Leveraging SAP Profitability And Performance Management . - Deloitte

Leveraging SAP Profitability and Performance Management (PaPM) to enable margin improvement through efficient cost allocations featuring msg Global and SAP Mike Seng, Partner, Deloitte & Touche LLP Shyam Chulki, Consulting Managing Director, Deloitte Consulting LLP Eric Smit, VP Global Center of Excellence, SAP Richard Dampf, Senior Director, msg Global solutions Rachel Sutherland, Manager, Deloitte Services LP May 25th, 2021

Agenda 1 Incorporating cost allocations into a strategic cost framework 2 Utilizing technology to support cost allocations – SAP PaPM 3 Creating a roadmap for cost and profitability improvement 4 Q&A Copyright 2021 Deloitte Development LLC. All rights reserved. 2

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Cost allocations process overview Cost allocations are created to help organizations identify, accumulate, and assign costs to cost objects such as departments, products, or a region based on specific criteria. Allocations can be simple or extremely complex. Simple cost allocation process (illustrative) Senders Distribution Rules Incur cost 2,000 Administration (Cost Center) Facilities (Cost Center) Incur cost 1,000 Copyright 2021 Deloitte Development LLC. All rights reserved. Periodic Allocation Receivers 1/3 Production (Cost Center) 1/3 Sales (Cost Center) Receive cost 1000 1/3 Purchasing (Cost Center) Receive cost 1000 Receive cost 1000 4

Marketplace example – complex cost allocation structure Cost allocations can become highly complex quickly due to the multi-entity and global nature of many organizations. These situations can sometimes require large data models across multiple financial systems. 1 2 3 4 Copyright 2021 Deloitte Development LLC. All rights reserved. 5

Why do organizations struggle with cost allocations? The inability to understand profitability at a granular level is a common issue that organizations face when designing and utilizing cost allocations due to the elements outlined below. Data challenges Costing methods Costing methods inconsistently applied Poor data quality Allocations not representative Varying levels of data granularity Costing methods driving the wrong behaviors Portfolio visibility Multiple systems capture and structure cost data differently Product and customer mix not understood Suboptimal pricing due to lack of cost information Large data volumes making it difficult to process allocation models quickly Analytics Organizational dynamics Historical vs. predictive Skepticism of analytics effectiveness Ad-hoc and siloed Data perfection syndrome Misalignment on when a model is “good enough” to be used Leadership alignment Limited analytic capabilities Lack of confidence in the data Different sets of books Copyright 2021 Deloitte Development LLC. All rights reserved. 6

Generating enterprise value through cost allocations Leading companies are leveraging financial and operational data to build allocation rules to improve transparency into meaningful profitability analysis resulting in margin improvement opportunities Extract Source Data Financial and operational data exists in multiple disparate systems Sales Discounts / Promotional Income Order Fulfillment Warehouse Management Third Party Logistics Cost Breakdown Routing/ Logistics Cancelations/ Returns Claims and Deductions Geospatial Physical Product Attributes Develop Common Data Model Data sources will be linked at the product level with defined attributes Generate Analytical Lenses Into The Business Customer Profitability Understand current customer efficiencies / improvement opportunities Differentiate service policies Run more cost effective promotions Engage in joint process improvement with customers Product Profitability Product/Service Costing Cost to Serve Shared Cost Allocations Costs are mapped to value chain centers and methodologies defined to attribute costs to cost objects (e.g., products/customers) Support product portfolio decisions on brand and SKU retirement / revitalization Enable improved mix of product sold Analyze how product variation and complexity drive trends in cost of quality Identify features / content that drive profitability Shared Service Costs Understand areas of waste and redundancy Identify functional and cross-functional efficiency opportunities Determine cost of specialized customer support Copyright 2021 Deloitte Development LLC. All rights reserved. 7

Introduction to SAP & Profitability and Performance Management (PaPM) PaPM is a business-user focused, solution, developed by msg global, that leverages the processing power of S4/HANA. SAP PaPM benefits Profitability & allocation: Complex calculation procedures in a single system, results distribution back to source Plan and forecasting: Integrates existing tools while leveraging PaPM modeling capabilities Integrated with ERP and related systems architecture Traceability, auditability Cash flow modeling: Aggregates economic and market data into analysis Simulation: Change assumptions, scenarios, and rules ‘on-the-fly’ Full traceability: Drill-down to granular, line-item level source data from any model or allocation including simulation Rapid calculation Process Compatibility: Integrates any database with no permanent storage of data inside of the application, avoiding data duplication and reconciliation Functional: Developed for business-users, extensive capability without IT involvement Copyright 2021 Deloitte Development LLC. All rights reserved. 8

SAP PaPM differentiators Freely definable process chain enables complex calculation and allocation models without coding and reduces volume of calculations and ACDOC-A tables Easy access to external and distributed source systems at runtime Efficient in executing allocation logic directly through SQL script in in-memory speed also for very high data volumes on detailed or even transactional level Any existing data model can be used avoiding field mappings No permanent storage of input and results data inside of the application necessary, avoiding data duplication and reconciliation Copyright 2021 Deloitte Development LLC. All rights reserved. Central Finance (S/4HANA) SAP PaPM (run on S/4 or BW/4) Allocation Complexity Tedious rules to book debits/credits with G/L accounting detail. Purpose-built allocation engine to model any use case. Ease of Use / Maintaining Rates Very difficult to maintain due to underlying data model complexity. Can source allocation rates from any source e.g Data Hub table, Anaplan, etc. Integrated Budget & Actuals Allocation Limited to actuals only unless write back Budget to ACDOCP (SAP S/4HANA planning table) Built to integrate multiple source systems for Budget and Actuals into single model. Automate NTS% Allocations Would require RICEF (reports, interfaces, conversions, enhancements, forms) to populate Statistical Key Figures. Built to integrate multiple source systems for Budget and Actuals into single model. Traceability and Reporting Limited traceback to most recent sender; out of box reporting is insufficient. Full traceback visibility across multi-step allocations in single user-friendly view. Key User Considerations Complete process Partial process 9

Key Considerations Overview of Scenario Deployment Scenarios Marketplace examples 1 2 ECC Migration to CFIN and/or SAP S/4 3 PaPM for Existing SAP S/4 Transformation 4 PaPM for legacy ERP (non-SAP) PaPM to complement planning integration Client is moving from ECC to S/4 in an effort to migrate existing finance processes Standard PaPM use cases apply Client is looking to deploy PaPM as part of an existing central finance and planning integration Standard PaPM use cases apply Client has challenge around profitability and allocations, modeling, and traceability but is not an SAP user Standard PaPM use cases apply Client uses S/4 but would like to bridge gap between S/4 and SAC to further integrate planning and traceability Planning focused PaPM use cases Consider: How will allocations or accounting rules be handled? Technology architecture Scalability Access/Integration Performance Data Retention Consider: How will allocations or accounting rules be handled? Technology architecture Scalability Access/Integration Performance Data Retention Consider: PaPM can integrate with any data source Architecture needs: HANA database NetWeaver Consider: Full traceability, drill-down details, what if analysis, and integration of existing tools (e.g., BPC, SAC) Migration of legacy profitability and performance management tool Copyright 2021 Deloitte Development LLC. All rights reserved. 10

SAP PaPM reference architecture Designed to enable businesses to model data, execute rules and calculations, and analyze financial and operational results with minimal IT involvement. Input data is distributed over different source systems Access layer AO Application layer Intended (chains of) calculations are rather complex Business data aggregator Data layer Integrates with any internal or external data source without requiring data replication Copyright 2021 Deloitte Development LLC. All rights reserved. SAC PaPM Transactional platform (S/4) Calculation engine High volume processing and simulation Run out of the box or custom rules & calculations on large volumes of data with high performance Very high data volumes driven by calculation on detailed or even transactional level BI Planning data as a driver BPC Data platform BW/HANA Simulation application Ad-hoc simulations adjusting input data & rules. AI/ML enabled. Simulates what-if scenarios and provides real-time data insights in a user-friendly environment 11

SAP PaPM – use case overview Transfer pricing Tax compliant revenue and cost transfer for intermediates, licenses, services, and products between legal entities, (OECD Transfer Pricing Guidelines) Business and financial modeling High-speed processing and analysis of big data volumes providing traceability and what-if simulation capabilities Allocation simulations Run simulations based on S/4HANA and ERP allocation rules and data Copyright 2021 Deloitte Development LLC. All rights reserved. Carbon footprint management Lifecycle assessment for the environmental impact of product and services Profitability and cost management Optimize profitability and cost on product & service, channel, and customer level Funds and liquidity transfer pricing Rate modeling, cashflow dynamics, funds and liquidity transfer pricing Agile plan and forecast modeling Run sophisticated driver-based, predictive and stochastic models based on BPC and SAC Product and price forecast Forecast and optimization of product profitability IT cost management IT cost transparency, financial management and automated bill of IT 12