DELIVERING OPERATIONALEXCELLENCE WITH INNOVATIONEnterprise Services Architecture for Enterprise Resource Planning

SAP White PapermySAP ERP

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Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Enterprise Resource Planning: Strategies and Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Why Consolidation Is Difficult . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Why Innovation Is Difficult. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Why Outsourcing Is Difficult . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Solution to Becoming an Adaptive Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Embracing Innovation and Achieving Operational Excellence . . . . . . . . . . . . . . . . . . . . . . . 10Business and IT Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10– Example: Consolidating HCM as Shared Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Business-Process Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11– Example: Extending the Quotation Process to More Suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . 11– Example: Reengineering the Employee On-Boarding Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12– Example: Reengineering the Procure-to-Pay Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12– Example: Integrating Desktop Productivity Tools with ERP Applications . . . . . . . . . . . . . . . . . 13Business-Process Outsourcing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13– Example: Outsourcing Logistics Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Unlocking the Potential of ESA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

mySAP ERP and ESA: Aligning IT and Business to Achieve Operational Excellence . . . 17

What’s Next?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

For More Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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CONTENTS

Today, islands of automation, growing IT complexity,governance pressures, and budget reductions are IT realitiesthat hamper the ability of small and large organizations toembrace new business practices and technological innovation.As organizations look for better ways to achieve competitivedifferentiation, market responsiveness, and operationalexcellence, they often find their existing IT landscapes toocomplex, inflexible, and costly to adapt to evolving businessconditions. Even if organizations can afford the resources, time, and effort it takes to change and enable new practices, all those might prove too extensive to justify the value of theinvestment. IT – often regarded as a monolithic, rigid, slow-moving, or foreign entity by many businesspeople – must bealigned with business needs and evolve with changing marketdemands to enable future innovation, agility, and excellence.

The growing importance of IT architectures has led many ITexecutives to rethink traditional approaches and seek better,smarter, and more efficient ways to serve their organization’sneeds. The adoption of services-oriented architecture (SOA) iscentral to becoming more responsive and agile. An SOA notonly helps organizations address short-term needs – such as lowering IT costs, improving quality of service, andenhancing existing IT systems – but also, and more importantly,provides a flexible, adaptive, and open IT foundation that canaccommodate changing business practices, market dynamics,and competitive challenges.

This white paper is intended for IT executives and line-of-business management. It introduces business strategies, trends,and issues related to enterprise resource planning (ERP),financial management, operations management, and humancapital management (HCM) that drive the consideration ofenterprise services architecture (ESA). It also examines theimportance of such architecture and the role it plays in guidingorganizations to create value, improve efficiency, and respondto evolving business needs in ERP – on any scale and for anyindustry. The document then illustrates and compares anumber of deployment examples with and without ESA andclarifies why businesses are adopting an enterprise servicesapproach to compete effectively in a dynamic marketplace.

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EXECUTIVE SUMMARY

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In the past, organizations deployed ERP software to gain internalefficiency in back-office operations, such as manufacturing,accounting, HCM, financial management, and purchasing.Such technological investments helped management reducecosts. But today’s businesses can no longer rely on automatingback-office processes to achieve top-line growth and bottom-line improvements.

This situation is well described in Living on the Fault Line byGeoffrey Moore. In the book, Moore frames the challenges of achieving continuous business innovation around anorganization’s “core,” the business processes that differentiatebusinesses in the eyes of their customers, and its “context,”which is everything else (see Figure 1). The purpose of anenterprise’s core is to drive business innovation and competitivedifferentiation to stimulate growth. The context’s primarygoal, according to Moore, is to operate as efficiently andproductively as possible. The catch is that core remains coreonly as long as it differentiates the enterprise from thecompetition. Once it has been copied, it becomes context and is no longer an innovation. At that point, the organizationmust refocus on improving the efficiency and productivity ofthe context.

Businesses might want to leverage their ERP software forcompetitive differentiation by finding new ways to achievegreater efficiency in previously untried or unsuccessful areas.They might also want to consider outsourcing standardprocesses to free up resources for strategic endeavors that leadto differentiation.

Examples of business practices that can enhance differentiationor improve productivity for an organization include thefollowing:

• Implementing mass customization with geographicallydispersed contract manufacturers and suppliers to reducecycle times, rework, and inventory costs in the automotive orhigh-tech industry

• Extending an existing quotation management process toexternal suppliers to encourage more efficiency andresponsiveness within the contract manufacturing process

• Improving new hire, employee transfer, termination, andother workforce management events to automate theexchange of information with third parties in accordancewith local and global policies

• Centralizing common operations as a shared service toenforce global policies and leverage economies of scale

• Outsourcing payroll and human capital management tothird-party agencies

ENTERPRISE RESOURCE PLANNING: STRATEGIES AND TRENDS

Figure 1: Business-Process Innovation – Core and Context

Common Experiences When Changing

Business Practices

• Once the competition copies a differentiating activity

from the core, efficiency and productivity become the

primary purpose of the core.

• Consolidating common business and IT functions

reduces costs and redundancy while it enforces

global policies.

• Outsourcing nonstrategic processes enables an enter-

prise to focus on its strategic or core competency.

Innovation

Invention

Standardization

Commoditization

CoreFocus on Differentiation

Courtesy of Geoffrey Moore’s Living on the Fault Line

ContextFocus on Productivity

Mission-CriticalActivities

EnablingActivities Invent

Scale

Inso

urc

e

Out-Ta

sk

Retire

Consolidate

Compose

Given the complexity and nature of IT in many enterprises,these operational strategies are difficult to implement.Traditionally, organizations develop custom applications fromscratch and use various platforms, but then find that they lackthe flexibility to accommodate change. Moving from core tocontext to consolidate common IT practices, for example, isdifficult and expensive. To make the move, enterprises mustanalyze their IT landscape to determine which assets to replace,upgrade, or make obsolete; acquire new skills; and support

integration with new applications. Similarly, developinginnovative processes from the context into the core is equallychallenging and expensive, because IT must determine the bestway to leverage existing investments. And business-processoutsourcing is difficult and expensive, because it requiresorganizations to manage the performance of the third-partyvendors on service-level agreements, but monitoring andenforcing such new policies would require new integrationswith third-party systems that reside beyond existing boundaries.

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THE ISSUES

Figure 2: Business-Process Innovation Hampered by IT

Innovation

Invention

Standardization

Commoditization

ContextPackaged Applications

CoreCustom Development on a Tech Platform

Consolidationis extremelydifficult:

• New platform

• New skills

• New integration

• Time

• . . .

Innovation

Invention

Standardization

Commoditization

ContextPackaged Applications

CoreCustom Development on a Tech Platform

Innovation

Invention

Standardization

Commoditization

ContextPackaged Applications

CoreCustom Development on a Tech Platform

Innovation can’t easilyleverage existinginvestments.

Outsourcing is challenging:

• New process extensions

• Data on different systems

• Governance

• . . .

Why Consolidation Is Difficult

In many enterprises, consolidating common business and ITfunctions is difficult and costly for several reasons. For instance,applications are often implemented independently to addressspecific needs at a given time. This approach creates islands ofautomation that comprise different technologies and propri-etary code that are too complex to integrate, that are too costlyto adapt to changing business requirements, and that make itdifficult to share critical business information. With evolvingbusiness conditions – such as mergers and acquisitions,company spin-offs, and reorganizations – fragmentedinformation, inconsistent user interfaces, additional pockets of automation, and redundant systems not easily used by other business units only complicate the IT landscape further.

Consider the example of an enterprise that has grown throughacquisitions and now consists of a few independently operatedHCM, financial, procurement, and IT groups, each with its ownsystem to support local needs. Any policy changes required atthe global level – such as IT security policies, privacy laws, orcontractual pricing – must be enforced separately at the locallevel.

The question? How can organizations in such a situation acteffectively to comply with global and local regulations? Theanswer? Not easily. Many organizations look for better ways tocentralize common functions as shared services, rid themselvesof redundancy, increase their operating efficiency, and enablereuse of their existing investments. Unfortunately, the growingcomplexity of the organization’s IT landscape often hampersthese laudable goals.

Why Innovation Is Difficult

To achieve innovation, organizations often attempt to buildupon existing IT investments. However, a number of issuesimpede their efforts. For instance, some organizations useenterprise application integration (EAI) tools to integrateindependent applications to support new or reengineeredbusiness processes. This approach relies upon proprietaryinterfaces to hardwire different applications. Although EAItools have been used successfully for such linkage, they requireemployees with specialized skills who understand the innerworkings of the systems on both sides to create tightly coupledintegration. In addition, skilled employees are also needed tomaintain the integration over the useful life of the applications.But the costs of up-front development and ongoing mainte-nance and efforts involved in integration can be avoided.

Consider a second example of the difficulty of processinnovation. In many organizations, the need to referencestructured (or online) data and unstructured (or offline) data is not only desirable to increase efficiency, but also mandatoryto satisfy regulatory requirements. This situation is especiallytrue in the public sector, where agencies rely on traditionalpaper forms to conduct business with smaller companies thatmight not have online access. Because traditional systems do notfully address the end-to-end process, the agencies create a wealthof offline data through administrative paperwork, e-mail, faxes,mail, and other methods of offline communication. The staffmust then spend non-value-added time sorting the offlineinformation and tying it back to, or reentering the data into,appropriate systems for compliance purposes. To innovate this process and ensure compliance with federal regulations,agencies must invest in IT staff to develop the customintegration necessary for data exchange and in a team ofcontract administrators to govern the end-to-end process.

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Why Outsourcing Is Difficult

Outsourcing is often difficult, because organizational bound-aries constrain an organization’s systems and applications,neither of which was designed to be interoperable with externalsystems. To accommodate outsourcing, organizations oftenbuild proprietary integration between internal and externalsystems, which increases the cost of ongoing maintenance andadds complexity to the IT environment. In addition, changes tothe internal or external systems cause a wave of updates todevelopment, testing, and documentation. For example, if anorganization wishes to outsource its payroll information, itmust extend its time and attendance processes in HCM to athird party. But doing so is difficult, because success here reliesupon the ability of multiple systems with different functionalities,underlying logic, and rules to work well with each other.

Consider logistics outsourcing as another example. Extendingan organization’s inventory management system to a third-party warehouse inventory system requires proprietary integra-tion and specialized skills unless the systems are built uponopen standards and communication protocols. Subsequentchanges to the tightly coupled systems drive up the costs ofmaintenance.

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Why the Complexity of IT Systems Hinders

Excellence and Innovation

• Impedes the ability of organizations to respond to

business change

• Requires additional investments to unite scattered

or hidden information

• Increases the costs of building and maintaining

integration

• Requires custom integration by personnel with

scarce and expensive skills

• Forces employees to work with multiple systems

to accomplish tasks

The need to respond rapidly to business demands, support newstrategies, and improve the overall user experience is driving IT organizations to search for new ways to improve IT at a lowercost. IT organizations can overcome these challenges by adoptingSOA. In general terms, SOA is a technical framework for buildingsoftware applications that use services available from a networklike the Web. Applications in SOA are designed to use Webservices as the standard means to communicate well-definedinformation with an array of other applications.

Enterprise services architecture, as defined by SAP, is a business-driven approach to SOA that expands the concept of Webservices into an architecture that supports enterprise-wide,service-enabled business architecture. However, SOA and ESAare not one and the same. The difference between an SOA andan ESA comes from service enabling the most common businessprocesses, such as procure to pay, order to cash, and hire toretire. Although SOA can be seen as a more technical concept,ESA can be thought of as the blueprint that enables flexibility,openness, and agility, which are critical elements for success inan adaptive enterprise. Simply put: ESA is a blueprint for abusiness-oriented approach to SOA.

Furthermore, although Web services are suitable for promotingsyntax and protocol-level communications, they do not yetprovide a way to ensure semantic interoperability. For example,the way a customer is defined in a product from Siebel Systemsdiffers from the way it is defined in a solution from SAP.Organizations need a way to resolve the data and processdisparities between different Web services and to translatesyntax and communications into business constructs that canbe reused across different situations. The notion of enterpriseservices does exactly that through the “semantic leveling” and “right sizing” of individual Web services. For example, anenterprise service can encapsulate incompatible and individualWeb services that span the Siebel and SAP® systems into acommon business concept such as “retrieve customer infor-mation.” Various enterprise services can then be assembled toform a composite application.

Composite applications enable the orchestration of new businessprocesses that leverage enterprise services from existing applica-tions in ESA. Whether a composite application is designed forinternal or partner use, it shows how any company can addressnew business needs and extend its existing processes by usingexisting systems and applications based upon ESA.

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THE SOLUTION TO BECOMING AN ADAPTIVE ENTERPRISE

ERP solutions that adopt a services-oriented approach enableorganizations to achieve competitive differentiation by allowingthem to implement a variety of IT and business strategies,including business and IT consolidation, business-processinnovation, and business-process outsourcing. This sectionillustrates the value of an ERP system built upon ESA forhelping organizations implement a number of processes underthe following strategies:

Business and IT Consolidation

By consolidating business processes, organizations can reduceredundancy and increase cost savings. Organizations avoid thecomplexity and costs of a fragmented, heterogeneous environ-ment by consolidating redundant applications and systems intoa single technology platform based upon ESA.

Example: Consolidating HCM as Shared Services

Consider the example of centralizing HCM functions for allemployees. In a distributed scenario, local HCM teams are on-site to address specific issues and administrative tasks. The tasksmight be as simple as executing an address change, enrolling in a 401(k) plan, or managing direct payroll deposits. But thetasks might also be as complex as managing benefits planningthrough different providers using different systems on severalcontinents.

In a centralized scenario, a self-service portal for employees isintroduced globally to allow employees to perform simple HCM tasks or use an online employee handbook and otherknowledge tools. The portal serves as an automated first line of support. The HCM department is readily accessible if theemployee needs assistance with the task at hand or with usingthe portal. This new approach liberates the local HCM repre-sentative from a significant number of routine administrativetasks to focus on more strategic initiatives that can furtherimprove employee satisfaction and reduce operating costs.

Existing Employee On-Boarding Process

Deployment of the employee self-service portal requiresextensive proprietary integration with back-end systems. Forexample, to register an employee home address change, theupdate must need to be reflected across multiple systems, asshown in the following table.

Integration of an HCM solution without ESA requires thedesign, testing, deployment, and documentation of a multitudeof custom proprietary interfaces. Changes to a given interfaceresult in yet another wave of development, testing, and docu-mentation. In time, this task becomes insupportable, because itis overly complex, cost prohibitive, and highly inefficient.

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EMBRACING INNOVATION AND ACHIEVING OPERATIONAL EXCELLENCE

Strategies Used to Achieve Competitive Differentiation

Strategy Examples

• Business and IT consolidation • Consolidating HCM as shared services

• Business-process innovation or reengineering

• Extending the quotation process to more suppliers

• Reengineering the employee on-boarding process

• Reengineering the procure-to-pay process

• Integrating desktop productivity tools

• Business-process outsourcing • Outsourcing logistics operations

Information Used by Multiple Systems

Type of Information System Involved

Employee master information ERP system

Travel profile Third-party travel system

401(k) Third-party financial services system

Employee stock purchase plan Third-party investment system

American Express card Third-party credit and banking system

Payroll ERP system and third-party payroll processing

Tax services Third-party tax services

Enhanced Employee On-Boarding Process

An HCM solution built upon ESA can use enterprise services to exchange employee data securely and reliably with multiplesystems. For example, when an employee submits a homeaddress change through the self-service employee portal, the appropriate change home address service is invoked tocommunicate real-time information to third-party systems.Several systems can use the enterprise services developed uponopen standards–based interfaces in the enterprise servicesrepository. This flexibility reduces the time, effort, and costrequired to build and maintain tightly coupled integration.

Business-Process Innovation

By reengineering existing processes and by composing andextending new applications, organizations can enable newbusiness processes. Doing so is difficult without ESA, becauseinnovation or changing existing business processes wouldrequire the IT organization to understand the inner workings ofthe underlying applications. With ESA, IT organizations cancompose applications that leverage existing IT investments andaccelerate the rate of change while eliminating the need forproprietary integration.

Example: Extending the Quotation Process

to More Suppliers

Consider the example of a contract manufacturer that mustextend the quotation management process to external suppliersto improve efficiency and responsiveness. Today, the processspans the line of organizational silos – the end customer, theinternal team, and the external suppliers. Numerous internaland external systems – including homegrown, third-party, and legacy systems – are in place to help address ERP, customerrelationship management (CRM), supplier relationshipmanagement (SRM), HR, supply chain management (SCM),and financials.

The process starts with the receipt of a request for quotation(RFQ) from the end customer. The account manager enters the information into the CRM system and then assesses theopportunity. The internal team is notified of the opportunityand assembles pricing and material information from multipleinternal and external sources. Depending upon the sourcingneeds, the internal team might produce an RFQ to source morecompetitive quotations from suppliers. This situation can occurwhen insufficient manufacturing capacity exists or when morecompetitive prices can be obtained.

Existing Quotation Management Process

The contract manufacturer relies upon its internal team ashuman integrators to bridge the flow of information manuallybetween multiple systems and parties. The extended quotationmanagement process requires extensive offline communication,paperwork processing, data reentry, and other administrativetasks, all of which result in poor process governance andfragmented data. The process is clearly ineffective, reactive,unreliable, time-consuming, and difficult to manage for allparties involved. Changes to the original RFQ require a wave of updates to the existing applications, which compromisesresponsiveness and data accuracy. The contract manufacturercan automate the process through hardwired integrationbetween its internal ERP systems and the supplier’s systems, butthis approach is complex and difficult – especially consideringthe vast number of suppliers and proprietary systems with whichthe manufacturer might have to connect. And even worse, this type of integration increases the total cost of ownership by making the IT landscape more and more complex.

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Enhanced Quotation Management Process

Using enterprise services, ERP systems can exchange business-critical information between different systems, including SRMand third-party CRM systems, and even with other ERPsystems. Examples of enterprise services include purchase orderand contract status tracking, costing updates, sourcing, vendorquotes status tracking, and PO creation.

The new approach enables different systems to communicateusing a common language and reduces the need for data reentryand offline communication. For example, the documentcontroller receives supplier quotation information throughvendor quotes developed specifically for a third-party CRMsolution. Information is then automatically communicated tothe manufacturer’s system with enterprise services.

Example: Reengineering the Employee

On-Boarding Process

Consider the employee on-boarding process that affects personnelin a number of departments, including the hiring manager,human resources and facilities employees, IT administrators,and so on.

With ESA, organizations can compose new business processes byorchestrating and rearranging existing enterprise services into acomposite application that automates the new-hire process asfollows:1. Initiate new-hire request (hiring manager)2. Approve request (approver)3. Generate offer letter and employee contract (automated)4. Accept or reject offer (candidate)5. Initiate service request to provision users on IT systems

(automated)6. Initiate purchase request to acquire new laptop and other

supplies (automated)

7. Initiate facilities request for office, phone, furniture, and wiring to support TCP/IP (automated)

8. Provision services, including facilities, IT procurement, office space, and so on (automated)

9. Schedule new-hire orientation (hiring manager)10. Enroll in benefits, submit W-4 forms, and so on (employee

through third party)

With the composite application, activities can be automated andinformation can be exchanged in real time. Furthermore, thecomposite application provides a consistent look and feel thatmakes it simpler for employees to access the enterprise servicesof the ERP system and other systems.

Example: Reengineering the Procure-to-Pay Process

Consider the example of a federal agency in the United Statesthat acquires goods and services from suppliers. Today, federalagencies are mandated to use standard forms to conform toFederal Acquisitions Regulations (FAR). Depending upon certaincriteria, such as acquisition value and type, specific contractualand provisional clauses must be presented on any formssubmitted to suppliers and contractors for bidding. (Agenciesstill rely upon standard forms to accommodate suppliers andcontractors who might not have online or Internet access.)

With ESA, agencies can submit standard forms as Adobe PDFfiles to suppliers and contractors (see Figure 3). Suppliers andcontractors can print a form and fill it out offline, or enter the information directly into the PDF file and submit it.

Using enterprise services, the unstructured data in the PDFdocument is easily transported to ERP systems and stored asstructured data. The benefit of this approach is that agenciescan reuse existing online and offline forms to comply withfederal requirements. At the same time, the competitive biddingprocess is simplified for contractors and suppliers.

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Figure 3: Sample RFQ in Adobe PDF Format

Example: Integrating Desktop Productivity Tools

with ERP Applications

Time and attendance management offers a prime example ofthe need for a services-oriented approach. To manage time andattendance, employees must record their activities in HCM and financials systems and maintain the same informationusing desktop tools such as Microsoft Outlook and MicrosoftProject. An abundance of information that, for compliance and control purposes, is scattered throughout the universe ofavailable systems and is unnecessarily difficult to track furthercomplicates the process.

Using enterprise services, time and attendance information isautomatically exchanged between third-party desktop tools,HCM systems, and financials systems, thus saving employeestime and effort and greatly improving the accuracy of reporting.Figure 4 illustrates how employees can improve productivitywhile meeting corporate compliance requirements by exchanging

real-time information between a desktop tool and a financialssystem in the context of managing appointments with MicrosoftOutlook.

Figure 4: Enhanced Time Management Process

Business-Process Outsourcing

By outsourcing context activities, organizations enable their IT and business employees to focus on the next differentiatingpractice and still ensure proper governance of service levels.Organizations can use enterprise services based upon openstandards to communicate and exchange information betweeninternal and third-party systems rather than buildingproprietary, costly integration with third-party systems. Because multiple systems can reuse enterprise services, thisapproach significantly reduces IT complexity.

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ScheduleAppointment

AssignProject

ESA Integration• Real-Time Access and Updates

from Desktop Tools to ERP• Data Integrity• Corporate Governance• Real-Time Insight

Submit andCharge Time

Time Recording Plan Execute Control

Example: Outsourcing Logistics Operations

Consider the outsourcing of logistics management for a globalhigh-tech original equipment manufacturer. The company hasmanufacturing plants, logistics centers, and third-party ware-houses located across Europe, the Middle East, Africa, the Asia-Pacific region, and North America. Each location has varyinginventory levels of finished goods, from 0 to over 120 days ofsupply, to meet service-level agreements (SLAs) with customers.

A key objective for the company is to reduce the finished goodsinventory across its distribution centers and warehouses. How-ever, the staff is consumed by the day-to-day activities of tacticallogistics and warehouse management related to global ship-ments, such as working with logistics carriers, custom agents,and third-party warehouse providers.

As a result, the manufacturer decides to outsource its logisticsand warehouse operations to a third-party provider withspecialized expertise in multimodal transportation and planning,contract negotiation, competitive pricing, insurance manage-ment, import and export, taxation, warehouse management,and so on. These activities are clearly mission critical for thebusiness, but the company recognizes that it does not have thecore competency in-house to differentiate itself.

Existing Logistics Outsourcing Process

The company uses an ERP system for sales and distribution and materials management, legacy systems for HR and CRM,and third-party solutions for warehouse management. The ITenvironment is complicated by a myriad of unique businessprocesses and proprietary, tightly coupled integrations.

The outsourcing initiative requires interoperability of thecompany’s internal ERP and legacy systems with the home-grown, sophisticated transportation and warehouse manage-ment tools of the third-party provider. Without proper ESA, the company will be forced to build and maintain custom,proprietary interfaces between its ERP system and all third

parties to exchange product, bill-of-material, order, inventoryavailability, pricing, and customer information. The interfacesare required to ensure that the third-party provider can sharereal-time information at any time on shipments, includingthose in transit and held up at customs, such as details onexpected delivery dates, damaged shipments, inventory atdistribution centers, and so on.

Now, suppose the company decides to establish a new process tomonitor and enforce SLAs with the third-party logistics provider.Because of the existing complexity of IT and the inflexibility of the tightly coupled systems, the organizations will face chal-lenges in decomposing existing functionality and composing a new application that can span business and IT boundaries.

Figure 5: IT Landscape Before Logistics Outsourcing

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Innovation

Invention

Standardization

Commoditization

Manufacture to Inventory

Order to Cash

ERP

CR

M

PLM

SR

M

SC

M

Cus

tom

SAP NetWeaver

Enterprise Services

EnterpriseServices

Repository

Custom and SAP® xApps™Composite ApplicationsPowered by SAP NetWeaver®

mySAP™Powered by SAP NetWeaver

Mission-CriticalActivities

EnablingActivities

Platform For Packaged Business Processes

Flexible Packaged Business Applications

Procure to Pay

Enhanced Logistics Outsourcing Process

In ESA, ERP, HCM, financials, and operations software can useenterprise services to communicate and exchange informationwith the external systems of the third-party logistics provider.Both parties can leverage their existing IT systems and publishenterprise services that can be found and invoked over anetwork. Some of the services might include product details,pricing, inventory availability checks, delivery status checks,purchase order details, purchase order changes, partialshipments, and bill-of-lading details.

What’s more, enterprise services enable organizations to composeand fine-tune business processes more easily. In the case of build-ing a process that governs an SLA across company boundaries,the use of enterprise services can ensure that business-criticalinformation is exchanged in real time between the third-partyprovider and the manufacturer. For example, the manufacturercan monitor the actual service levels of deliveries from orderreceipt (in the ERP system), to shipment in transit (in the third-party system), and ultimately to shipment delivered (in the third-party system), even though the process spans different systems.

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SAP NetWeaver

Enterprise Services

EnterpriseServices

Repository

Custom and SAP® xApps™Composite ApplicationsPowered by SAP NetWeaver®

mySAP™Powered by SAP NetWeaver

Mission-CriticalActivities

Platform For Custom Business Processes

Compose Differentiating Processes . . . by Leveraging Packaged Solutions

Procure to Pay

Figure 6: IT Landscape Enabling Logistics Outsourcing

Plan Manufacture Inventory

Order Ship

Source Procure

Order to Cash

Manufacture to Inventory

Order to Cash (with Logistics Outsourcing)

To address the business context in communication betweenapplications, SAP elevates Web services to enterprise servicesthrough its Enterprise Services Architecture Adoption Program,which helps companies develop a blueprint for their ESA.Through the program, organizations can expand the concept of Web services into an architecture that supports an enterprise-wide, service-enabled business architecture.

The mySAP™ ERP solution, the mySAP Business Suite family ofbusiness solutions, and many partner solutions are powered bythe SAP NetWeaver® platform – the open integration andapplication platform that provides the best way to integrate allsystems running SAP or non-SAP software. SAP NetWeaverunifies integration technologies into a single platform and ispreintegrated with business applications, enabling change andreducing the need for custom integration. SAP NetWeaverenables customers, partners, and SAP to unlock the potential of ESA. Based upon open standards like Web services, Java, andXML, SAP NetWeaver unites information and functionalityfrom SAP applications and offers them as enterprise services forcommunication with SAP, third-party, and legacy systems.

Traditionally, organizations have had two options when it comesto IT infrastructure: build or buy. With ESA, organizations havea third choice: compose. Organizations that leverage ESA candevelop applications more quickly and with less effort to supportnext or evolving business practices.

Organizations with an ESA can use the SAP NetWeaver VisualComposer tool to compose applications. In the past, teams ofbusiness analysts and application developers have translatedbusiness requirements into detailed, procedural logic. With ESA,the language of business becomes the language of IT. Enterpriseservices within mySAP ERP are defined with simplicity and at agranularity that allows business analysts to understand themeasily. Thus, business analysts can leverage the appropriateenterprise services for composite applications that support newbusiness scenarios.

SAP NetWeaver also enables delivery of role-based user inter-faces through an enterprise portal that allows organizations tostructure business processes and deliver relevant financial,operational, HCM, and other business information tailored to a specific role. This approach improves user productivity andprovides a more consistent user experience. With SAP NetWeaver,organizations can provide their users with access to structuredand unstructured information scattered throughout an enter-prise, including information stored in SAP and third-partysystems, databases, data warehouses, desktop documents, andWeb content.

Rather than establishing, managing, and maintaining a myriadof IT systems, organizations can cut costs and reduce ITcomplexity by consolidating their infrastructure. SAP intends todevelop SAP NetWeaver into a business-process platform, or“applistructure,” that helps organizations merge enterpriseapplications with infrastructure technology. This approachallows business analysts to compose applications by assemblingenterprise services from the enterprise services repository, acentral repository for modeling enterprise services and storingmetadata as defined by customers, SAP, and partners. SAP plansto make the repository an integral part of both SAP NetWeaverand mySAP ERP as they evolve to enable an ESA. Figure 7 illus-trates the different components enabling the evolution ofmySAP ERP and mySAP Business Suite to ESA.

Figure 7: mySAP ERP in ESA

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UNLOCKING THE POTENTIAL OF ESA

SAP NetWeaver®

Portal Devices Office RFID

EnterpriseServices

Repository

Composite Applications

Existing Systems

mySAP™

The following table illustrates the difference between pursuingbusiness strategies using a traditional IT environment and doingso with an ESA in place.

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mySAP ERP AND ESA: ALIGNING IT AND BUSINESS TO ACHIEVE OPERATIONAL EXCELLENCE

Adopting ESA Enables Operational Excellence

Business Strategy ERP Examples Traditional IT Environment With Enterprise Services Architecturein Place

Consolidate common ERP and legacysystems to provide shared services andreduce total cost of ownership

Accounting

• Time and expense management

• Credit and debt analysis

• Collections

• Invoicing

• Accounts payable

• Billing dispute resolution

Self-services

• Employee interaction center for centralized management of IT and HR

Different applications might have differ-ent technology platforms and proprietaryinterfaces – difficult and complex.

Enterprise services can be used bymultiple applications, so consolidationwill be more efficient and effective.

Compose applications to support uniquebusiness needs

HCM

• Employee on-boardingCustom-built applications withproprietary code are not designed forreuse by other systems.

Enterprise services are modular and canbe easily rearranged to support compositeapplications.

Extend existing applications to drivefurther operating efficiency beyondexisting boundaries

Supply management and procurement

• Procurement

• Logistics management

• Warehouse management

Special skills and proprietary interfacesare required to integrate multiplesystems, meaning higher costs and effort.Changes would also drive total cost ofownership higher as a result of additionalcoding, testing, documentation, andtraining.

Enterprise services are modular and canbe orchestrated to enable other businessprocesses by other systems.

Outsource core business processes andtheir IT systems

Human capital management

• Payroll

• Benefits enrollment

• Benefits management

• Training

Supply management and procurement

• Procurement

• Logistics management

• Warehouse management

Demand management

• Call center operations

• Analytics

Core business processes are difficult tooutsource because the underlying ITsystems are tightly integrated.

Business-process outsourcing is simplifiedbecause enterprise services are modularand loosely coupled and can be moreeasily out-tasked without affecting therest of the IT landscape.

In 2005, SAP announced its ESA preview system with more than500 live enterprise services. Developed and deployed on thelatest version of mySAP ERP, the preview system offers partners,developers, and customers an opportunity to test the enterpriseservices, and more importantly, to influence the definition anddevelopment of service-enabled solutions that help enterprisesrun business-critical processes more efficiently.

The following are just a few examples of the ways that theenterprise services can be used:

• A third-party provider of tendering software uses enterpriseservices to extend the purchasing functionality in mySAP ERPto address the public sector’s unique regulatory requirements.Enterprise services from mySAP ERP help the company verify budget availability before the release and publication of RFQs. Once the award is determined and the tenderingprocess between the customer and supplier is complete, thecompany uses enterprise services to generate purchase orderinformation and pass the information to mySAP ERP forinvoicing and payment processing.

• Using enterprise services, another third-party software andservices company integrates its time and attendance trackingapplication with the mySAP ERP Human Capital Managementsolution some 90% faster than it could with traditional methods.Enterprise services enablement of mySAP ERP allows thevendor to provide its customers with comprehensive and real-time insight into time and attendance status in a fractionof the time it would have taken otherwise.

• A large infrastructure management software company isworking to extend its asset management and infrastructuremonitoring systems into the purchasing functions available in the mySAP ERP Operations solution. Traditionally, thesesystems have been implemented independently, withoutintegration with SAP systems. ESA will enable the company to use enterprise services from SAP to exchange asset details,pricing, and contract terms and conditions from thepurchasing functions to its asset management systems. The company also plans to trigger an event from its infra-structure management tool to automate the procurementprocess in the purchasing module.

To demonstrate its continued leadership in helping customersmove toward SOA and build upon its commitment to providethe partner community with a development platform, SAP’sroad map for ESA includes the following milestones:

• SAP plans to publish an inventory of its enterprise servicesthat customers and partners can use for planning.Customers’ and partners’ composite applications and longer-term planning can leverage the list. Additional service-enabled functionality will be made available, focusing onbusiness-process flexibility and anticipating the needs of newcomposite applications.

• In 2006, SAP intends to create an enterprise services repositorybased upon the next release of SAP NetWeaver. The purpose isto make all relevant enterprise services actively available fromthe repository for use by selected partners and customers.

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WHAT’S NEXT?

Today, enterprises are burdened by complex IT landscapes thatdrive up the cost of innovation and slow down the pace ofchange. With rapidly shifting business conditions – such asmergers and acquisitions, business consolidations, new businessventures, new partnerships, and changing market dynamics –enterprises must find a better way to effect change and employinnovation.

There is a better way. The market is recognizing the value andpotential of SOA – a new approach to help organizations maketheir IT operations leaner, more responsive, and more easilyadaptive to enterprise solutions. SAP is among the first torecognize this vision and is leading the market with an ESAvision to support the next generation of ERP innovation.

mySAP ERP, powered by SAP NetWeaver, is evolving into an ESA with a new repository of enterprise services developedupon open standards for exchanging information with a varietyof systems, such as ERP, HCM, SRM, CRM, and SCM. Theevolution will enable customers and their trading partners toseek greater efficiency and differentiation as they becomeempowered to implement new business strategies with less ITcomplexity, lower total cost of ownership, and increased agility.

With ESA, mySAP ERP enables organizations to increaseefficiency and growth by doing the following:

• Extending existing processes across new business boundaries

• Consolidating business and IT to leverage economies of scaleand eliminate redundancy

• Innovating existing business processes by developingcomposite applications that leverage existing investments

• Replacing custom programming with model-drivencomposition of applications

• Delivering flexible and highly productive user interfaces

• Simplifying the IT landscape and reducing the costs and effortassociated with integrating internal and external applications

Organizations of all sizes around the world now have the choice,flexibility, and freedom to evolve into adaptive enterprises using an enterprise services approach that keeps them open toinnovation and responsive to change.

For more information about how ESA can help yourorganization deliver operational excellence and realize newlevels of innovation, please contact your account executive or visit us on the Web at www.sap.com/erp,www.sap.com/solutions/esa/index.epx, orwww.sap.com/contactsap.

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FOR MORE INFORMATIONCONCLUSION

50 077 977 (06/02)

www.sap.com/contactsap