Managing a capital budget in SAP: should I use Investment Management (IM) or Project and Portfolio Management (PPM). Or maybe even both.
What’s the best use of an organisations capital? Are you sure? Is the dollar you plan to spend in one, three or fifteen years time the best way to spend that dollar? It might be the best option right now, but what happens if your business environment changes? How do I recognise the change and adjust my capital budget appropriately, both now and also when updating budgets for future years? The usual view of managing a capital budget is, certainly in transactional ERP systems, to ensure that when a dollar gets spent it is spent from an approved bucket of money, and the user notified where a budget is exceeded or is in danger of being exceeded. There is very little integration between why the budget is approved, and what it’s trying to achieve, and the day-to-day transactions against this budget. This can be remedied by integrating the SAP portfolio management solution with the SAP financial system. And maybe including some parts of Investment Management depending on how stringently you need to control the budget.
High level budget process
Coming out of your organisation’s strategy are the objectives that need to be achieved to ensure that your organisation remains competitive. What are the capital requirements needed to achieve these objectives? Capital needs to be allocated to projects that support these objectives. The proposed capital projects will be across a range of areas – building new staff facilities, new production lines to support growth or the introduction of new products. Sometimes organisations drive a top down approach to the allocation of budget to projects. A dollar amount is allocated to each division and local management has to allocate appropriate projects, some organisations build bottom-up budgets where ideas, requirements and initiatives (I’ll call these portfolio items) are collected and consolidated. The proposers of the portfolio items need to justify the capital expense and capital is then awarded based on the financial returns of the proposal, the amount of risk associated with the project and the availability of both internal and external resources to deliver the project. The number of portfolio items to be assessed in each budget round could number into the thousands. With a considerable amount of work done to record and capture this data – if an item is rejected you’d like to keep the information and have it available for the next budgeting round. SAP’s Investment Management (IM) functionality does not do this (bar the information kept on an appropriation request). IM only captures the approved $ value with just about no other information related the capital needed. There is no ability to prioritise items across the portfolio or to manage the items through an implementation methodology. Once approved the budget is relatively static and it’s fairly cumbersome to make changes to the approved budget – especially where you need to make changes in future years.
The approval process involves collating all the requests and the related documentation and submitting this to the capital approval board. If you organisation only approves a few large items then this step of the process is easy, but there are usually many items needing approval. Most organisations will have many items with differing values, from the $20000 plant modifications to $100m or more plant constructions. It’s usually a struggle to manage and track the requests, particularly the smaller ones, through the approval and acceptance process. A tool is needed that can manage and workflow these requests. The SAP PPM solution is able to do this better than investment management. PPM is also able to assess the budget based on non-financial measurements, such as technical and commercial risk, and make this information available with common corporate wide standards, during the approval process. There are some other portfolio management features that could improve the approval process, such as links to related documents and e-mails, multi-hierarchy classification of portfolio items, what-if analysis, multi-project reporting and standard business content for reporting.
An Expected Commercial Value against Assessed Risk bubble diagram in PPM5.0
Organisations usually discuss the monitoring process on two levels. As active transaction based budget availability control or through reporting. By availability control I mean the checking of a budget every time cost is incurred, and then warning the user if the budget is within say 80% of being spent. Indeed some organisations request that when 100% of the budget is spent no further spending is allowed – usually this just causes frustration. Static, project independent rules are also not sensitive to the project being worked on – 10% of a $10000 project is very different to 10% of a $1m project. Accurate, real-time reporting of budgeted against actual spend is often a better way to manage a budget across a project with different values, risks and expected outcomes. This is often the most pragmatic approach for all but a few customers. During the monitoring phase there is also functionality that makes PPM a better choice than IM. PPM allows for the ability to review groups of portfolio items. A review is a standard set of assessment criteria which can be applied to the group of portfolio items on a periodic basis to ensure that the items are rated consistently. Evaluation functionality allows for real time checking of planned vs. actual dates and changing the status of the item to alert the project manager to schedule or cost slippage. Metrics management functionality can be used to asses the impact of your capital spend on the performance of your organisation. Did the plant modification increase throughput, has the organisational change increased efficiency, was the expected commercial value achieved?
I started this blog by questioning whether you should use IM or PPM for a capital budget. I hope I’ve been able to highlight some of the criteria so that you can make a better decision. You should use IM when there is little need to keep any details of the budgeted items in SAP and when there is a need for real-time active funds availability. PPM delivers more functionality and should be used if you need insight into what has been budgeted, you need to capture financial and risk information against the items and you need to track and review these items continually .