Where do you Start with SAP Return on Investment or SAP ROI?

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. However, this approach is not enough today, as the marketplace is demanding more from their IT dollars. Now the marketplace has questions about measuring cost reductions, process improvements, and customer retention/acquisition. These are all important discussions.

Your money has to work for you in your business– and it needs to 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. The dividend payout has a fairly reliable history, and you have a good idea of what your costs in several areas will be (or can find out what they are), such as in the following:

• current legacy systems cost,
• man hours (staffing, personnel, benefits, overhead, etc.),
• process cycle times,
• per transaction costs for things such as purchase orders, sales orders, production orders, etc.,
• competitor transaction cost benchmarks,
• current application license and maintenance costs,
• etc.

These are all lagging indicators that are 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 use cost-based process measures to some extent. These measures are not always structured, clearly defined, and then measured after the system is live, but they are expected to provide improvement. Even for those companies who buy into this paradigm during the sales process but never see it realized, cost-based process measures are still part of the system integrator pitch. The integrators always promise you improvements. 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 the approach everyone else in the SAP/ERP marketplace uses– 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. Even though it may provide 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, you need 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. In your SAP implementation both lagging and leading indicators help 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 critical value proposition areas that separate winners from losers in the marketplace. 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 to improve engineering, design, and delivery collaboration efforts? Maybe you are not there yet, and that is fine, but you need to consider it during 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 upfront due diligence to determine where they will have business benefit in terms of cost based lagging indicators:

• process improvements,
• cost reductions,
• automation,
• reduced transaction processing costs,
• reduced licensing for legacy systems,
• reduced system maintenance for legacy systems,
• improved cycle times,
• etc.

Even though they do take 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, they do not perform enough due diligence 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 the following:

Customer retention

• service processing (reducing overall service requests/requirements)
• repair and response turnaround times,
• first time fixes,
• solution databases,
• interactive response forums,
• etc. (you didn’t expect me to tell you all the secrets of an ERP customer retention program, did you?)

Customer acquisition

• target markets

o by geography,

o product line,

o customer strata,

o customer segment,

• promotion options

o special product mixes,

o offers,

o promotion execution,

o promotion cost tracking,

o buy “x” get “y” at a discount or free,

o buy “xyz” product mix and get “abc” mix at discount or free or both,

o etc.

• Customer analysis

o stratification,

o buying analysis,

o product mix / popular combinations,

o promotion integration,

o segmentation

•  by region
• dollar value,
•  product mix,
•  product line,
•  customer group or product line profitability

o overall profitability,

o 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)

• 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? 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, grow, and spot opportunities that they execute on 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 you view it as a business investment requiring regular adjustment, focus, balancing and change.

Use a Business-Focused SAP Implementation for Business Transformation

If you want to see true competitive advantage, you need 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 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.