Beware the transformation value gap

Ask any C-suite executive about their top strategic priorities, and digital transformation is sure to be on the list. 

Yet, according to McKinsey research, nearly 70% of large-scale transformation programs face delays and fail to deliver the expected benefits. This means that despite their ambitions, many organizations struggle to realize tangible P&L impact from these initiatives.

This significant value gap should raise eyebrows — as well as tough questions as to why. Given the scale of investment, it is critical that SAP S/4HANA programs generate tangible returns for the business because the bottom line is that these investments are material to investors.

By following the five principles we lay out below, your SAP S/4HANA program will not only drive economic value in shorter cycles — allowing you to drive early successes — but also ensure that your business benefits from the promise of simplified, streamlined processes, “return on data” and true transformation long after go-live is over.

Understand what drives P&L impact for your business — and what doesn’t

Our guiding principle is this: beyond the technology operations benefits of SAP S/4HANA, the real transformational value will be in P&L impact.

Many companies, however, conflate technology with transformation — and are then surprised to find that post-implementation of their new Cloud ERP, business processes have not improved materially.

This happens when there is a mismatch between strategic ambition and the detailed plan. For example, while "streamlined processes" is a great aspiration, there needs to be clarity of vision and a specific, business-focused action plan to drive process improvement and ultimately deliver P&L impact enabled by the digital transformation. And it is here that many programs drop the ball and instead develop a narrow focus on technical implementation.

It’s important to remember that the real impact of SAP S/4HANA is in the strategic capabilities it can enable, rather than in the software platform itself. Many of SAP S/4HANA’s benefits are based on technical advantages of simplicity, performance, speed, usability and consistency of a single instance, or on providing a core platform for streamlined processes and data initiatives. In other words, while technology can enable transformational change, it is not the change itself.

Realizing P&L impact will require an early visibility of — and a business focus on — the process changes that will help drive revenue and margin impact.

This means starting with a good understanding of the end-to-end process (and not just the elements covered by SAP S/4HANA). The changes needed will vary according to your business and specific challenges but will likely include cost reductions through elimination and simplification, streamlined end-to-end process operations, enhanced asset utilization or reductions in external spending, headcount, inventory or balance sheet liabilities.

It is imperative that you start with a clear vision of what you want your transformation to achieve, whether that be to address specific pain points, enable future growth, increase organizational agility — or, more likely, a combination of factors.

Bridging the value gap: 5 steps to realizing P&L impact from transformation

As we’ve now made clear, a successful SAP S/4HANA transformation requires more than a robust technological foundation. It also requires an understanding of your real issues, where your processes are “broken” and the opportunities for improvement.

Here’s our advice on where to focus your efforts:

1. Understand how SAP S/4HANA enables transformation: SAP S/4HANA is not SAP as you’ve known it — and to get the most benefit from the system, you will need to understand what’s different about it.

   SAP S/4HANA was designed as a lean core of financial processing, surrounded by process — specific satellite applications for sales, procurement, HR, etc. Thus, any end-to-end process “transformation” will require a line of sight across and beyond the SAP S/4HANA landscape into these process specific applications — and importantly, to the business outcomes you are trying to drive.

   It can be easy to fall into the trap of just reinventing what you do today — but with a different underlying technology base. This is not transformation. It also runs the danger of both replicating old inefficiencies and creating new ones.

   This brings us to our next point

2. Establish a clear rationale for transformation — and make sure your SI is onboard: The single most important factor for ensuring a successful transformation? Make sure that your leadership, teams — and your system integrator — are aligned on the strategic rationale of your program, the specific processes to be transformed and the key pain points to be eliminated.

   This will mean setting out a clear foundation for what the program priorities are, what outcomes the program is meant drive and where the program boundaries are drawn.

   This may sound obvious, but time and again we’ve seen programs put on hold during the roadmap and planning process because this foundation hadn't been set down through the organization.

   Your strategic ambition then needs to inform the detailed plan. While things like “streamlined processes” are a great aspiration, there still needs to be a specific, business-focused action plan to deliver P&L impact by process. You want the design process to be focused on the outcomes you need to drive and the financial benefits you want to realize, whether that is driving out efficiency, smoothing a customer journey or increasing revenue gain.

   In the end, you need processes and a system designed for the future, not the past.

3. Establish the right governance model: There are two challenges for program governance when it comes to delivering transformation. First, successfully delivering a transformation-enabling technology platform is hard. It requires specific governance and skills, which often do not leave time or energy to focus on outcomes. Second, an enabling technology platform is just that enabling. The actual outcomes follow, often over several iterations of the cost and revenue cycle.

   This highlights the importance of a governance model that focuses on delivering value, not just implementing technology.

   This involves setting clear KPIs that measure value in terms of process efficiencies, customer satisfaction and revenue growth, which survive the program governance long after program closure.

4. Set the stage for accountability: As with any goal, outcomes, including P&L benefits, are achieved through action. Actions need owners, and there needs to be consequences for achieving — or not achieving — them. Without this model in place — and the right level of focus and priority given to delivering the actions to achieve your benefit outcomes — they will not be realized.

   This involves embedding accountability into the transformation framework, ensuring stakeholders are not only aware of their roles and have the authority to act but are also measured against their success in achieving these goals.

   In other words, it must be clear who owns each benefit and is responsible for making it happen. Only then will you see the kind of P&L improvements that the program was predicated on.

5. Plan for continuous improvement: It is all too common for value realization to be 'tomorrow's problem' and get superseded by the next priority or initiative. This leaves money on the table when it comes to benefits and is a major missed opportunity. Successful transformation programs build momentum by focusing on executing short cycles with a bias for action.

   For example, adopting a 100-day P&L plan approach to drive early successes by focusing on optimization and elimination of low-value tasks while improving high-value process journeys. Recognizing these successes, learning from them and planning the next cycle will build a culture where delivering the P&L impacts of transformation is real and expected.

Conclusion

Our advice is to focus on 100 day P&L impact plans now, irrespective of where you are in your SAP S/4HANA planning or execution journey. You can then use the outcomes of early 100-day plans to fund, or at least subsidize your SAP S/4HANA investments.

The hallmark of a successful program is tangible P&L impact. And achieving this relies on having a clear vision on what business outcomes transformation needs to drive; early alignment between leadership, technology and integrator on the specific processes to be transformed; a governance model emphasizing accountability and value realization and business accountability to deliver these outcomes.

Leaders must ensure that these elements are in place so that an organization can navigate the complexities of transformation while focusing on delivering measurable outcomes repeatedly.