Supply Chain Management

Four Principles for Building your S/4HANA Business Case

 

How do you go about building the business case for a major IT project like migrating to SAP S/4HANA? Lots of companies will be facing this question in the near future, as SAP has announced it will discontinue support for their older ERP product, ECC6, in 2025. The move to S/4HANA is likely to be a much bigger, and more expensive, project than the ECC upgrades that companies have been doing over the last decade and a half.

If your company is looking at its migration to S/4 as ‘just an IT project,’ you’re likely to miss out on one of the great performance improvement opportunities of the next decade.

Why? Three factors are involved:

  1. There’s an excellent chance that your current SAP ERP system isn’t as well-aligned with your business needs as it ought to be. There are a lot of reasons for this, ranging from the simple passage of time (and corresponding changes in your markets and business environment) to M&A activity to simple lack of awareness (that better performance was possible, that SAP functionality was available, or other situations).
  2. Compared to SAP’s earlier ERP software, the functionality offered by SAP S/4 offers a wider range of capabilities as well as greatly improved efficiency in a number of operational areas.
  3. Even if not specifically enabled by SAP, companies often discover that major performance improvement initiatives require integration with, adjustments to, or data extracts from their ERP system. So a migration project is an excellent opportunity to implement some of those initiatives.

All of these represent major opportunities for performance improvements outside IT that need to be coordinated with updates to the company’s ERP system. Giving expanded consideration to business needs will help your company ensure that your new S/4HANA system meets the needs of your company for the next decade and beyond.

 

What’s more – understanding the potential for business performance improvements as part of a major IT project like migrating to S/4 is the first principle of building a compelling business case for the project:

  1. Look beyond IT benefits. The biggest and most meaningful benefits will often be in operations or finance.

This ought to be obvious, but it’s understandable if your organization has lost sight of this important principle. A thorough evaluation of your company’s efficiency and effectiveness in various key functions will often expose big opportunities for sustained cost reductions and performance improvements.

 

The second principle is aligned with the first:

  1. Do it early – identify the key elements of your business case while you are still working out the details of the project.

Why is this important? Because, for example, to capture a million-dollar cost reduction in a particular functional area, you may need to build $50,000 of development into your project plan. Examples of this are common; they exist in purchasing (both production and nonproduction), accounts payable and receivable, materials management, customer service, planning, and any area with a large staff.

 

How do you validate that a performance improvement is realistic and can be executed? The third and fourth principles provide a mechanism:

  1. Understand your company’s performance versus industry benchmarks – and what the difference in performance is worth to your company.
  2. Understand the mechanism by which you’ll achieve that improved performance, and how difficult it’ll be to achieve it for your whole organization.

 

Companies are sometimes persuaded by a compelling presentation to skip these two steps and simply apply an “average improvement percentage” that they heard – for instance, something like “companies that implemented our system achieved a 15% reduction in inventory levels.” But it’s almost impossible to defend this sort of calculation. It’s an average, after all. That means that some companies almost certainly achieved much higher levels – maybe even 30 or 40% reduction; and some companies may not have achieved any reduction. Applying the third principle: It’ll make your business case far stronger if you can show that your company’s performance is, say, 6 turns/ roughly 61 days of inventory versus a benchmark of 8 turns/ roughly 45 days – and you think that 7 turns (52 days) is achievable. That’s also about a 15% reduction in inventory, but with some data behind it.

And your commitment to reduce inventory by 15% will be even more defensible if you can explain how you’ll achieve it. This is the fourth principle: identify the means that will enable you to accomplish – and sustain – that higher performance level. If it’s inventory reduction, you might refer to more aggressive management of “A” parts, because of improved capabilities in your new S/4HANA system. If it’s labor reductions in Accounts Payable, you might use ERS (Evaluated Receipts Settlement) as the mechanism. Your systems integrator/ consulting firm can help in this area – they often will be able to provide examples of similar companies that achieved higher performance levels in the same functional area using a particular method.

Following these four principles will help your organization build a far more robust business case for its migration to S/4HANA – and in the process, build a more compelling project plan as well. Your company may well need to accommodate significant changes in your company’s business model that have occurred since you implemented ECC. Consider, for a moment, that fifteen years ago electronics companies almost exclusively made and sold things; but now a substantial portion of electronics industry income is derived from software, streaming and other services. Understanding the capabilities your ERP system needs to have in order to support the company’s business model for the next decade and concurrently developing the business case will help you ensure success.

 

Sr. Managing Consultant, Electronics Center of Competence at IBM

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