Building business case for SAP S/4HANA
The digital economy is accelerating exponentially, and digitization is disrupting how businesses operates today. Staying competitive in the digital age requires speed, agility and innovations. 72% of CEOs see the next 3 years as more critical than the past 50 years of their industries. 40% of executives worry that their organization will not keep pace with technology change and lose their competitive edge. Most businesses are aware that they will one day have to change their underlying IT platform to meet digital economy challenges.
According to SAP User Groups (SUG), one of the main reasons why SAP ECC customers are not migrating to SAP S/4HANA digital core is the lack of strong business case. Transitioning an organization to SAP S/4HANA requires considerable investment in effort, time & cost and managing business disruption. Regardless of your starting point and systems, building a professional business case will help secure internal funding and executive sponsorship.
I just thought to pen down in simple words my experience of working with multiple clients for building business case and advising them for value driven SAP S/4HANA adoption strategy.
Approach to build business case
I feel that building a business case for SAP S/4HANA should be a three-phase approach as illustrated below. It’s a 3D Model. First phase is all about discovering business value drivers & challenges, identifying SAP S/4HANA benefit areas & compiling industry benchmark for assessment. Second phase is all about defining potential improvement areas, identifying cost elements and quantifying benefit and cost areas. Finally, we put together cost-benefit analysis and connect all dots of qualitative and quantitative assessment to build professional business case.
I will try to explain each of these steps in detail with some hypothetical examples. This approach is put together using standard SAP tools and accelerators.
Step 1 : Identify Business Value Drivers & pain areas
Building business case for SAP S/4HANA should be top down approach and leadership involvement is absolutely important. The business value drivers are identified and professionally documented after understanding strategy & vision of business & IT leaders. The strategic discussions are conducted with different LOB owners to assess existing business pain points and identify areas of improvements.
Step 2 : Identify SAP S/4HANA Benefit Areas
Tools & accelerators are used to identify SAP S/4HANA benefit areas like SAP Transformation Navigator, SAP Innovations & optimization Pathfinder, BSR (Business Scenario Recommendations). SAP S/4HANA readiness check also illustrates recommended analytical apps & associated business benefits.
The BVR (Business Value Realization) strategy is built by identifying relevant business KPIs required to track business value drivers and potential improvement areas considering SAP S/4HANA innovations. Heat map analysis is executed to identify significant business value drivers that have major impact on business process improvements and tangible value realization.
Step 3 : Compile baseline Assumptions & Benchmarks
Once you identify SAP S/4HANA benefit areas the next step is to build assumptions and industry benchmarks to quantity benefit areas in $ numbers. The SAP Value Lifecycle Manager tool is used to compile standard baseline assumptions based on inputs like revenue, COGS, total inventory etc. The tool will also illustrate financial impacted area like revenue, working capital, pre-tax margin etc. Ideally you should set up SAP Transformation Navigator tool and then export analysis into SAP Value Lifecycle Manager.
The SAP Value Lifecycle manager is a benchmarking tool which has multiple proof points with case studies to show how your industry peers of similar size are performing against identified KPIs.
Step 4 : Estimate potential improvement range
The next step is to estimate potential improvement range by analyzing adopted SAP S/4HANA solution & innovations and Industry benchmarks. These improvement figures may vary from one customer to another depending upon size of organization, maturity of existing applications & business processes. The SAP Value Lifecycle manager or SAP Customer reference flipbook are used to build most “likely” estimate model.
Hypothetical example – your company’s annual sales is $500 m USD and average inventory is about 15% of annual sales and its inventory carrying cost is 20% of that value. Similar sized reference organization’s inventory carrying cost is from 10 to 15 %, then the potential improvement range of most “likely” estimate model is $3.75 to $7.5 m USD. This directly helps to improve pre-tax margins.
Finally, we need to run these findings & data points with different business owners along with value demonstration of potential improvement plan considering SAP S/4HANA innovations & solutions. The “conservative” estimate model is build based on agreement with business owners so that proposed improvements are realistic to achieve.
Step 5 : Identify cost elements of transition
To build CBA (Cost Benefit Analysis), it is important to understand cash outflows for SAP S/4HANA transition. Technical Impact analysis including cloud maturity assessment is needed to put together next five years of platform roadmap. Tools & accelerators like SAP S/4HANA readiness check and SAP Transformation Navigator will help to understand sizing & license requirements for proposed transition roadmap.
Typically, the following cost elements are calculated over a period of transformation (5 years) to illustrate cash outflows:
- Software licensing and capital infrastructure cost
- Implementation and integration cost, applications migration cost
- Maintenance and support cost of applications, hardware and networks
- Change management, trainings, improvement and adoption cost
Step 6 : Quantify benefits & Cost areas
Next step is to quantify SAP S/4HANA benefit areas and cost elements over a period to illustrate cash inflows and outflows. The timescale depends upon SAP S/4HANA proposed roadmap. Not every benefit will be realized immediately so its important to understand when potential improvements can be realized & start reflecting as tangible outcomes. The “conservative” estimate model should be converted into absolute $ number on proposed timescale.
ROI guidelines from SAP experts:
- 10-20% of the value of a HANA investment will come from TCO (Total cost of ownership) reductions
- 30-40% of the value will come from increase in productivity of business intelligence and application development
- 50-60% of the value will come from improved business processes
Step 7 : Build Cost Benefit Analysis
The important aspect of understanding financial viability of SAP S/4HANA transformation is the cash flow projection throughout the life cycle of the project. As illustrated below, cash inflows and outflows are projected over a period to calculate payback period, NPV (Net Present Value) of project and IRR (Internal rate of returns). This will help securing internal funding and executive sponsorship.
Step 8 : Build & Validate Business Case
Finally, you should be able to connect all dots together consolidating qualitative and quantitative assessment and bind it together in leadership consumable format. Focus should be on business value drivers, challenges on hand, high level improvement areas & realistic achievable targets for improvements. The business owners should validate business case before leadership readout.
Building business case is a summarized output of multiple qualitative assessments like business process impact analysis, applications & data impact analysis and technical analysis.
What is of interest to me is Business capability transformation & heat map strategy and I will cover the same in my next blog.
Thank you and have a nice day ahead!