Photo of Andreas Hartmann, SAP.
SAP was awarded the ‘Best in Class Benchmarking’ accolade in 2012 for overall working capital management. This winning project, led by the company’s global treasury, was set up to improve the way the company used its working capital. The scope of the project was not limited to improving financial data, but was to include other areas, such as remuneration schemes. One of the most important aspects of the project was to increase transparency over the company’s processes. This was done by measuring changes using scalable Key Performance Indicators (KPIs).
Andreas Hartmann
Global Treasury – Head of Front Office
As market leader in enterprise application software, SAP helps companies of all sizes and industries run better. The company‘s applications and services enable customers to operate profitably, adapt continuously and grow sustainably. Nearly two-thirds of the world’s transaction revenue touches a SAP system. The company‘s customers include more than three-quarters of the Global Fortune 500.
To ensure that the company’s most important KPIs were covered, it was decided that the company would develop the following seven KPIs, each of which covered the individual regions in which the company works and the SAP group as a whole:
-
Working Capital Intensity:
A KPI expressed in percentage terms with the goal to measure the capital needed to finance the operational business.
-
Days Sales Outstanding (DSO):
To reflect its business model properly, the company decided to use a rolling 12 months DSO as well a three month DSO.
-
Days Purchases Outstanding (DPO):
In DSO and DPO, the company distinguishes between the overall ‘number of days’ and the best possible DSO/DPO which is oriented on the pre-agreed payment terms, so it can calculate the potential improvement for DSO/DPO.
-
Revenue recognition due to accounts receivables overdue:
This is a euro-denominated KPI showing the amount of revenue which SAP was not able to recognise due to significant overdue amounts from customers that new business was entered into with.
-
Billing accuracy:
A KPI highlighting process accuracy of billing processes. It is shown in per cent as well as in euros.
-
Customer financing:
A KPI showing the amount of revenue being financed via the SAP financing programme together with external financing partners. As a third-party financing partner remits the funds rather quickly, such third-party financing has a positive impact on DSO reduction. SAP ensures the necessary transparency and enables related senior management decisions via an Xcelsius driven dashboard.
-
A ‘Probability of Default’:
KPI indicating a potential default of SAP’s customers between invoicing and effective payment of outstanding invoices.
As a result of implementing these KPIs, the company was able to improve its working capital efficiency. For example, the reduction of its days sales outstanding (DSO), which is the most important part of working capital at SAP, by just one day, improved the company’s cash flow by a substantial seven figure amount.
“It was not easy to define the KPIs and benchmarks. Even if the KPIs you want are widely used and have a clear definition, that does not necessarily make them an ideal fit for your operation. For example, where there is strong seasonality in a business cycle, averaging of DSO may be necessary to provide sustainable data to senior management. As a consequence we had to structure the KPIs in a way that they provide a sound basis to measure and support the related business,” explains Andreas Hartmann, SAP’s Head of Front Office within Global Treasury.
