Why are we dealing with SAP PaPM?

In risk management, new technologies are continuously conquering our industry. In order to stay on the ball, it makes sense to set up expert teams. Your task is to familiarize yourself with exactly one of these new exciting topics. Due to our close cooperation with SAP, we became aware of SAP Profitability and Performance Management (SAP PaPM) at an early stage and decided to form a team of experts at the end of 2017. Since then, this company has been working intensively with the tool, which is based on SAP HANA technology. The starting point was also that the maintenance of SAP SEM Profit Analyzer by SAP is to be discontinued by 2025 at the latest and therefore many financial service providers are well advised to look around for a suitable replacement in good time. In this context, SAP PaPM represents a possible option that is expressly recommended by SAP.

How does SAP PaPM work?

The application follows a modular principle in its implementation. In this process, ready-made functions, which can be customized by means of various setting options, are combined within a model (also called Calculation Unit) in such a way that a logical work chain is created. While this enables the development of many customized solutions, it requires a certain amount of experience with SAP PaPM when implementing them.

Basically, the available predefined functions offer specific setting options for various mathematical topics. For example, the Valuation function can be used to create a rule for interpolating a yield curve. However, it is often necessary to place several of these rules one after the other and let them build on each other so that a self-contained result emerges during execution. The generation of a cash flow via the funds transfer pricing function, for example, requires two steps or rules. In the first step, a flow modeling type rule is used to build a time series. In the second step, a rate modeling type rule is used to determine which amounts should flow at the time points generated in the first step.

The logic behind the various rule types is often not directly visible. Here, it then helps to look at the code generated by SAP PaPM via SAP HANA Studio. At the beginning, therefore, the Calculation function is often the developer’s best friend, because direct SQL coding is possible here.

How was our first experience?

At the beginning of 2018, we decided to introduce SAP PaPM to one of our customers, where we already provide maintenance and further development of SAP Profit Analyzer. The customer then commissioned us to perform a proof of concept (PoC) to take a closer look at the actual suitability. The PoC also included a prototype in which we implemented the basic features of SAP Profit Analyzer’s profitability analysis in SAP PaPM.

The functionality of the prototype ranges from the generation of cash flows to the creation of yield curves and the calculation of various key figures such as effective capital and interest income as well as their present values. In principle, the development went relatively smoothly. Shortly before the end, we even decided to switch from version 2 of SAP PaPM to version 3. Although this meant some additional work, it turned out to be a stroke of luck. Only in this way was it possible for us to also generate the cash flows of the sample transactions directly in SAP PaPM. The final presentation was able to convince the colleagues from the department and IT in any case.

Where do we go from here?

In the meantime, we have already been able to gain quite a bit of project experience regarding SAP PaPM. In an extensive project at a large German bank, we are involved in the implementation of SAP PaPM as a “Strategic Planning Tool”. In another project, we take over the implementation of SAP PaPM as a tool for the allocation of performance indicators from the very beginning.