Value Management Approach for the Chemical Companies (Part 1)
Ola, boa tarde!
In this blog article I would like to describe the Value Management Approach for Chemical companies.
This could be relevant and useful (at least I hope so) to those Chemical companies who think about to perform their digital transformation program based on SAP solutions and innovations and want to be sure the “promised” or “expected” value be really achieved as the actual result.
Let me introduce myself. Name´s Sergey Nozhenko. I work as the Solution Specialist in SAP Chemical Business Unit (Chemical IBU) and have several years of the practical experience in the Value Advisory practices – both working in SAP (more than 8 years) and working in the business transformation division of BearingPoint before SAP.
Of course, many of colleagues who are currently reading this article already know about the subject matter. Value management is not something new or innovative. Most of SAP (and even non-SAP) based digital transformation programs include the value subject as mandatory working stream by default. Value drivers, expected business effects, percentage of improvements, NPV & ROI calculations, KPIs, many other things … – all this staff is well-known to most of experts working in the industry in past 10 or more years.
So, why I believe this topic is will provide to my colleagues something new and interesting about value? That’s what I want to talk about in the upcoming articles. This first article is about the common overview of the value management approach, next ones will contain more of details about the specific subjects.
The common problem of most value advisory activities
During last 12 years I participated into several value advisory and business transformation projects and activities. I was involved in different roles – as the business transformation consultant, project lead, industry value advisor. I also was in contact with my colleagues executed the similar projects and programs for many other customers in different industries. Based on my experience, most of value management streams have been performed with the following common way:
- Presales and architecture team defines the transformation program scope:
- Functional (what business domains and processes be covered),
- Organizational (what business units be touched),
- Architectural (what SAP and other IT solutions be used, and how to-be landscape be looks like),
- Time (the high-level schedule for the different program phases and milestones).
- Sales and presales team estimates future costs related to the expected program calendar:
- Licences or cloud subscription,
- Data Centre and other IT hardware,
- External services (vendor and / or partner),
- Internal resources costs.
- Value advisory team defines and approves with the customer the value based on 1:
- Value drivers for functions, processes, and solution capabilities,
- KPIs for the improvements,
- Expected improvement values for each KPI (example: “DII” be improved on 15 days),
- Estimated monetized effects of each improvement.
- Value advisory team calculates theexpected return on investments based on 2 & 3:
- Net present value (NPV),
- Return on investments (ROI),
- Internal Return Rate (IRR).
- If NPV and IRR are acceptable, for example if investments be returned faster than 5 years, the company executives could make a positive decision about the investments into transformation program.
Here is the picture of common approach I described above.
Everything looks fine on the first sight… what could be wrong?
The most common question asked by customers’ executives after the period of 6…12 month after the program go-live: “OK then, we´ve spend lots of money and resources. Now we have the new system and corrected processes. But where is our actual value? How can we be sure that we achieved business outcomes and our investments have been returned?”
I have heard the similar questions several times. Sad bad true – usually it´s quite difficult to answer on it after 3…4 years of the definition of the program scope and expected value. Why?
According to my experience there are some reasons to this after go-live:
- Architecture team, value team and customers’ executive members might change their priorities, roles or even jobs,
- The value documents and definition, expertise and approval story might lose,
- It comes to understood that the value achieved is the difference (delta) between some digits “before” (before the program start) and “after” (after go-live),
- To calculate “after” all the data for calculations should be collected again and it requires huge workloads because should be collected via lots of excel files, etc
- If you want to re-calculate the value again – you should collect data again, and again, and again…
- “Before” data might either be lost or be unstructured or structured in another way, without required analytics, and because of this – is impossible to compare with “to-be”,
- After all, “after” data collections and calculations be done and aligned with “before” data structure (with lots of assumptions and approximations) suddenly it turns out that some actual KPIs are not better than before, and some are even worse.
Some of customers stop the actual value calculations when the understand the bullets 1, 2, 3 above.
Some of customers have enough administrative power and resources to proceed through all bullet (1…6), but results of 6 might disappoint them hugely. Either no results or bad results of actual transformation program outcomes calculation might cause customer to lose their trust to the business efficiency of IT area and decrease executives’ interest and priority to this topic.
The common problem is the disappointment of the customer and loss of trust to the value idea. Transformation programs still considering as just huge costs without bright and clear reason.
This reflects to most of all SAP community: to SAP as a vendor, to the SAP service partners, and to our respective customers first.
In this blog I would like to describe the SAP Value Management Approach which could help to avoid issues I listed and to ensure the actual business value really be achieved.
To do this, I must first list my vision of root causes and problems of the common approach that led to this situation.
The sources of failure of the common value approach.
There are several root causes of this disappointing situation:
- Responsibility for the expected KPIs after go-live:
- Responsibility for the target KPIs and value has been assigned on the service partner and motivated via the bonus part in the service contract,
- Target KPIs were shortened and re-designed during contract negotiations phase,
- Customers´ executives (ex. CPO, CFO, CMO, CTO, Chief Engineer, …) were not involved into the transformation program as the executives who are personally responsible for the target KPIs.
- Priorities has been changed or lost (forgotten)
- The estimated and expected business outcomes defined before the program might not be taken onto account during the program realization (requirements definition, blueprint development, etc),
- (As the result of 1 & 2) no business outcome targets mentioned inside the blueprint:
- Business targets during the program execution and realization were not in focus of customers’ executives and project team,
- The decisions made during blueprint solution development did not address required business target with strong enough focus.
- KPI data collection, calculation, and representation via dashboard are not included into blueprint:
- Just because has not been included into the functional project scope
- “We should focus on transformation itself and will postpone all unnecessary activities like the management reporting for the future phases. We should optimize our costs and resources and we must focus on transformation of the core processes, on migration of the data and solutions, in the testing, on the user trainings…” – sounds familiar, isn´t it?
All bullets listed above cause the value and business efficiency topic remain forgotten and unrealized. And that leads us to the next topic.
How do we make the Value Management Approach really working?
These following statements are most important, and everything should be done to ensure that they are implemented if we want to succeed in getting actual outcomes after the transformation:
- The KPIs should be defined in detail, and all calculations should be performed before the program start
- For allthe KPI should be defined (see picture 2 below for the company “Best Chem Co”):
- Actual value, or baseline,
- Industry peer values as the lighthouse,
- Target periods,
- Target (or expected) values after the program go-live – for several periods upfront,
- Affected business units,
- Responsible Executives.
- For each target KPI the financial outcome should be calculated
- For the example listed above the outcome affects the working capital decreased and additional margin of the investments of the affected working capital for each year, according to internal return of the investments rate of the company “Best Chem Co”,
- That allows us to estimate – is it worth it to invest into this KPI and perform the transformation, or not.
- The responsibility of executives should be defined for each target KPI:
- By business units,
- By executive persons,
- By target values and periods (years),
- Via executives’ compensation bonus agreements.
- Executives should take an actual lead for their areas and related or KPI-impacting business solutions inside the program.
- The KPI monitoring system should be included into the transformation project scope:
- Functional architecture, including the source data collection, reprocessing, staging and representation,
- Functional requirements,
- Licenses or cloud subscription,
- Assigned services to realize
- IT resources to deploy (cloud provider or inside the company datacentre) and to the maintenance,
- IT resources to additional development and enhancements.
- The KPI monitoring system should be used after go-live to monitor the actual achievements of each KPI by business unit and period, comparing to:
- Peers’ values,
- Defined and approved targets by periods,
- Dynamic and trend of each KPI,
- Between different business units.
What if monitoring system will show that some of KPI targets being not achieved after go-live?
First this might be expected result for some cases especially for the first year. The new system and processes should be stabilized, users might get used to work in the new environment and according to changed procedures and functions. The planning process might not start with high efficiency because of some mistakes in the replenishment parameters and/or in the demand management procedures. Many things might go wrong.
The major outcome of the Value Management Solution and Approach is capability to see all the problems fast and transparent without so called “human factor” and is ability for executive management to react on these possible problems quickly.
When some of KPIs be lagged from their target values – there are opportunities to improve raised for the company.
Any KPI-lagging area should be researched focusable, and we recommend using special Process Mining Tools to identify weak points and real root causes of every problem. That’s how the approach helps to focus your resources and save spends only on areas where they are really demanded and provide maximum outcomes.
Who should deal with it and get the KPIs be returned on the desired trend?
In our example, the “Best Chem Co” has already defined the responsible executives who should reach the KPIs and business outcomes. But they need assistance with the question: what exactly should be done to get the success? What are the root causes, and what should be the detailed action plan?
The special team should assist executives with the research of causes and preparation of the action plan. For this task the team or department of “Operational Excellence” or “Change Management” or “Business Process Management” should be established and should be given responsibility of continuous monitoring the actuals, analysing the weak points, and developing and valuating the initiatives for changes, innovations, and new projects. These activities must be included into one live improvements plan, based on continuous measurements.
The action plan might contain many different types of activities:
- Perform change management for different functions, or responsibilities, or organization’s structure,
- Change and approve the Company regulatory documents related to bullet 1,
- Perform users’ trainings,
- Initiate new business consulting projects,
- Initiate new IT project,
- Initiate new CAPEX projects,
- … etc.
What is the main benefit of the described approach? It’s a simple idea: any new project, initiative, innovation is based on defined and clear outcome calculated in digits. Now you always know the purpose you spend for.
So, how should the Value Management Approach look to be effective?
Here is the common picture of the Value Management Approach leads to continuous improvement instead of one-time activities.
Picture 4. The effective Value Management Approach – high-level overview.
And what next?
In this article I described the very common view and idea how the Value Management should look like. The desirable result of the Value Management Approach is the continuous improvement.
In the next articles I plan go deeper into details:
- What is the list of KPIs relevant to the Chemical company?
- How to calculate and store baseline and why it must be calculated?
- How to compare with peers?
- How to calculate the monetized outcomes of the expected KPIs?
- How to motivate the executives?
- How to build the KPI data collection and monitoring system?
- How to perform detailed analysis of the weak points?
- How to generate ideas and initiate new projects?
The Value Management only starts with go-live, not finished.
I hope these thoughts were interested to Chemicals community and not only. Please share your feedback or thoughts in a comment and I’d be happy to answer.
You might also be interested to read other Chemicals industry related topics here.
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