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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Business-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 . . . . . . . . . . . . . . . . . . . 13

Business-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

CONTENTS

Today, islands of automation, growing IT complexity, governancepressures, and budget reductions are IT realities that hamper theability of small and large organizations to embrace new businesspractices and technological innovation. As organizations look forbetter ways to achieve competitive differentiation, market respon-siveness, and operational excellence, they often find their existingIT landscapes too complex, inflexible, and costly to adapt toevolving business conditions. Even if organizations can afford theresources, time, and effort it takes to change and enable newpractices, all those might prove too extensive to justify the valueof the investment. 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 not onlyhelps organizations address short-term needs – such as loweringIT costs, improving quality of service, and enhancing existing ITsystems – but also, and more importantly, provides a flexible,adaptive, and open IT foundation that can accommodate changing business practices, market dynamics, and competitivechallenges.

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), finan-cial management, operations management, and human capitalmanagement (HCM) that drive the consideration of enterpriseservices architecture (ESA). It also examines the importance ofsuch architecture and the role it plays in guiding organizationsto create value, improve efficiency, and respond to evolving busi-ness needs in ERP – on any scale and for any industry. The docu-ment then illustrates and compares a number of deploymentexamples with and without ESA and clarifies why businesses areadopting an enterprise services approach to compete effectivelyin 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-lineimprovements.

This situation is well described in Living on the Fault Line byGeoffrey Moore. In the book, Moore frames the challenges ofachieving continuous business innovation around an organiza-tion’s “core,” the business processes that differentiate businessesin the eyes of their customers, and its “context,” which is every-thing else (see Figure 1). The purpose of an enterprise’s core is to drive business innovation and competitive differentiation tostimulate growth. The context’s primary goal, according toMoore, is to operate as efficiently and productively as possible.The catch is that core remains core only as long as it differenti-ates the enterprise from the competition. Once it has beencopied, it becomes context and is no longer an innovation. At that point, the organization must refocus on improving theefficiency and productivity of the context.

Businesses might want to leverage their ERP software for com-petitive differentiation by finding new ways to achieve greaterefficiency in previously untried or unsuccessful areas. Theymight also want to consider outsourcing standard processes to free up resources for strategic endeavors that lead to 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 or high-tech industry

• Extending an existing quotation management process to exter-nal suppliers to encourage more efficiency and responsivenesswithin the contract manufacturing process

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

• Centralizing common operations as a shared service to enforceglobal policies and leverage economies of scale

• Outsourcing payroll and human capital management to third-party agencies

ENTERPRISE RESOURCE PLANNING: STRATEGIES AND TRENDS

Figure 1: Business-Process Innovation – Core and Context

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

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.

Given the complexity and nature of IT in many enterprises, theseoperational strategies are difficult to implement. Traditionally,organizations develop custom applications from scratch and usevarious platforms, but then find that they lack the flexibility toaccommodate change. Moving from core to context to consoli-date common IT practices, for example, is difficult and expensive.To make the move, enterprises must analyze their IT landscapeto determine which assets to replace, upgrade, or make obsolete;acquire new skills; and support integration with new

applications. Similarly, developing innovative processes from thecontext into the core is equally challenging and expensive,because IT must determine the best way to leverage existinginvestments. And business-process outsourcing is difficult andexpensive, because it requires organizations to manage theperformance of the third-party vendors on service-levelagreements, but monitoring and enforcing such new policieswould require new integrations with third-party systems thatreside beyond existing boundaries.

THE ISSUES

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 can’t easilyleverage existinginvestments.

Figure 2: Business-Process Innovation Hampered by IT

Innovation

Invention

Standardization

Commoditization

ContextPackaged Applications

CoreCustom Development on a Tech Platform

Outsourcing is challenging:

• New process extensions

• Data on different systems

• Governance

• . . .

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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 proprietarycode that are too complex to integrate, that are too costly toadapt to changing business requirements, and that make it diffi-cult to share critical business information. With evolving businessconditions – such as mergers and acquisitions, company spin-offs, and reorganizations – fragmented information, inconsistentuser interfaces, additional pockets of automation, and redundantsystems not easily used by other business units only complicatethe 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 at theglobal 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 build upon existing IT investments. However, a number of issuesimpede their efforts. For instance, some organizations use enter-prise application integration (EAI) tools to integrate independentapplications to support new or reengineered business processes.This approach relies upon proprietary interfaces to hardwire dif-ferent applications. Although EAI tools have been used success-fully for such linkage, they require employees with specializedskills who understand the inner workings of the systems on bothsides to create tightly coupled integration. In addition, skilledemployees are also needed to maintain the integration over theuseful life of the applications. But the costs of up-front develop-ment and ongoing maintenance and efforts involved in integra-tion can be avoided.

Consider a second example of the difficulty of process inno-vation. In many organizations, the need to reference structured(or online) data and unstructured (or offline) data is not onlydesirable to increase efficiency, but also mandatory to satisfy regulatory requirements. This situation is especially true in thepublic sector, where agencies rely on traditional paper forms toconduct business with smaller companies that might not haveonline access. Because traditional systems do not fully address theend-to-end process, the agencies create a wealth of offline datathrough administrative paperwork, e-mail, faxes, mail, and othermethods of offline communication. The staff must then spendnon-value-added time sorting the offline information and tyingit back to, or reentering the data into, appropriate systems forcompliance purposes. To innovate this process and ensure com-pliance with federal regulations, agencies must invest in IT staffto develop the custom integration necessary for data exchangeand in a team of contract administrators to govern the end-to-end process.

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Why Outsourcing Is Difficult

Outsourcing is often difficult, because organizational boundariesconstrain an organization’s systems and applications, neither ofwhich was designed to be interoperable with external systems. Toaccommodate outsourcing, organizations often build proprietaryintegration between internal and external systems, whichincreases the cost of ongoing maintenance and adds complexityto the IT environment. In addition, changes to the internal orexternal systems cause a wave of updates to development, testing,and documentation. For example, if an organization wishes tooutsource its payroll information, it must extend its time andattendance processes in HCM to a third party. But doing so is difficult, because success here relies upon the ability of multiplesystems with different functionalities, underlying logic, and rulesto work well with each other.

Consider logistics outsourcing as another example. Extending anorganization’s inventory management system to a third-partywarehouse inventory system requires proprietary integration andspecialized skills unless the systems are built upon open stan-dards and communication protocols. Subsequent changes to thetightly coupled systems drive up the costs of maintenance.

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

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Furthermore, although Web services are suitable for promotingsyntax and protocol-level communications, they do not yet pro-vide a way to ensure semantic interoperability. For example, theway a customer is defined in a product from Siebel Systems dif-fers from the way it is defined in a solution from SAP. Organi-zations need a way to resolve the data and process disparitiesbetween different Web services and to translate syntax andcommunications into business constructs that can be reusedacross different situations. The notion of enterprise services doesexactly that through the “semantic leveling” and “right sizing” of individual Web services. For example, an enterprise service canencapsulate incompatible and individual Web services that spanthe Siebel and SAP® systems into a common business conceptsuch as “retrieve customer information.” Various enterprise serv-ices can then be assembled to form 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.

THE SOLUTION TO BECOMING AN ADAPTIVE ENTERPRISE

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 Web servicesinto an architecture that supports enterprise-wide, service-enabled business architecture. However, SOA and ESA are notone and the same. The difference between an SOA and an ESAcomes from service enabling the most common business process-es, such as procure to pay, order to cash, and hire to retire.Although SOA can be seen as a more technical concept, ESA canbe thought of as the blueprint that enables flexibility, openness,and agility, which are critical elements for success in an adaptiveenterprise. Simply put: ESA is a blueprint for a business-orientedapproach to SOA.

In a centralized scenario, a self-service portal for employees isintroduced globally to allow employees to perform simple HCMtasks or use an online employee handbook and other knowledgetools. The portal serves as an automated first line of support. TheHCM department is readily accessible if the employee needs assis-tance with the task at hand or with using the portal. This newapproach liberates the local HCM representative from a signifi-cant number of routine administrative tasks to focus on morestrategic initiatives that can further improve employee satisfac-tion and reduce operating costs.

Existing Employee On-Boarding Process

Deployment of the employee self-service portal requires extensiveproprietary integration with back-end systems. For example, toregister an employee home address change, the update mustneed to be reflected across multiple systems, as shown in the fol-lowing table.

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EMBRACING INNOVATION AND ACHIEVING OPERATIONAL EXCELLENCE

ERP solutions that adopt a services-oriented approach enableorganizations to achieve competitive differentiation by allowingthem to implement a variety of IT and business strategies, includ-ing business and IT consolidation, business-process innovation,and business-process outsourcing. This section illustrates thevalue of an ERP system built upon ESA for helping organizationsimplement a number of processes under the 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 into a 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-siteto 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.

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 operationsInformation 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

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and external systems – including homegrown, third-party, and legacy systems – are in place to help address ERP, customerrelationship management (CRM), supplier relationship manage-ment (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 theinformation into the CRM system and then assesses the opportu-nity. The internal team is notified of the opportunity and assem-bles pricing and material information from multiple internal and external sources. Depending upon the sourcing needs, theinternal team might produce an RFQ to source more competitivequotations from suppliers. This situation can occur when insuf-ficient manufacturing capacity exists or when more competitiveprices 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 and frag-mented data. The process is clearly ineffective, reactive, unre-liable, time-consuming, and difficult to manage for all partiesinvolved. Changes to the original RFQ require a wave of updatesto the existing applications, which compromises responsivenessand data accuracy. The contract manufacturer can automate theprocess through hardwired integration between its internal ERPsystems and the supplier’s systems, but this approach is complexand difficult – especially considering the vast number of suppliersand proprietary systems with which the manufacturer mighthave to connect. And even worse, this type of integration increas-es the total cost of ownership by making the IT landscape moreand more complex.

Integration of an HCM solution without ESA requires the design,testing, deployment, and documentation of a multitude of cus-tom proprietary interfaces. Changes to a given interface result inyet another wave of development, testing, and documentation. In time, this task becomes insupportable, because it is overlycomplex, cost prohibitive, and highly inefficient.

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 home addresschange through the self-service employee portal, the appropriatechange home address service is invoked to communicate real-timeinformation to third-party systems. Several systems can use theenterprise services developed upon open standards–based inter-faces in the enterprise services repository. This flexibility reducesthe time, effort, and cost required to build and maintain tightlycoupled integration.

Business-Process Innovation

By reengineering existing processes and by composing and exten-ding new applications, organizations can enable new businessprocesses. Doing so is difficult without ESA, because innovationor changing existing business processes would require the ITorganization to understand the inner workings of the underlyingapplications. With ESA, IT organizations can compose appli-cations that leverage existing IT investments and accelerate the rate of change while eliminating the need for proprietaryintegration.

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 internal

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 services ofthe 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 to Fed-eral Acquisitions Regulations (FAR). Depending upon certaincriteria, such as acquisition value and type, specific contractualand provisional clauses must be presented on any forms sub-mitted to suppliers and contractors for bidding. (Agencies stillrely upon standard forms to accommodate suppliers andcontractors who might not have online or Internet access.)

With ESA, agencies can submit standard forms as Adobe PDF files 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 agencies canreuse existing online and offline forms to comply with federalrequirements. At the same time, the competitive bidding processis simplified for contractors and suppliers.

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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 ERP systems.Examples of enterprise services include purchase order and con-tract status tracking, costing updates, sourcing, vendor quotesstatus 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 document con-troller receives supplier quotation information through vendorquotes developed specifically for a third-party CRM solution.Information is then automatically communicated to the manu-facturer’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)

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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 building pro-prietary, costly integration with third-party systems. Becausemultiple systems can reuse enterprise services, this approach significantly reduces IT complexity.

Figure 3: Sample RFQ in Adobe PDF Format

Example: Integrating Desktop Productivity Tools

with ERP Applications

Time and attendance management offers a prime example of theneed for a services-oriented approach. To manage time andattendance, employees must record their activities in HCM andfinancials systems and maintain the same information usingdesktop tools such as Microsoft Outlook and Microsoft Project.An abundance of information that, for compliance and controlpurposes, is scattered throughout the universe of availablesystems and is unnecessarily difficult to track further complicatesthe process.

Using enterprise services, time and attendance information isautomatically exchanged between third-party desktop tools,HCM systems, and financials systems, thus saving employees timeand effort and greatly improving the accuracy of reporting. Figure4 illustrates how employees can improve productivity whilemeeting corporate compliance requirements by exchanging

real-time information between a desktop tool and a financials system in the context of managing appointments with Microsoft Outlook.

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

The outsourcing initiative requires interoperability of the com-pany’s internal ERP and legacy systems with the homegrown,sophisticated transportation and warehouse management toolsof the third-party provider. Without proper ESA, the companywill be forced to build and maintain custom, proprietary inter-faces between its ERP system and all third parties to exchangeproduct, bill-of-material, order, inventory availability, pricing,and customer information. The interfaces are required to ensurethat the third-party provider can share real-time information atany time on shipments, including those in transit and held up atcustoms, such as details on expected delivery dates, damagedshipments, inventory at distribution 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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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 of supply, 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 with special-ized expertise in multimodal transportation and planning, con-tract negotiation, competitive pricing, insurance management,import and export, taxation, warehouse management, and so on.These activities are clearly mission critical for the business, butthe company recognizes that it does not have the core com-petency 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.

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

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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.

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 a network.Some of the services might include product details, pricing,inventory availability checks, delivery status checks, purchaseorder details, purchase order changes, partial shipments, and bill-of-lading details.

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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 and appli-cation 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 functionality from 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 have a 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 translated busi-ness requirements into detailed, procedural logic. With ESA, thelanguage of business becomes the language of IT. Enterprise serv-ices within mySAP ERP are defined with simplicity and at a gran-ularity that allows business analysts to understand them easily.Thus, business analysts can leverage the appropriate enterpriseservices for composite applications that support new business scenarios.

SAP NetWeaver also enables delivery of role-based user interfacesthrough an enterprise portal that allows organizations to struc-ture business processes and deliver relevant financial, operational,HCM, and other business information tailored to a specific role.This approach improves user productivity and provides a moreconsistent user experience. With SAP NetWeaver, organizationscan provide their users with access to structured and unstruc-tured information scattered throughout an enterprise, includinginformation stored in SAP and third-party systems, databases,data warehouses, desktop documents, and Web content.

Rather than establishing, managing, and maintaining a myriad ofIT systems, organizations can cut costs and reduce IT complexityby consolidating their infrastructure. SAP intends to develop SAPNetWeaver into a business-process platform, or “applistructure,”that helps organizations merge enterprise applications with infra-structure technology. This approach allows business analysts tocompose applications by assembling enterprise services from theenterprise services repository, a central repository for modelingenterprise services and storing metadata as defined by customers,SAP, and partners. SAP plans to make the repository an integralpart of both SAP NetWeaver and mySAP ERP as they evolve toenable an ESA. Figure 7 illustrates the different components en-abling the evolution of mySAP 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

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

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 the latest 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 the enter-prise 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 verifybudget availability before the release and publication of RFQs.Once the award is determined and the tendering processbetween the customer and supplier is complete, the companyuses enterprise services to generate purchase order informationand pass the information to mySAP ERP for invoicing and pay-ment 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 is work-ing to extend its asset management and infrastructure moni-toring systems into the purchasing functions available in themySAP ERP Operations solution. Traditionally, these systemshave been implemented independently, without integrationwith SAP systems. ESA will enable the company to use enter-prise services from SAP to exchange asset details, pricing, andcontract terms and conditions from the purchasing functionsto its asset management systems. The company also plans totrigger an event from its infrastructure management tool toautomate the procurement process in the purchasing module.

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

• SAP plans to publish an inventory of its enterprise services thatcustomers and partners can use for planning. Customers’ andpartners’ composite applications and longer-term planning canleverage the list. Additional service-enabled functionality willbe made available, focusing on business-process flexibility andanticipating the needs of new composite 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?

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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 as mergers 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 to recog-nize this vision and is leading the market with an ESA vision tosupport the next generation of ERP innovation.

mySAP ERP, powered by SAP NetWeaver, is evolving into an ESA with a new repository of enterprise services developed uponopen standards for exchanging information with a variety of sys-tems, such as ERP, HCM, SRM, CRM, and SCM. The evolutionwill enable customers and their trading partners to seek greaterefficiency and differentiation as they become empowered toimplement new business strategies with less IT complexity, lowertotal cost of ownership, and increased agility.

With ESA, mySAP ERP enables organizations to increase effi-ciency 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 developing compositeapplications 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 your organiza-tion deliver operational excellence and realize new levels 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.

CONCLUSION FOR MORE INFORMATION

50 077 977 (06/02)

www.sap.com/contactsap