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udo_werner
Product and Topic Expert
Product and Topic Expert
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In this article I describe alternative options of an SAP application landscape that can provide cover the requirement for profitability analysis and give the list of questions to answer to make the right choice for a customer, taking his situation and preferences into account

Business Capability Requirements

Profitability analysis or margin analysis is a specialized reporting allowing the comparison of costs and revenues of products and services of a company. It uses costs from purchase or production of the products and brings it together from sales orders and sales invoices or billing documents. Both parts can be broken down in cost and revenue elements and grouped together in different ways. An important outcome is the contribution margin reporting, with different categories of margins (cf. https://en.wikipedia.org/wiki/Contribution_margin )

Results can be aggregated on different dimensions or presented in rows and columns according to variable dimensions of the products and services. Typical reporting dimensions would be product group, brand, product line, country of sales, distribution channel, customer, customer, group, sales organization.

The solutions contain also possibilities to distribute cost and revenues between different objects according to definable rules using drivers.

Possible Solution Options

SAP allows different ways to perform profitability analysis

  • Profitability Analysis (CO-PA) in SAP ERP and SAP S/4HANA. We will consider here only the analytical method, not the accounting-based version
  • Margin Analysis in SAP S/4HANA
  • A combination of CO-PA and Margin Analysis
  • SAP Profitability and Performance Management (PaPM)
  • BW reporting

Characterization of the Solution Options

Costing-Based Profitability Analysis (CO-PA)

Costing-based profitability analysis was the preferred method to analyze margins in SAP through the different versions of SAP R/3 and SAP ERP. You find documentation here. It is still part of SAP S/4HANA OP and SAP S/4HANA private cloud edition, and no deadline is given when it would be removed from the scope. SAP commits to maintain and support the solution.

It is not offered in SAP S/4HANA Cloud public edition.

Margin Analysis

Margin Analysis is the new solution for the business requirement of profitability reporting that was made available first with SAP S/4HANA. In some respect it is an improved version of the former account-based profitability analysis that goes far beyond that. You find documentation here.

The main intention of the change from cost-based PA to margin analysis was to support the ideal of a single source of truth for both, accounting and cost reporting. While cost-based PA has its own data storage and update mechanisms, Margin analysis uses data exclusively from the universal journal and will therefore always be reconciled with accounting. By that is blurs also the limits between internal cost-based reporting and external reporting: legal reports like a profit- and loss-statement can now be us start of a rich analysis along typical profitability dimensions like customer groups or country of sales.

Margin Analysis is the strategic solution for the business requirement in SAP S/4HANA in all versions

Combination of CO-PA and Margin Analysis

CO-PA and Margin Analysis are both contained in several SAP S/4HANA versions. They have different data storage and update mechanisms configurations and reporting interfaces. For that reason, it is possible to use them side by side. This is mostly interesting for customers coming from an existing CO-PA implementation, going to SAP S/4HANA by system conversion. They can continue to use the existing solution and explore and extend Margin Analysis over time.

SAP Profitability and Performance Management (PaPM)

SAP Profitability and Performance Management (Pa

PM) is a powerful solution for extended analysis and simulation on HANA, that is not part of ECC or SAP S/4HANA but can be integrated very closely with it.You find documentation here.

SAP Profitability and Performance Management can be used on a separate instance but integrated with other SAP and non-SAP components. We recommend that you implement SAP Profitability and Performance Management as closely as possible to the relevant data. If other applications that contain relevant data are already installed on SAP HANA, we recommend that you use SAP Profitability and Performance Management on the same SAP HANA platform or even on the same instance to ensure optimal performance and the maximum reuse of existing data and metadata, such as hierarchies, master data, and so on.

By its nature, it can be used side by side with any of the former solutions, extending for more possibilities of dynamical allocations, simulations, what-if analysis and much more. The data collection mechanism of the formerly described solution provide a readily accessible data basis to be used in PaPM-

Data Warehouse

Some customers decided in the past to build their own profitability analysis based on BI cubes in which they bring cost and revenue contributions together. That approach will always be very limited in its capabilities in comparison to the former solutions, allowing only reporting with limited drill-down capabilities. The only scenario where this might make sense is when the source data like production costs and sales revenues come from different systems, particularly legacy systems.

Another flavor of BI usage that customer used in the past was extracting all data from CO-PA to BW and providing the reporting there. With the more powerful embedded reporting on Fiori in SAP S/4HANA, that possibility appears less attractive on S/4HANA.

 

Questions for the choice of the target solution

1. Do you want to use SAP’s strategic solution that will be improved and enhanced in future versions?

If the answer is yes that points to Margin Analysis, or when there are additional needs to PaPM

2. Are your targeting for a public cloud solution?

The only profitability analysis solution in SAP S/4HANA public cloud will be Margin Analysis

3. Do you prefer a close alignment between internal profitability reporting and external accounting?

Points to margin Analysis

4. Are you using Cost-based Profitability analysis to a major degree, and you get satisfactory results from it?

Investments in CO-PA can be maintained also in SAP S/4HANA, particularly if your transition foresees a system conversion and not a new implementation. You might consider in that case to start Margin analysis for some use cases and some reporting side by side and extend its usage over time.

5. Do you have the requirement to flexibly reallocate costs and revenues and perform simulations and what-if analysis on profitability data?

This requirement can best be fulfilled with PaPM. In most cases it will be an additional environment for profitability analysis and not replace the solution in SAP S/4HANA completely

A more complete list of requirements that can be better addressed with PaPM instead of  CO-PA or Margin Analysis:

  • Some dimensions relevant for calculation and analysis are not contained in the universal journal (typically always the case in service industries (Telecom, Retail, Utilities, Financial Services, etc.) because supply chain in often outside of SAP S/4HANA). Other example: CFIN.
  • Customer has millions of customers and/or products and number of transactions is very high (millions per month or even much more)
  • Calculation sequence is complex and rules are not tabular (like individual formulas in cells in an Excel spreadsheet, and like multiple different tabs in the same Excel spreadsheet)
  • Applying sophisticated cost allocation methodology also to forecasts ensuring method consistency
  • Allocations should take nonmonetary amounts into account such as environmental emissions and social aspects    
  • Realtime simulation for different scenarios (optimistic, realistic, pessimistic, with/without pandemic, with/without sanctions, etc.)
  • Error-prone Excel sheets need to be replaced with robust application for automating processes without losing flexibility  

Decision Tree

 Profitability Decision Tree.jpg

You find an interactive representation of the decision tree here.

Conclusion

You have received an overview about applications out of the SAP portfolio that can cover the requirement for profitability analysis and margin analysis. I have given you the key questions to answer for the choice of the right application in your target application landscape, after a transformation

Comments
MartinMysyk
Product and Topic Expert
Product and Topic Expert

We encounter so many different situations as Enterprise Architects and it is good to have a decision tree document or framework to aid in putting a solution together that fits with the strategy of an organization. Thanks for posting.

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Last update:
‎10-17-2023 2:04 PM
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