Introducing profitability analysis in SAP S/4HANA with 1709 Version

Understanding the importance of profitability analysis, key differences between costing- and account-based CO-PA, and discuss the improvements in account-based CO-PA with SAP S/4HANA Finance. Evaluate your business requirements and plan your SAP S/4HANA Finance integration, including important configuration steps for account-based CO-PA.

When we talk about profitability analysis, you should keep in mind the different ways that profitability of a business is measured. There is an external view and internal view of profit for any business organization.

The external view of profit is mostly driven and influenced by a number of statutory, tax, and regulatory requirements, whereas the internal view is driven by the management requirements of how business units, products, customer segments, and so on are performing.

Traditional data models in enterprise resource planning (ERP) systems focused on data collection, aggregation, and reporting primarily to meet the external view of reporting profit. When it came to indirect costs (costs that can’t be identified with a particular product or customer), allocation methods only focused on the minimum requirements needed for external reporting purposes.

Profitability reporting for external purposes required companies to report on dimensions such as legal entity, parent company, locations, segments, and so on.

The data models that were built in accounting systems, including ERPs, were primarily designed to produce information at that level. In the initial stages of ERP, companies always struggled to get insights into the internal view of business performance. None of the ERP systems provided businesses with insights into how products, markets, channels, customers, and other business segments were contributing to the bottom line. Managements desperately needed those insights to make business decisions to increase profitability and maximize the shareholder value. Many questions such as how much gross margin is made on different products brands, customers, channels, and so on went unanswered, and decisions were made on hunches and guesses. With increased competition comes increased demand to produce an internal view of the profitability required to run a business successfully or even to stay competitive. Major ERP systems have since enhanced their functionality to give insights into contribution margins based on different business scenarios and internal dimensions of a business organization.

This required capturing information at a more detailed and granular level than a general ledger. Because charts of accounts were mainly designed for external reporting purposes, ERP systems defined different data models and tables with more granular views to capture information for profitability purposes.

As for SAP customers, CO-PA is the solution that provides the internal view of profitability. CO-PA is one of the stable and solid functionalities of SAP that many customers have implemented. With the integration capabilities of SAP ERP, the data flow to CO-PA heavily depends on other modules of SAP such as Sales and Distribution (SAP SD), Product Costing (CO- PC), Production Planning (PP), and so on. In a way, CO-PA is a parasite module.

The majority of the data is fed from other business events such as goods issue, billing, general ledger, credit memos, and so on; rarely are postings made to CO-PA directly. In addition to the actual data, CO-PA also allows planning for reporting plan versus actual. For indirect costs that can’t be directly associated to CO-PA dimensions such as customer, products, and so on, CO-PA provides an allocation functionality to give more than just gross margin analysis.

Companies that are challenged with finding the right tracing factors to properly allocate indirect costs use CO-PA to generate a gross margin view rather than a full profit and loss (P&L) view.

Profitability in the past: Account-based and Costing-based profitability analysis

There are two methods of CO-PA, account-based and costing-based. Account- based CO-PA is an extension of your general ledger and feeds off financial postings made there. Costing-based CO-PA, on the other hand, has its own data model to capture costs and revenues.

One of the rationalities in the past for implementing both methods of CO-PA is to be able to compare and reconcile the profitability information reported under both methods.

We see few SAP customers implementing both methods at go-live, but it’s common for companies to stop using one method and rely on the other for profitability reporting.

Although SAP officially hasn’t endorsed one method over the other, due to the many advantages costing-based CO-PA has over account-based CO-PA, a majority of companies use costing-based CO-PA. Even though it’s widely used, costing-based CO-PA has its own limitations, such as a different data model, duplication of data, timing differences, reconciliation issues, and so on.

Profitability in the S/4 HANA: Account-Based and Costing-Based Profitability Analysis

Due to these limitations, costing-based CO-PA may not fit into the future SAP product road map. As the foundation and digital core of all current and future SAP products, SAP S/4HANA is all about removing redundancies, providing a single version of truth, and directionally building a “thick journal” (the Universal Journal) that will be the one-stop shop for all statutory, tax, regulatory, or management information.

So, it’s unlikely that SAP will invest much in costing-based CO-PA in terms of future enhancements.

The majority of greenfield implementations on SAP S/4HANA Finance are likely to be account-based. Accountbased CO-PA under SAP S/4HANA Finance does have a few limitations as we’ll discuss later, but those limitations will be addressed by future releases of SAP S/4HANA Finance.

Profitability in the S/4 HANA: Account-Based and Costing-Based Profitability Analysis

SAP S/4HANA brings pervasive change for the better in multiple areas in which businesses operate, including speed, mobility, user experience, and interconnectivity. When SAP HANA was introduced years ago, one of the earliest innovations and use cases was in CO-PA through CO-PA accelerators. It showed how performance in CO-PA planning, allocation, and reporting processes would improve when run on SAP HANA. Before SAP HANA was introduced, SAP Business Warehouse (SAP BW) was the most preferred analytical solution for CO-PA reporting.

Specific to CO-PA applications, SAP S/4HANA caused a paradigm shift on how customers would use and benefit from CO-PA in future. The trans- formational changes include the usage of the thick ledger (the Universal Journal), elimination of reconciliations, improved end-user experience, real-time close, and so on.

Profitability in the S/4 HANA: Account-Based and Costing-Based Profitability Analysis

Thin and thick ledgers are concepts that define how much detail you want to keep in your ledgers. In the thin ledger, you keep minimal details mostly to meet statutory reporting needs, whereas in the thick ledger you keep more details needed for a broader group of stakeholders, such as shared services, regulatory, financial analysis, profitability, operational and internal reporting, and so on.

With SAP S/4HANA’s in-memory capabilities and extensibility, the thin ledger concept is losing its sheen, and the thick ledger is gaining ground. Performance constraints and rigid data models are things of the past.SAP S/4HANA Finance is designed with the core principle of thick ledger— specifically, the Universal Journal. Any future innovations, especially in finance, will follow that principle. Whereas the old thinking is you might need a different data model for each type of reporting need, the new thinking is that you should target a singular data model, that is, a thick ledger that will serve the reporting needs of all the consumers. Each consumer group will pick whichever view they want from the thick ledger

This is the core tenet that influenced and introduced the Universal Journal and the underlying table ACDOCA in SAP S/4HANA. With emphasis on the Universal Journal as the core for SAP S/4HANA Finance, costing- based CO-PA with its separate data model and tables might not fit into the SAP product road map. In SAP S/4HANA, the single version of truth will emanate from the Universal Journal. The Universal Journal will be the foundation for statutory, tax, regulatory, and management reporting of which profitability is a key reporting view.

Future of Costing-Based Profitability Analysis

Costing-based CO-PA compromises the principle of the single version of truth in finance by creating two versions of profitability that lead to the same old reconciliation issues experienced with SAP ERP. If you’re using costing-based CO-PA and are migrating to SAP S/4HANA, you can continue to use it but you should activate account-based CO-PA as well. It’s not possible to migrate the history from costing-based CO-PA to account- based COPA, so you may want to retain costing-based CO-PA for a certain period. After your business is comfortable with account-based CO- PA, and you have enough history built up, you may decide to deactivate costing-based COPA.

Extension of Characteristics

The Universal Journal has extensibility features that come with SAP S/4HANA. You can easily extend the CO-PA characteristics to enhance your information needs. After you extend the CO-PA characteristics, they become part of the Universal Journal. Extensibility was available even before SAP S/4HANA through extension of coding block in the general ledger.

The setup for extensibility in the general ledger and CO-PA are separate activities. Before extending a coding block, note that leading practices about extensibility of ledgers under the Universal Journal aren’t yet fully established. There are many possibilities but no established guiding principles on extensibility.

With extensibility as standard functionality in SAP S/4HANA, it’s hard to see why anyone would want to implement costing-based CO-PA because all the dimensions required to report profitability are and can be part of table ACDOCA, which the account-based method uses.

Real-Time Insights

With SAP S/4HANA as the single platform for both online analytical processing (OLAP) and online transaction processing (OLTP), profitability reporting is now done in real-time. If a large sale is made for multiple cranes in China, the CEO, CFO, and other executives across the globe can see how that event impacted the profitability for that region, brand, and branch by running the SAP Fiori reports such as margin analysis. This is a big leap from the current capabilities of CO-PA reporting where you have to wait for month-end activities to complete, perform reconciliations, and extract data to SAP BW before seeing the profitability information.

CO-PA under SAP S/4HANA also empowers the sales force with real-time insights on gross margin analysis so that they can analyze and respond to customer demands instantly. This was always an issue with CO-PA before SAP S/4HANA as the margin and contribution weren’t readily available for sales and marketing people. The primary reason is that CO-PA was never real-time, and no one could trust the CO-PA numbers due to the reconciliation issues with the general ledger. In a way, CO-PA has become more of an after-the-fact analysis of profitability. Sales representatives who were on the road trying to make deals and win business couldn’t open their iPads or mobile devices and get answers to questions like the following:

• How much of a discount can I give to my customer, and how does that impact the gross margin?
• If I change the product mix, how does that impact profitability?
• Which of the two competing offers should I accept?
• Which products should I push to maximize profitability?
• Does it make sense to pursue a lead?

Almost everyone worked on hunches and guesses to do business and close deals. Alternatively, they often sent information requests to IT or sales support to get the insights they needed and thereby lost invaluable time in the sale process. In the tough competition of today, stakeholders in business need real-time and easy access to profitability of their prod- ucts, customers, and channels; otherwise, they are bound to lose to the competitors.

In this age of mobile device proliferation, your competitor is just a click away. Unless you’re empowered with real-time insights on the cost break- down of your products, discount plans, and pricing options, you stand no chance to win.

The user base for CO-PA used to be middle or top management looking at past business events and performance after month-end was complete. Sales and marketing people at the forefront dealing with customers never trusted or adopted the CO-PA application to help them close deals. They didn’t have the right tools and devices to give them insights to proactively address customer demands. With SAP S/4HANA, any time, any device, anywhere can access information that will make CO-PA very valuable for sales and marketing professionals to maximize profitability. You can also do a number of forecasting models using CO-PA data for better business decisions. It may take some time to get organizations to realize the full potential of CO-PA, but those who are early to adopt to new technologies such as SAP S/4HANA and gain profitability insights beforehand are at a distinct competitive advantage over others.
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