Strategic Enterprise Management (SEM)

Transcription

1 The new generation of analytical applications to support management processes: Strategic Enterprise Management (SEM) by Juergen H. Daum, former Product Manager SEM, Corporate Development SAP AG - An article from November copyright 1998 Juergen H. Daum ( All rights reserved. Use of quotes of text taken from this article or of its graphics is permitted only with reference to the author and his website. 1

2 The new generation of analytic applications to support management processes: 6WUDWHJLF(QWHUSULVH0DQDJHPHQW %\- UJHQ+'DXP3URGXFW0DQDJHU6(0&RUSRUDWH'HYHORSPHQW6$3$* 0DQ\ FRPSDQLHV SDVVHG LQ WKH ODVW \HDUV WKURXJK D %35 %XVLQHVV 3URFHVV 5HHQJLQHHULQJ SURFHVV WUDQVIRUPLQJ KRPHJURZQ RSHUDWLRQDO EXVLQHVV SURFHVVHV LQWR LQGXVWU\EHVWSUDFWLVHVWDQGDUGV,QWHJUDWHG(53VRIWZDUHSURGXFWVOLNH6$35VHUYHG DV D FDWDO\VW DQG HQDEOHU IRU VXFK D FKDQJH SURFHVV DQG DUH VHUYLQJ WRGD\ DV WKH LQIUDVWUXFWXUH IRU VXFK DGYDQFHG EXVLQHVV SURFHVVHV,W V WLPH QRZ WR H[WHQG WKH VFRSH DQGWRLQLWLDWHUHHQJLQHHULQJRIPDQDJHPHQWSURFHVVDQGWREHWWHUVXSSRUWWKHPZLWKDQ DSSURSULDWH LQIUDVWUXFWXUH ZKLOH OHYHUDJLQJ LQYHVWPHQWV LQ (53 V\VWHPV :LWK EHWWHU PDQDJHPHQW SURFHVVHV ZKLFK DUH OLQNLQJ DOO RSHUDWLYH DFWLYLWLHV ZLWK WKH HQWHUSULVH VWUDWHJ\ FRPSDQLHV ZLOO EH DEOH WR EULQJ WKHLU DELOLW\ WR FRQVWDQWO\ JHQHUDWH YDOXH IRU WKHLU VWDNHKROGHUV WR WKH QH[W OHYHO 7KLV DUFWLFOH ZLOO GLVFULEH KRZ WKH ODWHVW GHYHORSPHQWVLQEXVLQHVVVRIWZDUH±DQDO\WLFDO6(0DSSOLFDWLRQV±ZLOOKHOSWRPDNHWKLV KDSSHQ :K\LVLPSURYHGLQIRUPDWLRQWHFKQLFDOVXSSRUWRIPDQDJHPHQWSURFHVVHVWRSLFDOULJKW QRZ" One reason certainly, is the fact that enterprise management is under pressure to consistently generate value for the investors and also for other stakeholders. Also European companies have learned their lessons: if they don t perform from an investor s point of view, the management is in trouble. The combination of a huge concentration of capital in the hands of institutional investors, transparent global capital markets, and not least the intense competition between the institutional investors for private investors creates an uncomfortable situation for CEO s and CFO s of publicly owned companies. These institutional investors can not just sell their shares in a company which is not performing. The number of shares that they typically own in a company is too large: If they tried to sell them on the stock market the stock price would fall immediately and they would lose a lot of money. Their only chance, therefore, is to exert influence directly on enterprise management. The result is that it is difficult for management to stick to its policies if it cannot convince investors, analysts and other stakeholders of its ability to consistently generate value for these groups. We already know from the USA that institutional investors have the power to have 'non performing' management replaced and that they don't hesitate to do so. Europe is catching up now. One prerequisite for the ability to consistently optimize shareholder value generation is a good internal reporting and performance management system. Without complete information, you don t know where immediate action is required. This is the reason why top management today is exerting increasing pressure on the head of group controlling and accounting and on the CIO to maintain the reporting and information infrastructure in line with current requirements. What is required is the implementation of enterprise-wide standard reporting, the integration of internal and external corporate reporting so that the performance optimization demanded externally by the shareholders can be controlled internally at division, business unit or even product level. Even more urgent is the shortening of accounting and closing cycles because the information relevant for management must be made available quicker and more frequently. In addition, management reporting must better meet the needs of the user, it must 1

3 include information about non-financial critical success factors for early warning, and it must clearly show the effects of these on financial performance. But this is not the whole story. Clearly, efficient reporting processes which e.g. meet the actual need for value measures are the foundation of best practice in enterprise management. Therefore, in the next chapter we will outline today s requirements in corporate reporting and what companies can do to meet these requirements. But excellence in strategic enterprise management means more than simply better reporting. In the following chapter we will therefore explain the future direction of developments in strategic enterprise management on what principles it relies beyond well organized corporate reporting - and the solution SAP will provide to support SEM excellence. )LUVWVWHSVWRZDUGVYDOXHEDVHGPDQDJHPHQW,PSURYLQJSURFHVVHVLQPDQDJHPHQWDQG JHQHUDODFFRXQWLQJDSSO\LQJQHZILQDQFLDOSHUIRUPDQFH PHDVXUHVDQGXVLQJ EDODQFHG VFRUHFDUGVWRFRQWUROILQDQFLDODQGQRQILQDQFLDOVXFFHVVIDFWRUV The method of determining whether an enterprise is performing in the interests of the investors or not, has changed. Also, the methods management uses to control the enterprise internally, and to optimize performance at Business Unit level for example, have changed. It was common in the past to manage an enterprise exclusively on the basis of a historical figure like 'profit'. Now, however, investors and finance analysts value enterprises and their performance exclusively on the basis of their ability to generate future free cash flows (they include opportunity costs in the form of capital costs in their calculations). Because of this, it no longer makes sense to manage and optimize internal enterprise units and the enterprise portfolio based purely on 'profit contributions'. This is the reason why controllers today are dealing with value-based controlling concepts and with new financial key figures. These key figures link P&L and balance sheet data they provide information on 'Return on Capital Employed'. They take an investor's opportunity costs into account (cost of capital) leading to a residual income or return, an 'Economic Profit. The trend is increasingly towards cashbased measurement factors that are not subject to 'manipulation' ('cash is a fact profit is an opinion'). 2

4 What is Shareholder Value? Competitor s stock value Total Shareholder Return Competitor 9DOXH Own stock value Own Total Shareholder Return 7LPH Competitor s & own dividend payments Source: PricewaterhouseCoopers *UDSKLF :KHQ HYDOXDWLQJ HQWHUSULVHV LQYHVWRUV QR ORQJHU UHIHU WR GLYLGHQG SD\PHQWV XVXDOO\ OLQNHG WR SURILWV DQG (36 EXW LQVWHDG WR 7RWDO 6KDUHKROGHU 5HWXUQ ZKLFK DOVR WDNHVVWRFNYDOXHJURZWKLQWRDFFRXQW(YHQLIWKHGLYLGHQGSD\PHQWVRIWZRHQWHUSULVHVDUH WKHVDPHWKHHYDOXDWLRQRIWKHHQWHUSULVHVFDQSURYHTXLWHGLIIHUHQWDVWKHJUDSKLFLOOXVWUDWHV The data for calculating these key figures has up to now only been generally available at the enterprise level within the general ledger, meaning that the data typically applied to the enterprise as a whole. It has not been available at the level of the operating units which often do not exist as legal entities. The first challenge is to be able to break down this data into smaller internal units, although often the assignment of asset and liability accounts or the determination of tied capital represents the real problem: )LUVWFKDOOHQJHLQFRUSRUDWHUHSRUWLQJWRGD\%UHDNGRZQRIQHZILQDQFLDOPHDVXUHVVXFK DV (FRQRPLF 3URILW IURP D FRUSRUDWH OHYHO WR D EXVLQHVV XQLW SURGXFW OLQH RU HYHQ D SURGXFWOHYHO Since we are dealing with a high volume business often with assignment to several profit or value centers' such as a product, for example - in day-to-day activities, manual posting is no longer possible and logical. It is too complicated, the error rate is too high and it is too timeconsuming. It would hinder the real-time provision of this information to management. The same applies to the most widely used method today, subsequent assignments at period end done manually. This is inaccurate and no longer acceptable for the managers whose evaluation and compensation is based on it (flat rate assignments are often used). Because of the effort involved, these are done infrequently and the 'break down' is only possible as far as a relatively high level of aggregation in the enterprise hierarchy. One American customer told 3

5 me recently, that for the reasons given above, the economic profit can only be calculated once a year - and then only to the level of the Business Units. They are looking for a more automated way to provide this kind of information more frequently and at a much more detailed level. A bottom-up approach, working with automatic assignment directly in the transaction systems, has clear advantages here. This is the solution which SAP offers it s customers today, leveraging functions from it s integrated ERP System R/3. With the R/3 component Profit Center Accounting (PCA), customers can automatically derive the correct profit center postings from operative transactions such as goods received postings, material movement postings, invoice postings and postings in general accounting and management accounting. Postings and allocations to those profit centers are then handled automatically by the system in the background. This also includes postings of balance sheet type items such as fixed assets, inventories, work in process, receivables and payables. Even if adjustments are used to calculate EP such as capitalization of advertising costs or R&D expenses - R/3 customers can leverage other R/3 functions such as parallel depreciation areas in asset accounting. Here for example, depreciation for non-gaap or statistical reporting purposes can be processed automatically and passed through to PCA. Using this information, the system can calculate the capital employed rate in a defined responsibility area (the profit center). The system combines this with the cost of capital rate to compute the appropriate capital charge which is then used within the EP calculation scheme to calculate EP for each single profit center without the need for further manual work. A profit center can be defined as a product, a product line, a department, a regional sales office, plant or warehouse, or similar responsibility area. Profit centers can also span several legal entities. They can be grouped flexibly into parallel hierarchies which allows users to have EP not only reported automatically for single profit centers, but also for any aggregation of them in different dimensions. Graphic 2 shows an Economic Profit calculation scheme of an American consumer products company. They use R/3 Profit Center Accounting to calculate EP according to the 'direct costing' philosophy which means that they assign only those costs at a given level of the scheme, for which the relevant object the profit center has responsibility for. The capital charges are calculated through automatic allocation of the appropriate balance sheet items like fixed assets, goods inventories or other working capital items to the profit center responsible for these investments (which are multiplied with the relevant cost of capital %), and also through allocation of other more P&L-type items (revenue/sales, other costs). 4

6 1HW6DOHV3HU3URGXFW Direct Cost of Sales for Product &DSLWDO&KDUJH±)LQLVKHG*RRGV,QYHQWRU\ &DSLWDO&KDUJH'LUHFW0DQXIDFWXULQJ$VVHWV 'LUHFW(FRQRPLF3URILW3URGXFW/HYHO Direct Brand Expenses Other Direct Marketing Capitalized Advertising: Amortization Net of Add-Back &DSLWDO&KDUJH±&DSLWDOL]HG$GYHUWLVLQJ &DSLWDO&KDUJH±3UHSDLGDQG$FFUXHG/LDELOLWLHV 'LUHFW(FRQRPLF9DOXH&RQWULEXWHG%UDQG/HYHO Sales and Marketing G&A Add-Back Amortization of Goodwill &DSLWDO&KDUJH±&XPXODWLYH8QXVXDO/RVVDIWHU7D[ &DSLWDO&KDUJH±$FFRXQWV5HFHLYDEOH &DSLWDO&KDUJH±2WKHU'LUHFW&DSLWDODW6 0 'LYLVLRQ(FRQRPLF9DOXH&RQWULEXWHG'LYLVLRQ/HYHO Shared Manufacturing Costs Operations Shared Services &DSLWDO&KDUJH±66 266:RUNLQJ&DSLWDO &DSLWDO&KDUJH±5DZ0DWHULDOV :,3,QYHQWRULHV &DSLWDO&KDUJH±&RPPRQ)L[HG$VVHWVIURP Corporate Expenses Other (Income) Expense &DSLWDO&KDUJH±&RUSRUDWH&DSLWDO &DVK,QFRPH7D[HV3DLG (FRQRPLF9DOXH$GGHG7RWDO(QWHUSULVH *UDSKLF (9$ 70Ã FDOFXODWLRQ VFKHPH RI DQ $PHULFDQ FRQVXPHU SURGXFWV FRPSDQ\ (FRQRPLF 3URILW LV FDOFXODWHG DFFRUGLQJ WR WKH µgluhfw FRVWLQJ SKLORVRSK\ 7KHUHIRUH RQO\ WKRVH FRVWV DUH DVVLJQHG DW D JLYHQ OHYHO RI WKH VFKHPH IRU ZKLFK WKH UHOHYDQW REMHFW ± WKH SURILWFHQWHU±KDVUHVSRQVLELOLW\ 5

7 6HFRQG FKDOOHQJH LQ FRUSRUDWH UHSRUWLQJ WRGD\ KDUPRQL]LQJ RI 0DQDJHPHQW DQG *HQHUDO$FFRXQWLQJWRHQDEOHFRQVLVWHQWFRUSRUDWHSHUIRUPDQFHPRQLWRULQJ The second challenge is to integrate the calculation systems of management (internal) accounting and general (external) accounting at least at the corporate, division and business unit level. It makes no sense if the sum of the results of the operating units (internal accounting) is not reconcilable with the result of the enterprise as a whole (external accounting). The difference may indeed be based on different evaluation methods and also different consolidation methods for example, but it cannot be explained quickly to management. Eliminating internal accounting completely clearly cannot solve the problem since it is essential for product cost planning and control. And external accounting typically does not provide the degree of detail necessary for such an internal performance management system. In addition, many internal organizational units with management responsibility are not legal entities and therefore, are not subject to external accounting. The solution for this problem is to have a flexible financial consolidation system, which is able to work with data from both management and general accounting systems. With R/3 Consolidation (CS), SAP provides such a solution. CS can be linked both with the R/3 Management Accounting System (CO) through PCA, and with the R/3 General Ledger System (FI). Also data from other sources than R/3 can be transferred to and used in CS. All consolidation steps such as data transfer from local systems, currency translations, adjustments, eliminations and consolidation of investments can be automated through CS. This is speeding up the closing process significantly even in companies with many reporting units. For different types of data (for example, from the management accounting system and from the general ledger), consolidation can run in parallel within different 'dimensions'. Automated reconciliation and validations between both dimensions are possible, to ensure that they end up with the same results. This is possible even if companies use adjustments at lower levels, for example, for EP calculations: the adjustments are posted in separate 'statistical' accounts which are not used for GAAP reporting. If they wish to reconcile their corporate results (based on GL accounts) with the total of the results from Management Accounting (through PCA), they would not pass these statistical accounts through CS. By the way: reconciliation between FI and CO/PCA is already ensured within R/3 on an operative level through automated system functions. This makes it easier within the consolidation process: differences should normally not occur on this level. Reconciliation and validation in R/3 Consolidation is therefore only a final check. The whole consolidation process can easily be controlled using the 'data and consolidation monitor', which provides constant real time information about the status of all consolidation tasks at all enterprise levels. 6

8 1RQ)LQDQFLDO.3,V.3, 5HSRUWLQJ 0DQDJHPHQW &RFNSLW &RQVROLGDWLRQ&6 ),'DWD 'LPHQVLRQ 3&$'DWD 3URILW&HQWHU$FFRXQWLQJ 3&$ 6' 00 ),*/*HQHUDO/HGJHU %6DFFRXQWV,6DFFRXQW $VVHWV $5 $3 :L3,QYHQWRU\ 0LVF &2&RQWUROOLQJ *UDSKLF 5 RIIHUV DQ LQWHJUDWHG VROXWLRQ IRU FRUSRUDWH UHSRUWLQJ 'DWD LV JHQHUDWHG DXWRPDWLFDOO\DWWKHERWWRPDQGFRQVROLGDWHG 7KH 0DQDJHPHQW &RFNSLW ERWK LQQRYDWLYH.3, YLVXDOL]DWLRQ DQG D PDQDJHPHQW PHHWLQJVXSSRUWWRROEDVHGRQWKHSULQFLSOHRIWKH%DODQFHG6FRUHFDUG It is not enough today to report solely on financial performance. Reporting content must be expanded to include information on non-financial critical success factors. This provides early warning on internal or external occurrences that may influence profitability before these actually affect financial results, a typical lagging performance indicator. A typical leading indicator, for example, is customer satisfaction. The customer satisfaction index tends to fall much sooner than revenue and profit. If you just concentrate on revenue, you will be hit by poor financial results by surprise. But imagine: if you were regularly informed about the development of the CSI in your various businesses just as you are with financial results -, you would be aware very early of unfavorable developments. This would allow you to react in time to prevent poor financial results in the future. A Balanced Scorecard, a concept developed in the early 90s by Norton and Kaplan, will provide you with a balanced view on both leading and lagging KPIs. These are grouped into four major dimensions: a financial, customer, internal and strategic view. This will help managers to oversee and quickly interpret the current situation of their business. But in contrast to the relatively stable and purely financially orientated reporting of the past, the relevance of the non-financial reporting objects can change frequently: indicators that are no longer relevant must be removed and new indicators must be included. As a rule, one can assume that the reporting should be completely reviewed at least once a year. In some enterprises today changes are already made on a case by case basis, from one management meeting to the next, should this prove necessary. 7

9 Therefore both controllers and management end-users require flexible and user-friendly software tools. Whilst allowing for varying reporting content, they must maintain an organized and consistent reporting structure through various levels of the enterprise. Here, SAP offers the Management Cockpit TM and the appropriate software infrastructure for KPI data collection and OLAP capabilities for multidimensional analysis. The Management Cockpit supports top-level decision-makers by letting them concentrate on the essentials. In contrast to conventional, strictly finance-oriented management accounting systems, all relevant information including non-monetary data is presented in a consistent manner in real time. The cockpit-like arrangement of instrument panels and displays enables top managers to recognize whether corporate structures need changing and to see how all the different factors interrelate. Executives can call up this information on their laptops of course, but a key element of the concept is the Management Cockpit Room, with four walls on which ergonomically designed graphics depict performance as reflected in mission-critical factors. The Black Wall shows the principal success factors and financial indicators, the Red Wall shows market performance, the Blue Wall shows the performance of internal processes and employees, and the White Wall the status of strategic projects. Board members and other executives can hold meetings in this room. Typically, managers will also meet here with their controllers to discuss current business issues. For this purpose, the Management Cockpit can implement various scenarios. A 'Cockpit Officer' (typically a junior controller) can very quickly prepare room ready for different kinds of meetings. A major advantage of the Cockpit is that it provides a common basis for information and communication. It supports efforts to translate a corporate strategy into concrete activities by identifying performance indicators, in addition to permitting appropriate monitoring. An additional advantage in using the Management Cockpit for Management Meetings is that the applied ergonomic methods also increase cooperative intelligence of management teams and enable more effective communication. Therefore, board meetings held in the Management Cockpit room are more efficient and less time consuming than the traditional meetings. 8

10 *UDSKLF $OO PLVVLRQ FULWLFDO LQIRUPDWLRQ LV FOHDUO\ SUHVHQWHG LQ DQ (QWHUSULVH :DU 5RRP 7KH 0DQDJHPHQW &RFNSLW %HVW SUDFWLFH LQ YDOXH EDVHG PDQDJHPHQW SURFHVV LPSURYHPHQW LQ VWUDWHJLF SODQQLQJ LQ HQWHUSULVH SODQQLQJ SHUIRUPDQFH PDQDJHPHQW DQG VWDNHKROGHU UHODWLRQVKLS PDQDJHPHQW The improvement of processes in internal accounting or Responsibility Accounting, in financial consolidation and corporate reporting represents a significant step on the way to best practice in value-based enterprise management. It often clarifies, for the first time, which organizational units have eroded value and which have actually created it. However, if you consider the way a financial analyst or investor evaluates an enterprise, it becomes clear that this is not sufficient. What counts here is not past performance but what the enterprise is likely to do in the future. The financial analyst is concerned with the level of the future free cash flows or the Economic Profit/Value Added in the future periods. He makes assumptions about these for example, based on recently published figures and other information from the enterprise and calculates them for the next 5, 10, 15 or sometimes even 20 years. He takes the future free cash flows for these years including a residual value where applicable - and discounts these to their present value using the Weighted Average Cost of Capital (WACC). This way he arrives at a calculated value for the enterprise. The number of years used for the calculation is dependent on the assumption of how long the enterprise can outdo the capital market, in other words, how long it can achieve profits or returns that exceed the cost of capital (CAP: Competitive Advantage Period). The higher the number of years, the higher the value of the enterprise (for example: the typical CAP used is 5-10 years. In exceptional cases longer periods are used for example, Microsoft = 20 years). The enterprise value calculated this way is divided by the number of shares. The result is a fictitious stock price, that is compared with the actual current 9

11 stock price: if the actual current stock price is lower, the analyst will recommend buying the stock, if it s higher, he will recommend selling. If several financial analysts arrive at the same estimate, the actual stock price will tend towards the calculated price. The probability of this happening is relatively high because such evaluation models are generally accessible and are often shared by the analysts. The absolute margin by which the returns/profits exceed the cost of capital, the cost of capital itself, and the number of years in the Competitive Advantage Period have, therefore, a direct influence on the current enterprise value. This, in the case of a quoted enterprise, is reflected in the stock price. The profits made by an enterprise in the previous year, quarter or month are irrelevant here. At most, they help the analysts to correct their forecasts on the enterprise s future figures. This is also the reason why, after publication of past poor figures, the stock price of enterprises can fall - if these figures are unexpected by the analysts. These are, therefore, exclusively revised plan values that affect the value of the enterprise, and lead the analysts to a different evaluation. Since the enterprise strategy effectively determines the future of the enterprise and its financial potential, this strategy is extremely important as a production factor for enterprise value. Firstly, what does management actually do internally to enable and optimize future returns exceeding the cost of capital over several years, and secondly, how do the capital markets or analysts believe the current business strategy affects this? If the enterprise management is to be judged externally based on future returns less capital costs over the competitive advantage period, it is understandable that the CEO and the CFO would now wish to base internal performance management on such factors. Only this way is it possible to optimize the internal enterprise performance at business unit level or value center level for example, so that the total result meets the expectations of the investors and other stakeholders. 10

12 2QO\ZKHQWKHIXWXUHLVFRQVLGHUHGFDQZHVHH ZKLFK%XVLQHVV8QLWJHQHUDWHVWKHPRVWYDOXH 3URGXFW /LIHF\FOH $ 69 % 3URILW &RVWÃRIÃ&DSLWDO HPSOR\HG 3URILW &RVWÃRI &DSLWDO HPSOR\HG (9$ Š (9$ Š 69 %XVLQHVV8QLW$ %XVLQHVV8QLW% Source: PricewaterhouseCoopers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his is much more demanding than the procedure commonly used up to now; controlling based on historical financial figures even if this now takes cost of capital into account. This requires a significantly closer linking, for example, between strategic planning and enterprise planning - since the future values are now the most important - and also a significantly closer linking between strategy and performance management in day-to-day activities. In the typical dynamic enterprise environment of today, it is no longer sufficient to link and reconcile the strategic work with the operational business exactly once a year. This is the time, just before the annual operational planning, when the executive board goes into its strategy sessions and works out the targets for the yearly plans. It must instead be possible, during the year, for example from one management meeting to the next, to dynamically adapt strategy, total enterprise or department goals and resource allocation to changing environmental conditions, in order to achieve the macro targets that have been communicated to the public. At the same time, a regulated communication process with the 'stakeholders' is required an 'external marketing of strategy', if you like which goes hand-in-hand with the internal processes of strategic planning, enterprise planning and performance management, and allows quick feedback-loops in each case. This way, the efforts of management can actually be 11

13 reflected in increased enterprise value, and the capital market and other stakeholders can acknowledge that the chosen strategy is successful and is bringing about the planned appreciation in the value of the enterprise. An active, forward looking information policy plays a decisive role here. As a side effect, this provides management with a time buffer against the pressure from the capital market and other stakeholders - but only if the information from management proves to be reliable. The achievement of previously communicated macro targets then turns out to be the actual value driver and also a measure of the quality of the enterprise management. Integrated planning and performance management processes are required, that allow short-term corrections to be made quickly and flexibly in day-to-day activities. %XVLQHVV3URFHVV0DQDJHPHQW %XVLQHVV3URFHVV0DQDJHPHQW %XVLQHVV3URFHVV0DQDJHPHQW $QDO\]H VWDNHKROGHU H[SHFWDWLRQV 6LPXODWHÃÃGHFLGH EXVLQHVVÃVWUDWHJ\ 'HILQHÃWDUJHWV IRUÃ%8CVÃ LQYHVWPHQWV 0DQDJHÃ SHUIRUPDQFH &RPPXQLFDWH UHVXOWVÃÉÃPDQDJHÃ VWDNHKROGHUÃ UHODWLRQV 6WUDWHJLF(QWHUSULVH0DQDJHPHQW3URFHVV )RFXV n 'HYHORSPHQWDQGH[HFXWLRQRIVWUDWHJLHVZLWKWKHJRDORI PHHWLQJWKHVWDNHKROGHUV H[SHFWDWLRQVRIWKHHQWHUSULVH n 5HVRXUFHDOORFDWLRQLVRSWLPL]HGZLWKWKHJRDORIKDYLQJWKH UHOHYDQWEXVLQHVVSURFHVVHVJHQHUDWHUHWXUQVWKDWH[FHHGWKH FRVWRIFDSLWDO n 3HULRGFRQVLGHUHGIXWXUHVKRUWPHGLXPDQGORQJWHUP *UDSKLF7KH6WUDWHJLF0DQDJHPHQW3URFHVVOLQNVWKHRSHUDWLRQDOEXVLQHVVSURFHVVHVLQWKH HQWHUSULVHIRUH[DPSOHDW%XVLQHVV8QLWOHYHOZLWKWKHJRDORIFRQVLVWHQWO\JHQHUDWLQJYDOXH IRUWKHVWDNHKROGHUV Many enterprises have several decentralized operational units operating in different countries. In order for the successful implementation of the above management processes to be possible in these enterprises, efficient information systems and a new type of integrated analytical applications are required. The new SAP product, SAP SEM Strategic Enterprise Management, will provide support here and serve as a catalyst and enabler for the implementation of modern management processes in the enterprise, and will contribute to the consistent increasing of the enterprise value for investors and other stakeholders. 12

14 The Strategic Enterprise Management Process (QWHUSULVH 0RGHOLQJ 6RXUFLQJ H[WHUQDO LQWHUQDO 6WUDWHJ\ (QWHUSULVH 3ODQQLQJ %XVLQHVV &RQVROLGDWLRQ 3HUIRUPDQFH 0RQLWRULQJ 7DNH $FWLRQ l 'HILQH ÃÃÃHQWHUSULVH ÃÃÃVWUXFWXUH l &ROOHFW LQWHUQDO Ã DQGÃH[WHUQDO ÃÃ LQIRUPDWLRQ ÃÃ FRGHGÃDQG QRQFRGHG l 0DUNHW 0RGHOLQJÃÉ 6LPXODWLRQ l %XVLQHVV 6WUDWHJ\ 0RGHOLQJÃÉ 6LPXODWLRQ l (QWHUSULVH 3ODQQLQJ l 5LVNÃ9DOXDWLRQ l /HJDOÃFRQV l 0DQDJHPHQW ÃÃÃFRQV l 9DOXH ÃÃÃDGMXVWPHQWV l $QDO\]H ÃÃÃÃSHUIRUPDQFH l 0DQDJHPHQW ÃÃÃÃPHHWLQJÃLQÃWKH ÃÃÃÃ0DQDJHPHQW &RFNSLW l &KDQJH WDFWLFDO WDUJHWV l &KDQJH ÃÃÃÃHQWHUSULVH ÃÃÃÃVWUXFWXUH l &RPPXQLFDWH ÃÃÃÃWR ÃÃÃÃVWDNHKROGHUV *UDSKLF 6$3 6(0 VXSSRUWV WKH 6WUDWHJLF (QWHUSULVH 0DQDJHPHQW 3URFHVV IURP HQG WR HQGLQDQLQWHJUDWHGPDQQHU European enterprises, when compared with American enterprises, lag far behind when it comes to value management, and are significantly undervalued. If you consider that, in the future, there will be more large transatlantic mergers or acquisitions such as Daimler- Chrysler, you will realize that these can be to the detriment of not only the European stockholders but also of the employees. Because of the magnitude of these mergers or acquisitions, the value of the enterprise being acquired or merged is no longer settled in monetary form, but rather by the transfer of stock. As a result of the low valuation of European stock corporations, European companies are not able to acquire American companies: they can t pay for them with their own shares, because their value is too low. In a merger situation the result will usually be that the American party ends up in the dominant position. If, for example, General Electric (GE) and Siemens were to merge (looked at purely arithmetically), the Siemens stockholders today would receive barely 11 per cent of the new enterprise (valuation as at end of September 98), although the number of employees at Siemens greatly exceeds that of GE. A sell-out of European industry like this would not only be unacceptable to European stockholders but also to the employees whose bosses might typically be located in New York. This is the reason, why many European companies are now starting to implement value based management techniques. If one compares European and American companies, an interesting result is that the Americans are far ahead in terms of applying VBM at a corporate level. But when European companies, especially German ones, start to implement VBM they do it the 'right' way in a typical German 'engineering' manner. They train all their managers, even if there are several thousand of them, at all enterprise levels in 13

15 VBM, and they attempt to implement efficient reporting systems to calculate EP, for example bottom up, where as american enterprises struggle with spreadsheet solutions on corporate level and detailed EVA TM information can not be provided for products, product lines and often even not for entire Business Units. Therefore, when it comes to making VBM operational in large enterprises, American and European companies are similar: they both seek for software solutions to help them go about this. SAP SEM Strategic Enterprise Management l Linking strategic planning and simulation with enterprise planning ABC/M modeling & simulation Automatic sourcing of external and internal business information Speeding up legal and management consolidation Providing balanced scorecards and Management Cockpit KPI s + interpretation models Integrating strategic, financial and operational information Linking your enterprise management process directly with your most important stakeholders 6$36(0 l l l &RUSRUDWH 3HUIRUPDQFH 0RQLWRU &30 6WDNHKROGHU 5HODWLRQVKLS 0DQDJHPHQW 650 %XVLQHVV &RQVROL GDWLRQ %&6 l l %XVLQHVV 3ODQQLQJ 6LPXODWLRQ %36 %XVLQHVV,QIRUPDWLRQ &ROOHFWLRQ %,& l %: *UDSKLF 6$3 6(0 LV D VHW RI LQWHJUDWHG FRPSRQHQWV IRUPLQJ SDUW RI DQ DQDO\WLFDO DSSOLFDWLRQ 7KH 2/$3 DQG': WHFKQLTXHV IURP WKH 6$3%XVLQHVV,QIRUPDWLRQ :DUHKRXVH 6$3%:DUHXVHGDVWKHWHFKQRORJLFDOEDVLV 7KH ILUVW HQGWRHQG VROXWLRQ IRU VWUDWHJLF HQWHUSULVH PDQDJHPHQW 6$36(06WUDWHJLF(QWHUSULVH0DQDJHPHQW SAP SEM Strategic Enterprise Management is a new SAP product that does not require a SAP R/3 installation. However, R/3 users do have an advantage insofar as the data that is required for SAP SEM from the operational applications is already available in R/3 in a well structured form.. It should be noted that in the area of management support, the processing of external data and information (especially unstructured) is becoming more and more important. SAP SEM includes a component specifically for handling this type of information. SAP SEM will use SAP Business Information Warehouse technology. This means that it can be operated stand-alone or within the framework of an existing SAP BW Data Warehouse. SAP SEM consists of 5 integrated application components: 14

16 SEM-BPS Business Planning & Simulation SEM-BIC Business Information Collection SEM-BCS Business Consolidation SEM-CPM Corporate Performance Monitor SEM-SRM Stakeholder Relationship Management SEM BPS Business Planning & Simulation: The BPS component provides functions to convert investor/stakeholder expectations into value-based goals and then to incorporate these in an enterprise plan. They include: functions for market modeling and for creating dynamic and linear business models; ABC/M modeling and simulation, simulation of different scenarios and their evaluation, taking into account the business risks; linking to, and integrated execution of enterprise planning and forecasting. SEM BIC Business Information Collection: The BIC component provides functions for the automated and semi-automated collection of structured (for example, KPIs), and above all, unstructured business information from internal and external sources. Regarding external sources (especially unstructured information); functions for automated Internet searches and for structuring the information based on the internal enterprise structure are provided. SEM BCS Business Consolidation: The BCS component provides functions for financial consolidation and for value-based accounting. These include functions for automated valuebased adjustment postings, currency conversions, inter-unit eliminations, consolidation of investments and parallel valuation systems according to different internal procedures and/or GAAP. SEM CPM Corporate Performance Monitor: The CPM component provides functions for the definition, analysis, visualization and interpretation of Key Performance Indicators, and is specifically meant for use by managers and executives. Innovative visualization techniques are used here that are designed to improve the productivity of managers. This component will support, for example, the creation of interpretation models such as Balanced Scorecards, Value Driver Trees, Management Cockpit scenarios etc. The 'Management Cockpit' is not only a software-based KPI interpretation model, but is also a concept for an 'Enterprise War Room'. The KPIs are portrayed on its walls, structured according to ergonomic criteria. The concept also covers specific working methods, including how this tool can be used to efficiently support management meetings. The Management Cockpit (software) will form an integral part of SEM-CPM. SAP's partner, N.E.T. Research, will handle the installation of an MC room and the relevant training for the managers (optional). SEM SRM Stakeholder Relationship Management: The SRM component provides functions to support the Stakeholder Communication process. Firstly, it well help to regularly inform the stakeholders (investors, employees, customers, partners, social groups/state institutions) about the business strategy for example, over the Internet and its effect on their Stakeholder Value. Secondly, it will help to obtain organized feedback from the stakeholders, and to structure it in such a way, that this information can be processed within the other SEM components (BPS, CPM). A significant advantage of the solution is the fact that SAP SEM provides integrated support for management processes and therefore allows a real time linking between strategic planning and simulation activities, the target planning and enterprise planning processes and performance monitoring and ad-hoc feedback-loops between the individual process steps. 15

17 During the regular or extraordinary management meetings in the Management Cockpit, the management team can quickly analyze the current enterprise performance and compare it with the current valid strategy scenario or stored alternative scenarios. These scenarios can then be recalculated immediately based on current data, the enterprise planning and resource allocation can be adapted to correspond with the new situation, and the new goals can be communicated straight away within the enterprise and to the public. If different software tools are used for each of the individual process functions - especially if these are based on different technologies then the solution is either impossible or extremely expensive because of the adaptations necessary. The SAP solution has significant advantages here. In addition, the SAP solution will provide functions to support the entire management process. SAP SEM will be available in the third quarter SEM Customer Council currently exist in Europe and North America. This is aimed at those enterprises that intend to implement the system. It will provide them with an opportunity to be regularly informed about the concept and its development progress, and will also allow them to input their software requirements. For further information see: 16

18 The new generation of analytical applications to support management processes: Strategic Enterprise Management (SEM) by Juergen H. Daum, former Product Manager SEM, Corporate Development SAP AG - An article from November Find more information and additional articles about this topic at the author s website at Book recommendation (now available!): Introducing the enterprise management concept for the knowledge and information age The first book on the market that summarizes in a synopsis all relevant aspects of the new 21 st century corporate performance management model and that describes the steps for its implementing Intangible Assets and Value Creation By Juergen H. Daum John Wiley & Sons Ltd, Chichester, 2002 ISBN Working with some of the main contributors to a new model of enterprise and performance management as well as of accounting and corporate reporting and communications, Juergen H. Daum developed in his book the foundation for a new enterprise management system and introduces it from a very practical perspective. He is citing many examples and is describing concrete steps that companies must take to implement the management system for the 21st century. This is complemented with interviews with some of the leading experts like David Norton, coauthor of the Balanced Scorecard, Leif Edvinsson, pioneer and thought leader in intellectual capital management, and with Baruch Lev, the worlds leading expert in intangibles accounting. This book aims at a paradigm change in management and names good reasons and arguments for it. It belongs into the management discussion of today. Juergen Daum proves great thought leadership. (Controller Magazin, Germany, issue 5/2002) You will find more information about this book at copyright 1998 Juergen H. Daum ( All rights reserved. Use of quotes of text taken from this article or of its graphics is permitted only with reference to the author and his website. 1