To get a 360-degree look at the customer, your applications should not only draw attention to the call center or front-office view, but also should analyze the back-end view to see the overall profitability. I'm going to cover what customer profitability is and show how detailed analysis can help your organization get an edge so that your sales force is proactively working on customer needs rather than struggling to react.

I'll show you how to combine customer data from mySAP CRM with R/3's Profitability Analysis (CO-PA) module. You then can analyze the customer profitability in Business Information Warehouse (BW) and use the results to focus limited resources on the most profitable customers. Although my comments in this article refer to R/3, this method also works with mySAP ERP. (For more detail about the analytical capabilities of CO-PA and mySAP CRM, see the sidebar, "Analytic Functionality in CO-PA and mySAP CRM.")

Figure 1 shows the overview of integration among mySAP CRM, BW, and CO-PA. In brief, you follow this process:

• Capture back-end data such as incoming sales orders and billings in the CO-PA module. (You can set up your R/3 system so that it automatically transfers some of that detail, such as incoming sales orders, from the CRM module.) You then can use CO-PA's derivation and valuation functionalities to obtain more detail.
  
  
• Transfer the costs of customer service front-office activities from mySAP CRM to the BW customer database. Move those costs to CO-PA as cost drivers. Use the cost assessment feature in CO-PA to allocate these customer service costs to customer segments.
  
  
• Move the profitability information from CO-PA to BW for OLAP analysis. Use BW analytics, including drill-down and slice-and-dice, for reporting customer profitability.

Figure 1

Integration among mySAP CRM, CO-PA, and BW

Now I'll take you through the process in more detail.

Step 1. Capture Back-End Data in CO-PA

The goal of the CO-PA module is to track and analyze profitability, especially for business segments. Usual examples of business segments are customers, product lines, organizational units, regions, or a combination. Back-end scenarios (for example, customer orders, deliveries, returns, and sales overheads) have a significant influence on determining customer profitability.

Billings and Sales Orders

CO-PA is able to calculate revenues, costs, and other profit information taken from both billing documents and sales orders. The CO-PA ledger is updated with relevant profitability information upon invoicing. At the time of invoicing, the CO-PA module calculates the profitability and stores the details, including revenues, discounts, and costs. At the time of billing, the revenues, discounts, and cost of goods sold (COGS) are transferred to the CO-PA ledger, shown in Figure 2.

Figure 2

Invoice/billing documents are posted to CO-PA

In addition to billing documents, you can also configure your system to transfer sales orders to CO-PA, as shown in Figure 3. Sales and Distribution (SD) invoice information always flows to CO-PA. However, the type of sales order information flowing to CO-PA is optional, as you can see in Figure 3. Using the configuration option available in the CO-PA IMG, you can activate the transfer of incoming sales orders from mySAP CRM to CO-PA. The SD module replicates the CRM orders, which in turn sends the profitability information to CO-PA. The replication assures that you don't have to re-enter the order details.

Figure 3

Incoming sales orders transferred to CO-PA

Once the sales orders are transferred to R/3, you can process them in the usual manner for subsequent actions such as deliveries and invoices. Similar to the billing process, CO-PA captures the profitability information for incoming sales orders. Transferring these sales orders from mySAP CRM to CO-PA can provide you with an early estimate of the anticipated revenues before the sales order has been completed so that you can perform a customer profitability check.

When the R/3 system transfers the profitability-related information to CO-PA, it also transfers the characteristics (for example, customer, product, and sales order numbers) from the source documents such as orders or invoices. The system can also transfer additional information from the customer master (customer group, sales office, sales group) and product master (product hierarchy, material group) based on the source transaction.

Derivation and Valuation

Two CO-PA features can give you a more holistic view of the customer. In addition to providing information from source transactions, CO-PA also lets you determine additional profitability details using derivation and valuation.

• Derivation is the process of deriving additional characteristic values based on source values, such as strategic business units (SBUs) based on customer groups. Say you want to report profitability along the lines of SBUs, but SBUs are not part of standard objects. You can define some business rules to derive SBUs based on other standard characteristics. If your organization determines SBUs based on customer groups, for example, you classify the customer groups into different SBUs. CO-PA allows you to define such derivation rules. See the sample in Figure 4. Per these rules, CO-PA classifies customer groups 10 to 40 under the Games business unit, 50 to 70 under Electronics, and 80 to 99 as Software. Using these derived values, you can do profitability analysis based on SBUs.
  
  
• Valuation provides additional amount information for revenues or costs. Valuation is an estimate of amounts and values before an actual transaction has occurred. You want to include the estimates to determine the true profitability (for example, the estimate of the sales commission payable to your sales employees or an estimate of freight costs). True freight costs are not known at the time of invoicing, but are only known at month-end when the invoices are received from the freight vendors. Using valuation, you can estimate the sales commission payable to the sales force and transfer this additional information to CO-PA to get a truer picture of customer profitability.

Figure 4

Derive SBUs based on customer groups

Step 2. Transfer Customer Service Costs

You need to transfer the costs of customer service front-office activities from mySAP CRM to the BW customer database, then to CO-PA as cost drivers. In addition to the usual costs associated with selling, you should consider other sales-related overhead costs such as costs related to marketing campaigns. The activity management application within the mySAP CRM system supports various sales and service processes. Activity management provides details about all business activities and tasks carried out to support and serve the customer.

Say you are carrying out a marketing campaign to solicit business from potential or existing customers. mySAP CRM offers a wide range of tools to support business activities associated with sales and service processes, such as logging phone calls, maintaining task lists, customer visits, and order recording. Although these activities are a part of business life, they cost your organization money. A true picture of customer profitability should include the costs associated with such customer activities. For example, two customers, A and B, each placed orders worth $100,000 for the same products. Customer B placed the order with just one phone call, whereas customer A took a lot of effort on the part of your sales staff. In this case, customer B was really more profitable.

Note that although the CO-PA module offers a feature to allocate costs, the actual costs are not incurred in R/3. Such sales activities are actually available in the mySAP CRM system. If these activities are transferred from the mySAP CRM system to R/3 as cost drivers, CO-PA can consider these costs to determine the customer profitability more accurately.

To get them into CO-PA, you use BW to extract the activities from the mySAP CRM system and then move them as cost drivers to R/3. CO-PA offers a feature called cost assessment to allocate such costs to the customer profitability segments so that you get a better view of the customer profitability. Using cost assessment in CO-PA, you can allocate marketing costs to customers based on, for example, the number of phone calls made to customers.

Step 3. Move Profitability Information to BW

Now that CO-PA has a 360-degree view of customer profitability, you transfer the CO-PA data to BW using the extraction, transformation, and loading (ETL) process. BW offers a uniform reporting interface with various OLAP reporting functions for slice-and-dice, sorts, exceptions reporting, and more. Figure 5 shows the integration of data flow.

Figure 5

Integrated customer profitability

Analytic Functionality in CO-PA and mySAP CRM

CO-PA allows you to perform contribution margin analysis, which is revenue minus product costs and other sales costs. A detailed contribution margin analysis includes product costs, marketing costs, and other overheads. Figure 1 shows the components of contribution margin. Component Value Gross sales 500 Customer discounts 20 Other discounts 10 Net sales 480 Product costs 250 Contribution margin I 220 Direct sales costs 20 Campaign costs 10 Other customer costs 10 Contribution margin II 180 Figure 1 Components of contribution margin As the name suggests, the primary objective of CO-PA is to do profitability analysis. CO-PA lets you understand where your profits came from. It provides information you need to make strategic business decisions. It lets you answer questions such as: Who are my most profitable customers? What are my most profitable product lines? What are the profit margins of my business segments? CO-PA combines value fields, which give numeric values for revenues or costs, with characteristics, which show the causes of profit values (for example, customer, product line, and sales area). The combination of characteristics and values is referred to as a profitability segment. For example, a profitability segment answers the question, "What is the technical definition of my sales channel?" It could be a combination of "region north," "customer group government customers," and "product group electronics." Figure 2 shows typical characteristics, value fields, and profitability segments. Figure 1 Components of contribution margin The profitability data (characteristics and value fields) is represented as multi-dimensional InfoCubes (Figure 3). The data shows the source transaction sales order or the invoice posted in the system. Using derivation, additional information such as SBU, customer region, or sub-region is determined for more analysis. The profit margin information (revenues, discounts, and costs) is transferred from the source transaction. Using valuation, the estimated sales commission is determined. Additionally, with cost assessment, sales overheads are determined. The profitability information then is available in a multi-dimensional InfoCube for specific reporting for profitability segments. Figure 2 Profitability analysis — characteristics, value fields, and segments You can design the CO-PA structure depending on your own requirements. If your organization puts more emphasis on customer-related characteristics (for example, sales office, customer group, and sales group), you can include these characteristics in your CO-PA design. Another company might want to add product-related characteristics for its analysis. The same applies to the number of value fields — you can choose the amount columns you want to analyze (for example, product revenues, service revenues, product discounts, customer discounts). This design flexibility makes it possible for you to analyze customer profitability based on your organization's unique needs. Analytical CRM allows you to analyze information and OLAP functionalities. Customer profitability is part of customer analytics. Typical analytical CRM tasks include: Understand how profitable the business is Monitor, understand, and influence customer behavior Focus limited resources on the most valuable customers Analyze marketing initiatives and influence future marketing campaigns Plan for future customer discount and promotion programs Understand and analyze plan vs. actual results Gain insights into all important perspectives of service activities performed, the drivers behind them, and the financial performance of the service organization Understand the performance of each interaction channel to optimize resources Various analytical applications are available within the standard mySAP CRM: Marketing (marketing analytics) Sales (sales analytics) Services (service analytics) Customers (customer analytics) Products (product analytics) Interaction channels (channel analytics) Marketplaces and Internet (marketplace and Web analytics)

Mitresh Kundalia

Mitresh Kundalia heads the SAP practice at Quality Systems & Software (www.QSandS.com), a consulting firm specializing in SAP S/4HANA, SAP General Ledger, and complex System Landscape Optimization (SLO)-type reorganizations. Mitresh is widely acknowledged as a leading SAP expert, with multiple publications and an SAP-PRESS book to his credit. He has published more than 50 peer-reviewed articles and white papers, and he has given presentations at various SAP conferences and events. Mitresh is the chief solutions architect of General Ledger Migration Optimizer (GLMO), a leading product to accelerate and jump-start the SAP S/4HANA and SAP General Ledger initiatives; SAP Data Reorganization Optimizer (SDRO), an SLO-type product for managing complex system landscape reorganizations; and Group Currency Activation and Conversion (GCAC), a product suite to manage introduction of parallel currencies and conversion of data in a live SAP system.

You may contact the author at Mitresh@QSandS.com.

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