In This Chapter
Making a business case for mySAP ERP
Exploring the financial aspects of introducing mySAP ERP
Taking on the challenge of change
Throughout this book, we explore the challenges to business today and how mySAP ERP can help you address them. If we've convinced you and you're ready to put mySAP ERP to work in your organization, what should you do to get your ducks in a row? You probably have to justify mySAP ERP from a financial perspective to the powers-that-be in your corner of the world. To that end, in this chapter, we tell you about the tools and services available to help you impress even the most jaded CEO.
At this stage, you should also prepare yourself and your management to deal with impending change in your organization. Don't underestimate this: A mySAP ERP implementation touches just about everybody in your company and potentially your vendors, partners, and customers. At the end of this chapter, we give you some sound advice about dealing with change management.
In Chapter 2, we cover the two major challenges businesses face today. Businesses have to find ways to
Increase efficiency and reduce the cost of their standard processes
Enable differentiating processes and foster innovation with low investment
But how do you know that implementing mySAP ERP will help you achieve these goals? What you need is a model. We're not talking about the people in fashion magazines; a financial model helps you imagine possible business futures.
One type of financial model is total cost of ownership (TCO): how much money you will have to spend on something, such as implementing new technology. SAP has developed a TCO model that helps you understand the structure of the total cost of your ERP system.
Total cost of ownership (TCO) is the sum of all costs associated with a project. If you're installing a hot tub on your patio, your TCO is not only the several hundred dollars to purchase the hot tub, but also the costs of delivering it, a plumber to help you install the pipes, a cover for the tub, water to fill it, chemicals to clean it, and so on. If you add these all up, you may be surprised to see that the purchase price may not be your biggest cost.
Your mySAP ERP license is just one part of your TCO. If you're smart, you will make the effort to understand all the other costs up-front. Your CFO will want to know, guaranteed.
Determining IT costs is nothing new. In 1987, Gartner (an industry analyst) pioneered the practice of determining IT costs in a structured way. At the time, the approach was focused on the end user and broke down the costs per individual user and the cost of the necessary IT equipment. Over the years, Gartner extended its analysis and methods. Today, Gartner provides a comprehensive IT cost analysis that takes into account not just the user's IT equipment, but also all the training, hardware, and software involved. Many other folks have jumped on the TCO bandwagon, which is why today there is a plethora of models for TCO analysis.
SAP has come up with its own TCO framework that includes a TCO model that takes the specifics and complexity of ERP software into account. Here we walk you through the gist of that model to help you make sense of the TCO puzzle.
The SAP TCO Framework process involves three steps:
Using a questionnaire, customers collect all the relevant information about their company from key stakeholders, such as the company structure, the existing IT landscape, and the practices that are used to implement and maintain that landscape and any associated costs.
SAP transfers the collected data (anonymously) to a great big database from lots of companies and analyzes it.
As time goes on, the TCO database expands as more customers participate in this program.
Based on the results of its analysis, SAP suggests specific procedures that enable customers to modify their own business practices and reduce their total cost of ownership.
As SAP and its customers gain more experience in the use of these cost-reduction procedures, the TCO model gets tighter and more effective.
Figure 10-1 illustrates the various components of the SAP TCO Framework. The framework is made up of the SAP TCO Model, SAP TCO Reference Parameters, SAP TCO Database, and SAP TCO Reduction Procedures.
Here's how the parts of the Framework break down:
TCO Model identifies the areas of cost, just as we did in our earlier hot tub example.
TCO Reference Parameters define concrete parameters to measure the cost in the areas defined in the TCO model. By using these standardized parameters, you make your own TCO analysis comparable to others.
TCO Database functions as the central storage area for the completed questionnaires that are the basis for the reference parameters and the collected cost data.
TCP Reduction Procedures is a collection of recommendations for reducing costs in specific areas.
The heart of the TCO Framework, the thing your CFO will focus on, is the TCO Model. This is where you take a good, long look at every single cost involved in making the mySAP ERP leap. The TCO Model objectives take into account
All SAP solution-relevant cost components
Direct costs, as well as the costs arising from the use of an SAP solution
A lifecycle-oriented focus
A distinction between investment costs and ongoing costs
The SAP TCO Model identifies cost areas called categories and organizes them in a tree structure, as shown Figure 10-2. The SAP TCO Model has three levels, with increasing specificity as you move down the branches. The model can help you to take a holistic look at the costs associated with making the transition to mySAP ERP.
For a TCO model, you must record cost data so that it's clearly associated with its source. Specifically, this means taking different cost types into account. The main cost type difference, which is reflected in the SAP TCO Model, is between investment costs and ongoing costs, and direct costs and indirect costs.
Investment costs are one-time costs and typically fall under the headings of hardware/software investment, implementation consulting, and upgrade projects.
Ongoing costs, on the other hand, typically relate to operations, maintenance, and end-user usage.
Direct costs might include the actual licensing costs for mySAP ERP, a cost that is obviously tied directly to getting ERP in-house.
Indirect costs are initially difficult to quantify. They could be training that you must provide to end users, or the cost of replacing a network security component to enable outsourcing to third parties.
In the TCO Model, there are seven major cost categories (see Figure 10-3). The first six are direct costs; the last is an indirect one:
Hardware/software investment, which includes hardware and network infrastructure, the licenses for databases and system management software, SAP licenses, and so on.
Implementation, which includes preparation on the business side of things, such as process analysis and design, project management, and the technical implementation.
Hardware/software ongoing costs, which include maintenance for hardware and software and replacement of aging hardware.
Operations, which include operating the hardware infrastructure, operating systems, databases, and applications.
Continuous improvement projects for both business processes and technology.
Upgrade projects for application and system software.
End-user usage, which is focused on the productivity of the end user. Although this indirect cost is hard to measure, it can have an enormous impact on your overall cost structure.
Figure 10-3 provides another interesting perspective on your cost categories: It shows where costs can occur over a period of time.
Tip
SAP has published lots of information about its TCO model, including a white paper and a paper specifically on TCO reduction, which is available in the SAP Service Marketplace at service.sap.com in the TCO section. (You have to register as a customer or partner to have access to the SAP Service Marketplace.)
Using the TCO Framework and all the great questionnaires SAP provides, you can work together with SAP and business consultants to gather data from your company and get comparisons by industry to begin to calculate your TCO model. This is your benchmark against which you can track actual costs. After your data is in the TCO database, you can analyze it to identify areas for TCO reduction, comparing your company with organizations of a similar size in your industry.
Tip
The two biggest costs you typically encounter are in implementation and operations.
SAP offers a useful evaluation service to help you get your arms around TCO and start planning your implementation. Called SAP value-based services for SAP solutions, these services can help take the guesswork out of IT planning. Whether you are just identifying areas where cost savings can be made, developing proof of concept, estimating your TCO reductions, evaluating potential return on investment, or developing a roadmap for future deployment, SAP value-based services for SAP solutions help to reduce your risk, ensure you get the maximum return, and support your long-term business goals.
What do these services involve? Value-based services involve working with SAP, your line-of-business executives, and your IT managers to
Define capabilities that deliver specific strategic advantage and help realize key objectives of your enterprise
Quantify the potential cost savings and revenue enhancements achievable with SAP
Evaluate and justify the proposed expenditure through a business case analysis
Develop an implementation strategy to help you realize program benefits within an acceptable time frame
SAP provides company-specific value analysis. Depending on your needs, these value services can apply to a specific project that you've already defined, a broader effort for overall process improvement, or a long-term roadmap for business enhancement. Depending on your needs, these can range from a one-day workshop to identify areas of potential savings to a full-fledged project to identify return on investment (ROI). Such analyses can typically be completed within 2-12 weeks, depending on the size and complexity of your business.
Value-based services consist of three areas: business assessment, business case development, and value assessment.
SAP business assessment focuses on the business benefits you could get by implementing or enhancing IT projects. It enables you to quantify potential business value before the project begins, and then uses business value as the guiding principle throughout design and deployment. SAP Business and Value Assessment starts by analyzing the strengths, weaknesses, risks, and opportunities related to your business processes. It then reviews existing IT capabilities and future requirements and identifies areas where you can take action to best achieve results and prioritize activities.
Then you can create an initial plan, a project roadmap that describes project scope, approach, and milestones with a high-level analysis of costs and benefits.
The second piece of value-based services, SAP business case development, helps you to build a value proposition for your IT investment. The analysis concentrates on IT costs, process efficiency, and strategic value impact. It can also provide a postimplementation review of the value you achieved.
SAP business case development provides the following:
A defined program scope, including processes, regions, and product lines.
A qualitative description and quantitative performance metrics that apply to your current situation.
A qualitative description of your proposed situation based on industry best practices, specific recommendations for process design, or a long-term deployment roadmap.
Quantitative estimates of implementation and deployment costs.
A cost/benefit analysis, which can take the form of payback analysis, internal rate of return, net present value, and so on.
Quantitative estimates of business benefits. These can include strategic value impacts such as effects on cross-selling; customer satisfaction; process improvements involving expenses, assets, and liabilities; and reductions in IT expenses resulting from a more effective IT infrastructure.
Setting quantitative goals for an IT project and then measuring the results help you to understand the business value that your IT investments provide, and also give you a framework for managing process improvement as you go along.
Figure 10-4 shows some typical areas where business cases have been used in mySAP ERP. Some of them fall into the area of revenue generation with new processes; others involve reducing costs and making your assets more efficient.
SAP Business and Value Assessment helps you identify the potential value of an investment in an IT project by comparing existing and proposed cost/ benefit structures. This gives you a baseline for high-level return on investment calculations.
SAP Business and Value Assessment provides the following:
Quantitative evaluation of the proposed IT investment
Analysis of strengths, weaknesses, risks, and opportunities
Visibility of relevant business process areas and owners
Detailed transformation plan and roadmap
High-level ROI analysis, including an analysis of IT costs and process efficiency
As a result, you can define gaps in your IT capabilities and process performance levels. You estimate capital expenses and identify the owners of business processes who can contribute knowledge and resources. This helps you capture the potential benefits of an IT investment and adjust costs and value drivers accordingly.
Here's a practical example. Figure 10-5 shows the results for a specific customer. Surprisingly, much of the savings came from some of the most mundane areas. The value derived from changes in the travel management and procurement procedures saved the company almost E 500,000 and went a long way to justifying the cost of the implementation.
In the following sections, we wax a tad conceptual about implementing ERP in your organization. That's because such an implementation involves more than technology and business value calculations; it involves people.
Here we give you some advice about what attitude to use in approaching an ERP implementation, or, in fact, any strategic change in the way you do business.
One thing you have to understand and help others in your organization to understand is that when you find a better way to do anything, you are in the business of exposing your past inadequacies. That means that you're going to tread on the feet of those who absolutely love the status quo, or who were involved in defining current processes. People become defensive or even protective of how things are done now (even if the way they are done now is painful).
If you ever had to move from one house to another, you know that digging out all that stuff in the basement that you've accumulated for years is painful. You have to go through a lot of junk, throwing some out, giving some away, and thinking that the old lamp you used to hate might just fit in perfectly in your new house. Change makes you look at all your problem stuff, so we tend to blame change, rather than our problems, for the pain we feel.
The bottom line to this piece of advice is that change is painful for everybody. Implementing solutions such as mySAP ERP, ESA, and SAP NetWeaver requires a serious shift. Try to keep folks focused and try to sympathize with their pain. Change is a process, and you're all in this together. And luckily, you have a lot of SAP support to help you get through.
Tip
The more you can involve people in change, the easier it will be. If they're involved, they feel invested. If they're outside the process, they feel like victims. Form employee advisory committees, test groups for rollouts, and focus groups to get people on board with the process.
Of course, the upside to change is that every person who ever uttered the phrase "Can't we find a better way to do this?" should be pleased that you're doing just that, right? But human nature is fickle, and these same people who thought they hated the current system could be the ones who rush forward and say "Hey, don't monkey around with what we've got — you're just making it worse."
Getting people to jump onto the bandwagon of a new system can be a long, challenging road. It's up to you to prove the value. You start by communicating the goals of your implementation right up-front. Then, you have to phase things in so there are no big surprises. Don't tackle everything up-front. Define an incremental plan and follow it. Test a process in one location, not ten. Learn from that smaller implementation, and then try it at another location.
The fact that you can use SAP components built on best practices should make things easier. After all, best practices for an industry encapsulate logical ways of doing business that support productivity and efficiency, so your people should be able to see benefits early on.
Here's a shocker: 95 percent of the questions you have to ask yourself in implementing ERP are business questions, not technology questions. To understand why this is so, you have to consider your key tasks in this process. You have to do the following:
Understand your own business and industry
Define your processes and the services that support them
Find ways to change your employees' behavior to make use of the self-service and collaborative tools and friendlier interfaces to technology that you are providing
The good news is that in working through these questions, you find out a lot about your business at the same time that you're making improvements to it. Always remember that technology should serve your business strategies and processes, and not the other way around.
Finally, here are a few specific tips on how to approach your mySAP ERP implementation to get everybody on board right from the outset:
Have a clear idea of your goals and specific ways to measure them. As we have said throughout this chapter, proving the business benefits of the implementation of an ERP solution is key. Anticipate, track, and measure your goals all along the way.
Get an executive sponsor. Many projects have gone awry due to lack of senior-management sponsorship. Naturally, any project runs better when you know that management supports it; an ERP project is no exception.
Hold a dialogue between IT and the business people. Keeping an open dialogue between IT and the business users is essential. Many organizations create a new role in their organization that sits between IT and the business departments, acting as neutral advisors and mediators in projects. This person keeps track of user requirements (which, of course, tend to change) as well as the compromises IT makes (which also tend to change).
Keep the implementation team on board to exploit their knowledge. ERP does not stop after it is installed. New services and composite applications allow you to extend and grow the benefits of your ERP implementation over time. To ensure some sort of consistency, keep at least some of the team members working on continuous improvement.