Automatic Calculation of Financial KPIs in SAP EPPM
In any Portfolio Management, Financial KPIs like Net Present Value, Expected Commercial value are used very commonly and widely. SAP EPPM addresses this business need in two of its objects, namely the Portfolio Item and the Portfolio Initiative. In each of these objects, SAP EPPM offers two sets of data. While one set is just manual entry of values, the other set of data does the automatic calculation. This blog post is my personal insight to guide implementation consultants on automatic calculation of Financial KPIs in SAP EPPM. You will get to see how to enable automatic calculation of these KPIs, prerequisites and the formulas behind these calculations. This can also serve a good guide to key users, who are beginners and new to these concepts, by dealing with rudimentary aspects of these KPIs.
Following are some of the KPIs used in SAP EPPM
- Rate of Interest and Net Present Value
- Internal Rate of Return
- Payback period in months
- Return on Investment
- Expected Commercial Value
Enabling Automatic Calculation:
To enable automatic calculation of values, the following are the standard settings from SAP. Here you can see that NPV is calculated automatically and the variable that determines the Rate of Interest.
If needed, one can override the default settings in the next node “Override Default Global Settings”.
Prerequisites for automatic calculation of NPV and other Financial KPIs is the information about Cashflow. This is nothing but, difference between Cost and Revenue in a Period. This leads to the requirement of Financial Views that must becategorized as Planned Cost and Planned Revenue as show below.
Calculation of Automatic NPV must be activated at the Portfolio Level as shown below.
Rate of Interest:
Rate of interest is also called the discount rate. This is the rate at which the costs and revenues are normalized over a period. Because, what is costing amount X today, may cost more in future. Similarly, the revenue earned today may value less in future. Discount rate normalizes this.
Rate of interest can be set in the customizing node “Define Values for Reference Interest Rates” as shown below.
Net Present Value:
In short, the net present value is the sum of the discounted cash flows of an item. Cash flow is the “Revenue – Cost”. For each period this difference (cash flow or CF) is discounted by dividing with a factor (discount factor or DF) corresponding to that period. The details are explained below.
NPV = (CF0 / DF0) + (CF1 / DF1) + (CF2 / DF2) + …. + CFn / DFn
CFn = Revenue in period ‘n’ – Cost in Period ‘n’
DF = 1 + % of Interest Rate per month = 1 + ((RPM_IRATE / 100) / 12)
DFn = DF to the power of ‘n’.
Please note the Interest rate in the formula here is per month. The interest rate specified for RPM_IRATE in the configuration is Annual. Thus, “RPM_IRATE /100” must be further divided by 12.
NPV calculation always uses monthly discounting. The date range considered is planned start and the planned finish of the item or initiative. If one of these dates is missing, the financial planning start or finish is used instead. If neither finish date is specified, all future values of Financial Planning are considered for NPV calculation. If neither start date is specified, NPV cannot be calculated.
So, CF0 / DF0 corresponds to the first month derived from the timeframe logic specified in the above paragraph.
While calculating NPV, value from each month gets added. The month where NPV is greater than or equal to zero for the first time is the Period when the payback starts.
(CF0 / DF0) might be < 0
(CF0 / DF0) + (CF1 / DF1) was also < 0
(CF0 / DF0) + (CF1 / DF1) + (CF2 / DF2) was also < 0
But if, (CF0 / DF0) + (CF1 / DF1) + (CF2 / DF2) + (CF3 / DF3) >=0
then the period when payback has started is 3.
Internal Rate of Return:
The interest rate that results in NPV close to zero is called Internal rate of return. For example, let us consider that an interest rate of 10% in the time frame of 2 years resulted in NPV of value “X”. For the same period of 2 years, if applying 30% of interest rate results in NPV of value zero, then the Internal Rate of Return is 30%. But It may not be possible to find an interest rate which can result in NPV exactly zero. So, in SAP EPPM, the approximation allowed is 0.01 %. To find this, SAP EPPM uses something called “an adapted secant method”. With this method, if it is unsuccessful to find an IRR, then the value is updated as 999,999.
Return on Investment:
Return on Investment is the percentage of NPV when compared to the discounted costs. The calculation is explained below.
NPV / Discounted costs * 100
NPV is calculated as explained previously
Discounted costs = (C0 / DF0) + (C1 / DF1) + (C2 / DF2) + …. + Cn / DFn
Cn = Cost in Period ‘n’
DF = 1 + % of Interest Rate = 1 + ((RPM_IRATE / 100) / 12)
DFn = DF to the power of ‘n’.
Expected Commercial Value:
Expected commercial value (ECV) about the commercial worth of a Project Portfolio. This is calculated based on the probabilities of success.
The success in “Development phase” of the project leads to Technical success
- Development phase incurs cost
- Technical success has a probability
The success after Launching leads to Commercial success.
- Launching incurs cost
- Commercial success also has a probability
At first, Probability of Commercial success (PCS) is applied to Net Present Value (NPV) and Launch costs are subtracted from it. On the remaining value, probability of technical success is applied and then development costs are subtracted. This will derive the Expected Commercial Value (ECV).
Hence, ECV = ( ( (NPV * PCS) – Launch Costs) * PTS ) – Development Costs
These automatic calculations are handy for the key users and managers responsible for the Portfolio Management in their organizations. Besides, it is also possible to control the visibility of manual entry fields or automatically calculated fields using the UI configuration,. The customizing path to do so is “ SAP Portfolio and Project Management –> Portfolio Management –> Global Customizing –> Global Field Settings –> Define Custom Field Configuration”.
With this, I hope consultants and key users get a basics of the concept and calculation behind the Financial KPIs available at the Portfolio Item and Initiative level of SAP EPPM.
For further information please refer the SAP Help documentation Financial Information About Items and Initiatives – SAP Help Portal
You may be also interested to see my other blog posts What is SAP S/4HANA EPPM? – Disambiguation & Overview | SAP Blogs and Overcoming hurdles during the new setup of SAP PPM | SAP Blogs
You can visit the Community page: SAP Enterprise Portfolio and Project Management