.  Underneath those KPIs some of the specific goals, measures, or metrics to define top level KPIs will fall into the area of competitive pressures.  How well you execute against those competitive pressures to enhance your value proposition directly affects your position in the marketplace.  The KPI index of various goals and measures provide a great underlying foundation for a solid ERP, SAP, or IT business case.  These various goals and metrics as well as the processes that support them become a great foundation for your ERP, SAP, or IT business case –, they are powerful for guiding IT spend and IT investment as well as corporate direction.

The components of each of the areas of competitive pressure should focus on the three business drivers: cost, revenue, and profitability.  These three areas should underlay each of the metrics that are used to define your goals, and then the index of those goals and the weighting of each of those measures becomes the KPI or score for your business.

Key Performance is All About Business

One way to determine if you have created an appropriate KPI is whether it is directed at your company’s value proposition (operational excellence, customer focus, or innovation) or whether it is focused on competitive pressures (vendor / customer power, competitors, or new products / services).  A solid Key Performance Indicator can be built from an index of either a value proposition element or a competitive pressure element.  To develop skill with these measures you may wish to define your goals first at the competitive pressure level.  As time goes on and your comfort increases you may begin to align them higher up into the value proposition area.  Then each of the competitive pressures is addressed for each of the value proposition areas you wish to target.

I am a proponent of keeping the KPI at the highest level, at the level of your value proposition.  However in some companies, especially those businesses or industries who deal with commodities, your KPI indexes might be better aligned more directly at the landscape of competitive pressures.  Either way there is a close relationship to your value proposition and competitive pressures so either will work.

KPI, Value Proposition, Competitive Pressures, and Business Goal Alignment

It is not easy!  If it were easy the whole area of strategy and KPI alignment would just be another commodity.  As another commodity it wouldn’t produce results that help your business to win in the marketplace.  But while it’s not easy, it is possible and like all things that take a measure of skill the more you practice it and the more diligent you are the better you get and the easier the exercise becomes.

Related Posts:

• Tactics, Strategy, ROI, TCO and Realizing Business Benefit from SAP
• The Real Reason Executive Participation Creates IT Project Success
• Using SAP to Improve Revenue and Profitability
• Competitive Pressures and Value Propositions, Is Lean the Answer?
• Opportunities for INNOVATION SAP, HELLO?

SAP Business Case Target

Your company’s SAP or ERP business case should start before your RFP, and not just at a high level. It is important to take some time up front to get educated and develop some key understanding before ever issuing an SAP RFP.

There are a number of steps you can and should take, first among them is to get educated.  Educated software buyers are more sophisticated, and the more sophisticated you are the better your results will be.

There are many benefits to being an educated software buyer.   The more educated you are:

• The better the quality of the ERP RFI or RFP.
• The better choice you will make at vendor selection (you’ll be able to see past sales pitches to the substance).
• You’ll be able to make a more objective assessment during demonstrations.
• You’ll be able to focus on ensuring vendors show you what is really important to make a better decision.
• The better your project will be scoped and blueprinted, and;

Ultimately, you will end up with a better project and results overall.

The most successful RFP business case for an SAP, ERP, or IT project will include several components:

ERP Project Value Proposition Elements

• Operational Excellence – expected cost reductions from automating and improving ongoing operations and their processes.
• Customer Focus – how will people, processes, and technology enable operations, goals, and reports to focus on the customer needs and wants? How will sales, marketing, and customer service be integrated and extended to delighting the customer? Tools and resources to empower customers for success with the organization’s products and services.
• Innovation – Tools and resources to support internal and external collaboration, engineering efforts, and market intelligence.

Business Competitive Pressures to consider for your SAP Project

An honest assessment of the organization’s strengths and weaknesses in the four core competitive pressures businesses face [FN3]:

• Customer options
• Vendor power
• Existing competitors
• New (innovative) products or services.

Underlying the value propositions and the competitive pressures is the need for solid business goals and metrics that you expect the software application to enable.  I’ve provided some insight on the process of developing meaningful KPIs which can become the basis for a solid business case.  That article helps to define the business drivers that are necessary to intersect with technology.  By changing how you look at SAP to focus on the business rather than the technology you are far more likely to achieve great results and more satisfaction with your implementation.   And on top of that, by making the business drivers the focus of all of your efforts you will also gain more meaningful insight into aligning the right implementation vendor with your technology project.

For success in highly competitive global markets your organization must be agile enough to change and adapt as necessary. This is true no matter what the size of the organization is.  And by focusing on business needs rather than just on the technology you are far more likely to design processes, goals, metrics, and project expectations that will help to keep you from getting locked into rigid technology restrictions.

Where to start with developing a solid SAP business case based on business and IT strategy:

1. Get your company “A” team together to work on the initial project definition. Be sure they are the people that will have key responsibilities for the SAP project (and they should be key decision makers for the vendor selection process).
2. If you have not acquired an SAP software agreement yet then contact an SAP sales rep and ask about getting a copy of the ASAP toolset as part of your evaluation process for software selection.  Be prepared for the sales pitch but if you have not yet decided on SAP just insist that you are going through the up front due diligence of Discovery and Evaluation of what SAP might be able to offer.
3. If you’ve already agreed to purchase the SAP software then have your sales rep give you access to SAP’s ASAP toolset. Install it on any web server (Apache, IIS, etc.) and begin getting your team familiar with it.
4. Set a timeline and deadline for the initial project team to produce a business case with your company’s core strategic direction.
5. Get familiar with the ASAP tool set.
6. IF you have an SAP software agreement then you also have something called “IDES” available to you free from SAP. That is a complete SAP system used for training by SAP America. It is the full and complete application with pre-loaded data for a fictitious company. If you are a licensed SAP customer it is NOT a trial version, it is an educational version that does not have some short term expiration date. Along with it you can also go through installing some of SAP’s Best Practice scenarios to get more familiar with the Best Practices resources SAP provides.
7. If you do NOT have an SAP software agreement or if you do not have the time or resources to set up an internal educational system there are several reasonable online services for direct SAP access.
8. If you set up the SAP IDES system, or decide to get remote access, then have several key decision makers about the SAP vendor selection begin to get familiar with the software to help with your own understanding.
9. Get familiar with the ASAP tool set.
10. Plan on spending about 3 – 6 months on all of this PRE-project prep work depending on the size and complexity of your company and implementation requirements.  It may take 2 – 4 weeks or more just to put the RFP together after you have had a few months exposure to SAP’s resources and tools.

From this exercise one of the most critical drivers of success in the initial business case will be the ability to define outcome based business drivers for the project. These outcome based business drivers should be articulated in such a way as to be able to be verified after go-live and sufficient enough to write a contract with a vendor to include them along with penalties for lack of compliance.

SAP Business Case critical elements

No matter how you draft, define, or craft your business case it should contain a few critical elements:

• People – the expected organizational effects or company changes such as: changes in workforce behavior, more collaboration, greater cross-functional cooperation, more customer focus, etc.
• Process - the existing business processes will be implemented along with any expected cost savings from improvements or automation (lagging indicator processes).
• Process and Technology - any new business processes that will address competitive pressures or value propositions and any expected savings or revenue opportunities (lagging and leading indicator processes).
• Technology - the Key Performance Indicators (KPIs), reporting requirements, goals reporting, and other metrics that the SAP implementation will address and provide the details for (lagging and leading indicator reports). This would also include any new technology that is needed or desired to reduce operational costs or improve revenue and profitability.

Notice that this business case includes the three key areas of business process and technology intersection in the marketplace–, people, process and technology. It is equally as important to note that the best business case will also focus on both lagging and leading indicators of success. And one other key point to keep in mind is that this type of business case is focused on business transformation. Transformation in the form of developing an organization that is more focused on competitive pressures, company value, and growth. As a result all any application can do is to enable those transformation efforts, and it can lead them, but it cannot make them happen.

The best measure of success of your SAP project is whether the tools, resources, and means to achieve that business transformation were delivered as expected.

In other words, did the software and implementation vendor provide you with the tools and resources you need as a business to address your business drivers and your business reasons for doing the project?

No software, technology, or even capital equipment is going to suddenly make you money by itself.  Even capital equipment needs the raw material, labor, or service inputs that produce the products or services you make in a new, cheaper, or better way.  In other words, no equipment or technology investment alone is going to create revenue, profitability, or cost savings without having proper inputs and outputs to use that resource.  It is the new or more effective way of processing those inputs and outputs that makes the difference and this is where your business case should focus.  What do you hope for SAP or any other technology to enable your business to do better.

Business transformation must come from the business although it is enabled by the technology.

From this business case a set of “success criteria” and of strategic goals, initiatives, processes and reports can be defined to be included in an RFP to a vendor. And although I’ll write another post on RFPs another day, one of the most important focal points of an RFP and of an SAP project is in achieving “operational independence” which is just a fancy way of saying that you have developed the internal competence to be able to process day to day SAP related issues without outside vendor involvement.

Consider Independent SAP Contractors as SAP Project Auditors and Coordinators

If there is sufficient funding available it would also be helpful to bring in one or two very seasoned contract veterans at this point to help educate you and your team about the ASAP methodology, SAP’s Best Practices, solutions options, help with an RFP, and in learning how to use the SAP system, etc.  And even if you don’t have an SAP license yet, your company may wish to use one of the many SAP educational services that provide access so you can get some initial exposure to the application with no risk and no obligation.

If you decide to bring on an outside contractor or outside vendor resources to help with the initial efforts it would be to your advantage as a company to insist that by accepting that responsibility they will not be allowed to participate as a competitive vendor during the RFP.  This will prevent your up front efforts from being skewed or distorted  to have the “deck stacked” to ensure only they get the project. And by employing one vendor’s resources for that portion of the project with an absolutely clear expectation that they will not replace the final vendor you help to avoid some of the finger pointing and “gaming” between the vendors.

In spite of an incumbent vendor or consultant’s claims, or their sales pitches on how they know your business the best, you are likely better off using their talents for the vendor selection and for guidance during the actual project.

Whoever you bring in during the Discovery or Evaluation phase (independent contractor or implementation vendor) it would be best to draft an agreement that they are not allowed to participate in the RFP process as a competitive vendor. However, depending on your vendor selection it might be a good idea to work out an arrangement with the incumbent vendor who helped during the Discovery or Evaluation phase to be first choice for project staff augmentation of your internal resources or staff augmentation for the prime vendor only if that vendor does not have certain key resources during the course of the project.

SAP Business Case conclusion

Good luck on your SAP business case, it will be the beginning of a business focused journey that will help to move your SAP implementation, SAP upgrade, or SAP development work in the right direction toward realizing real business benefits. You might actually discover that elusive “ROI” and recognize the ERP system’s promise of enabling your organization to be more competitive in the marketplace and enhance your value proposition.  Using your new system to enable the business to focus more effectively on the underlying measures that are important for revenue and profitability should be your primary goal.  And defining what those measures and processes look like creates the foundation for the success criteria you need for your project.

For a little more insight read the article on effectively scoping your SAP project [4] to get some initial scoping for the SAP RFP. Being able to do some initial SAP scoping work before your SAP vendor RFP will help to level the playing field some.

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[1] SAP as a Change Enabler
http://www.r3now.com/sap-as-a-change-enabler

Change How you Look at SAP to Create ROI
http://www.r3now.com/change-how-you-look-at-sap-to-create-roi

Why SAP Projects Fail to Deliver ROI (and How to Change IT)
http://www.r3now.com/why-sap-projects-fail-to-deliver-roi-and-how-to-change-it

Using SAP to Improve Revenue and Profitability
http://www.r3now.com/using-sap-to-improve-revenue-and-profitability

[2] SAP PDF files with overviews of the toolsets for use on your SAP business case.
ASAP Methodology and Tools Overview (KEY Resource)
ASAP Proven Methodology for Fast Successful Implementation (similar to the one above)
Additional Resources for Using SAP Tools and Methodologies for Success (similar to the ones above)

Nearly every SAP vendor claims they use the SAP ASAP methodology but few actually follow it.

[3] Adapted from Harvard Professor Michael Porter’s “Five Competitive Forces” model. Professor Porter adds a fifth consideration–, the entry of new competitors. This author believes that while the fifth “force” might be a valid consideration for academic purposes that in practicality if an organization were able to master the other four competitive pressures then the barrier to entry for new competitors would be so high as to make that competitive pressure irrelevant. That fifth force only becomes a real factor if one or more of the other competitive pressures sufficiently lower the barriers to entry.

[4] Effectively Scope Your SAP Project
http://www.r3now.com/effectively-scope-your-sap-project

Related Posts:

• Tactics, Strategy, ROI, TCO and Realizing Business Benefit from SAP
• The Real Reason Executive Participation Creates IT Project Success
• Using SAP to Improve Revenue and Profitability
• SAP Customer Responsibility for SAP Project Success
• SAP System Vendor Project Success Criteria 1

Part of the frustration with the failure of results in SAP implementations is the “hangover” from the Y2K effect.  At that time businesses everywhere simply wanted to install ERP systems to take care of the looming potential “crisis” over the millennial changeover.  The real promise of SAP was lost in the Y2K chaos.  After Y2K, the brief downturn in demand for ERP systems along with the tech bubble burst in the stock market created additional pressure.  The idea of delivering SAP implementations “better, faster, and cheaper” together with business benefit was lost in the confusion.  

Because so many custom systems had been developed from the era when disk space and memory were incredibly expensive, nearly all programs were written with 2 digit designations for the year.  The fear was that as we approached the year 2000, those same systems might read that date as 1900, have a different day of the week assigned, or not know how to handle the 2 digit date at all.  As a result there was a massive rush to implement ERP systems to manage this issue and to replace legacy systems with “off the shelf” software.  

ERP and SAP, Better, Faster, Cheaper but What About Business Benefit and Business Focus?

Leading up to Y2K the demand for replacement of these legacy systems with new ERP systems was so strong it lead to an almost exclusive focus on implementing SAP projects “better, faster, and cheaper.”  Certainly this is not a bad thing, but business alignment and business drivers got lost in the fog of technical system replacements.  Rather than doing system implementations that were focused on genuine business drivers nearly all ERP systems were installed as technical system replacements rather than being implemented for business benefit.

After Y2K, there was a continued emphasis by vendors and companies everywhere to implement and automate current business processes because that is the sales model (and competency) they had developed.  That sales model worked, presentations, approaches, methodologies, implementation tools, consulting training and prep, everything was centered around the Y2K “get it in” model. Projects focused only on existing business operations and on replacing existing IT systems.  Implementation methodologies and techniques for “better, faster, cheaper” implementations were developed to support these “quick hit” IT system replacements.

While every project should be delivered on time and on budget, the focus on only current business processes fails to address the forward looking nature of business.  Even to this day businesses implementing SAP still fail to see the system as any other kind of a capital asset where you build a business case with both a current state justification and a future state justification as well.  The current state is nothing more than the “on time, on budget” back office operational project requirements while the future state looks at business strategy and builds those into the application as well.  What do you want SAP to help you with in the future?

ERP Technicians Replace Systems – Consultants Use ERP to Transform Business

SAP projects fail to deliver for a number of reasons that have nothing to do with the software itself.  SAP projects that focus almost exclusively on “back office” processes or “operational excellence” find that they use lagging indicators.  These are important for evaluating current company health, and today’s (or yesterday’s, last months, etc.) indicators of marketplace performance, but these lagging indicators will not produce world class results most C-level executives are now looking for from SAP. [FN1] 

Today the marketplace still wants the “better, faster, cheaper” model of delivery, but now CEOs, CIOs, and CFOs are insisting that the application software must do more.  It must deliver something more meaningful. It must deliver strategy and forward looking business benefit.

Leading or Lagging Indicators? 

SAP projects, whether they are new implementations, upgrades, or re-implementations should begin with strategy, goals, and KPIs. In developing goals, KPIs (Key Performance Indicators) and performance metrics there are generally two types of measurement categories–, leading indicators and lagging indicators.  Leading and lagging indicators refer to “timing of cash flows within a corporation.”  [FN2] 

In the past, lagging and leading indicators have been applied almost exclusively to economic output, not necessarily to that of business, but the impact of business on economies. 

Recently, with the rise of the use of KPIs as a method to help drive business goals and strategy, the idea of leading and lagging indicators has been applied to business. In the context of economics, Wikipedia defines these indicators as:

Lagging Indicator  

A lagging indicator is an economic indicator that reacts slowly to economic changes, and therefore has little predictive value. Generally these types of indicators follow an event; they are historical in nature. For example, in a performance measuring system, profit earned by a business is a lagging indicator as it reflects a historical performance; similarly, improved customer satisfaction is the result of initiatives taken in the past. [FN3]

Leading Indicator 

[L]eading indicators are key economic variables… used to predict a new phase of the business cycle. A leading indicator is one that changes before the economy does. [FN4]

The Future of SAP – Strategic Implementation 

To finally realize business benefit from SAP, to achieve that elusive ROI and begin to make a difference in the way your company works, you must change the way you approach your implementation.  [FN5]

The Y2K days of any consultant who could learn to make system settings on the fly to support all those implementations are over.  With them, the thousands upon thousands of application “technicians” who got their start in SAP when the demand was so high may not be able to deliver in today’s tremendously competitive market. After all, now that the Y2K scare is long past, businesses everywhere are beginning to ask the really important questions of “how do we make this huge investment actually provide a return?”

The type of vendor and consultant you employ must have business and application experience.  Today more than ever it is critical to ensure you find the right resources and then do some up front planning and prep work yourself. 

Long before your implementation or upgrade project starts the implementation focus must change. 

While it is great to focus on process improvement, and that is critical in today’s market, it is no longer enough to win in today’s marketplace.  All of your competitors are working process improvement so it will not differentiate you in today’s market.  Does that mean you can ignore it?  Of course not, it still has to be done, but it must be done together with a serious strategy focus to your SAP implementation or upgrade.

Start by looking out at your competitive landscape, where are your company’s strengths and weaknesses in comparison to your competitors?  Are there areas in comparison to them that you are not executing particularly well?  Should you then focus on those processes to improve your competitive position?  In the areas you are doing well against your competition, should you emphasize those?  Are there market opportunities you are missing, or are there gaps in your product portfolio that partnering with another firm might help to fill the gap in?  Is your company large enough that you can change the vendor dynamic for certain key products or services by outright purchasing, or possibly underwriting new competitive vendors to ensure better products and services at better prices?

How do you use SAP to enable all of these processes you’ve just answered these questions to?  How do you develop the key goals and KPIs to meet the new market challenges out there in today’s competitive landscape?  What SAP reports or tools will be needed to support your leading indicators?  What KPIs should you focus on first?

There are many more mountains of additional things you can do to use SAP to achieve genuine business benefit, find that “elusive” ROI and make a real difference in the marketplace.  But to get there take the first step to changing your implementation approach–, start by defining the business reason for your implementation or upgrade before you even begin. [FN6]

[FN1]  Using SAP to improve Revenue and Profitability
http://www.r3now.com/using-sap-to-improve-revenue-and-profitability

[FN2] Bloomberg Glossary, http://www.bloomberg.com/invest//glossary/bfglosl.htm (retrieved 9/21/2009)

[FN3] Wikipedia, http://en.wikipedia.org/wiki/Lagging_indicator (retrieved 9/21/2009)

[FN4] Wikipedia, http://en.wikipedia.org/wiki/Leading_indicator (retrieved 9/21/2009)

[FN5] SAP as a Change Enabler
http://www.r3now.com/sap-as-a-change-enabler

[FN6]  Change How You Look at SAP to create ROI
http://www.r3now.com/change-how-you-look-at-sap-to-create-roi

Related Posts:

• Using SAP to Improve Revenue and Profitability
• Tactics, Strategy, ROI, TCO and Realizing Business Benefit from SAP
• Competitive Pressures and Value Propositions, Is Lean the Answer?
• The Real Reason Executive Participation Creates IT Project Success
• Where do you Start with SAP Return on Investment or SAP ROI?