Business case channel financing ver 1.5

BUSINESS CASE

CHANNEL FINANCING USING SOA

by: Partho H. Chakraborty

Business Case: CHANNEL FINANCING USING SOA

TABLE OF CONTENTS INTRODUCTION /BACKGROUND .................................................................................................................. 4

BANKS INVOLVED ................................................................................................................................................ 4 OVERVIEW ........................................................................................................................................................... 4

VISION ................................................................................................................................................................. 4 OBJECTIVES ......................................................................................................................................................... 4

SITUATIONAL ASSESSMENT AND PROBLEM STATEMENT.................................................................. 5 CURRENT SITUATION ........................................................................................................................................... 5 PROBLEM ............................................................................................................................................................. 5 OPPORTUNITY ...................................................................................................................................................... 5

IMPLEMENTATION STRATEGY .................................................................................................................... 6 PROJECT TITLE ..................................................................................................................................................... 6 TARGET BENEFITS FOR ALL THE CHANNEL MEMBERS .......................................................................................... 6

Benefits to Dealers/Distributors ..................................................................................................................... 6 Benefits to Supplier ........................................................................................................................................ 6 Benefits to Manufacturer / Principal customer .............................................................................................. 7 Benefits to Bank .............................................................................................................................................. 7

OUTPUT ................................................................................................................................................................. 8 PHASE 1: .............................................................................................................................................................. 8 PHASE 2: .............................................................................................................................................................. 8

SAP AND INTELLIGROUP ................................................................................................................................ 8 MODULES INVOLVED IN PROJECT .............................................................................................................. 9 SAP ENTERPRISE SERVICE ORIENTED ARCHITECTURE (SOA) ......................................................... 9

INTRODUCTION .................................................................................................................................................... 9 ROLE OF SOA IN CHANNEL FINANCING PROCESS .............................................................................................. 10 SPECIFYING COMPOSITE APPLICATION .............................................................................................................. 11 DESIGNING COMPOSITE APPLICATION ............................................................................................................... 12 DEVELOPING COMPOSITE APPLICATION ............................................................................................................ 12 CONFIGURING COMPOSITE APPLICATION .......................................................................................................... 12 TRANSPORTING & PACKAGING COMPOSITE APPLICATION ................................................................................ 12 ARCHITECTURE LAYERS -- TECHNOLOGY COMPONENTS ................................................................................. 12

WORK PLAN ...................................................................................................................................................... 13 SALES................................................................................................................................................................... 13

TARGET CUSTOMERS ......................................................................................................................................... 13 SAP BUSINESS SUITE......................................................................................................................................... 13 MARKET SIZE .................................................................................................................................................... 14 SAVINGS/EARNINGS VIS-À-VIS INVESTMENT FROM THE CUSTOMER ................................................................... 14 SAP REVENUE COMMITMENT THAT THEY WILL GET US .................................................................................... 14 TYPICAL IMPLEMENTATION SIZE & DURATION .................................................................................................. 14

FINANCIALS ...................................................................................................................................................... 15

Author: Partho H. Chakraborty 2


Resources required: (For setting up the in-house box) ............................................................................... 15 HW, SW required ......................................................................................................................................... 15 Duration to build .......................................................................................................................................... 15 Ongoing costs ............................................................................................................................................... 15 Other Costs .................................................................................................................................................. 16 Costing Summary ......................................................................................................................................... 16

REVENUE ............................................................................................................................................................ 16 ANNUAL MAINTENANCE CONTRACT (AMC) ..................................................................................................... 17 ROYALTY ........................................................................................................................................................... 17 UPGRADE REVENUE ........................................................................................................................................... 17

Benefits derived ............................................................................................................................................ 17 Value Addition .............................................................................................................................................. 17

PROJECT MANAGEMENT FRAMEWORK ................................................................................................. 18 GOVERNANCE .................................................................................................................................................... 18 QUALITY MANAGEMENT .................................................................................................................................... 18

PROJECT RESPONSIBILITY .......................................................................................................................... 18



Introduction /Background SAP has an integrated suite of products catering to various domains such as Manufacturing, Logistics, Discreet Manufacturing, Banking, Insurance, etc. In banking one of the requirements of banks are to finance the Supply Chain called as Channel Financing. Channel Financing covers both the legs of financing. The first leg covers payments to vendors and the second leg covers the payments to the dealers. Channel Financing covers the end-to-end financing in this supply chain factoring a lot of components such as limits, regulations, crystallization of bills, documents, net banking, etc.

Banks involved Two Banks (AXIS Bank and SBI) have shown interest towards this project. We are going to develop a prototype and showcase it to the Banks.

Overview

Vision To provide a solution on SAP for Channel Financing process.

Objectives

The core objective of Channel Finance is to provide integrated commercial and financial solutions to the supply and distribution channels of a given industry.

To draw out the end-to-process of Channel Financing. To map it to the existing SAP Landscape. This means taking

modules working on diverse applications, including SAP, and integrating them all using SOA, to have Channel Financing in place.



To fill up the missing links or White Spaces in SAP in this Process with Composites to be developed by Intelligroup.

To allocate resources to work on this project.

Situational assessment and problem statement

Current situation Banks are currently using the “conventional lending” method, but this method is not concerned about suppliers & dealers’ financing activity. Here, independent activity is focused upon and the lending is backed by collaterals.

Problem The conventional lending method leads to weak financials of the supplier or the dealers may adversely affect the top & bottom line of the financed firm (Company) due to reasons like delay in supply, non-availability of credit, and delay in receipt of payment.

Opportunity

Channel Financing involves financing supplier, manufacturing unit, buyer (distribution unit) – entire supply chain mostly discounting bills. It extends market determined credit to supplier (vendor) & dealer (distributor). It meets funds required for purchase & sales besides production. It helps in sustaining seamless business flow and avoids working capital related difficulties. Channel financing opens up manifold opportunities due to which the banks can make conscious efforts at popularizing this credit delivery mechanism. Most banks require Channel Financing in full if not in parts; i.e. some specific modules such as Dispute Management, Net Banking, etc.

Note: This solution can be given to NBFC’s also



Implementation Strategy

Project title Channel Financing Using SOA.

Target Benefits for all the channel members

Benefits to Dealers/Distributors

a) Steady and cheaper source of Working Capital financing.

b) Channel partners can increase Sales through higher purchasing power.

c) Clean facility up to certain limits.

d) Simplicity of documentation and approval procedures.

e) High service and delivery standards compared to current neighborhood Banker / Moneylender.

f) Channel partners may be able to increase profitability by availing of cash

discounts from Corporate.

Benefits to Supplier

a) This involves the liquidity position by availing finance at cheaper rate based on the credit assessment of manufacturer.

b) There is no risk of non-payment by the buyer (manufacturer).

c) No documentation or formality.

d) Cost effective due to finer rate of interest.



e) Supplier saves time & human resources for receivable management.

Benefits to Manufacturer / Principal customer

a) Pre sale working capital requirement shall come down.

b) Assured availability of Working Capital finance to their channel partners at lower than current cost of credit.

c) Corporate can use Channel Finance as a marketing tool and strengthen their

relationship / reward loyalty of their Channel Partners.

d) Release of funds from the Balance Sheet resulting in improvement in financial Ratios.

e) Conversion of Balance Sheet into an Off Balance Sheet liability.

f) Greater efficiencies in the Corporate’ receivable management and cash

management process.

g) Ability to introduce payment discipline with their Channel Partners.

h) Firm can concentrate more on their core competence i.e., area of production & marketing their products besides saving time & cost involved in arranging creditors.

Benefits to Bank

a) Bank will have increased data & customer base.

b) Bank can understand purchaser profile and payment history of borrower.

c) Simple monitoring of end use.

d) Risk is diversified & credit exposure norms are better observed.

e) In case of liquidity crisis these bills can be rediscounted with RBI.



f) Easy tracking for performance of banks at each leg of the channel financing.

g) Need not to retrieve data and report from heterogeneous application

Output Robust tested Channel Financing solution which will be the part of overall Cash Management.

Phase 1:

Phase 2: a) Net Banking b) Mobile Alerts

SAP and Intelligroup

a) SAP will take us to various banks to market this product. b) Marketing will be handled by Intelligroup. c) License fee will be given to SAP. d) Intelligroup gets:

i. Implementation revenue. ii. Support process revenue.

Cash Management

Collection

Payments

Liquidity

Trade Finance

Channel Financing



iii. Annual Maintenance Contract (AMC). iv. Royalty for any process / objects developed by Intelligroup.

Modules involved in project

a) BCA: Customer Account Management. b) FS-CMS: Collateral Management. c) FS-CML: Loan Management / Risk Assessment. d) FSCM: Dispute Management. e) RBD: Reserve for Bad Debts. f) GRC: Governance and Risk compliance.

SAP Enterprise Service Oriented Architecture (SOA)

Introduction Enterprise SOA revolutionizes the design of business applications, enabling the rapid composition of business solutions. With enterprise SOA, you can encapsulate business logic and expose it as enterprise services -- smaller functionality components that can be reassembled quickly to form new



innovative business solutions that meet changing business requirements. Based on SAP Net Weaver’s SOA platform, enterprise SOA provides you with business and industry-specific context views through enterprise services and safeguards scalability, robustness, and governance for your IT. Enterprise SOA is therefore your blueprint for an adaptable, flexible, and open IT architecture for developing services-based, enterprise-scale business solutions.

Role of SOA in Channel Financing Process

i. To create new applications on top of existing enterprise solutions. ii. To automate new or existing business processes. iii. To increase the value of your current systems. iv. To achieve greater flexibility while controlling technology costs. v. To deploy innovative solutions to extend our business partner networks. vi. To improve our ability to link other applications to SAP solutions through

SOA. The Main Use of SOA is “Enterprise service bus”, where it will work as a communication channel like spoke and hub as shown in below diagram:

Designing services via an ESB paradigm makes services modeled

according to a harmonized data model before implementation takes place. This is called Outside-in approach, as the model that is developed outside an application context is afterwards propagated to the application systems for implementation.

This approach will eventually result in no or only few data mapping requirements on the ESB as the semantically data model is harmonized



across various provider and consumer applications based on a commonly shared service model.

This is in fact one of the main differentiating factors between a classical EAI and an ESB approach: EAI will heavily depend on data transformations (mappings) on the middleware component; in a service oriented architecture, the ESB ideally does not perform tremendous amounts of data mappings ESB ideally does not perform tremendous amounts of data mappings.

Here is the process of building this composite solution, explaining all the artifacts from the Channel Financing Process:

Specifying Composite Application

• Define the Business Process

• Define the Process User Roles

• Define the Process Steps and Define the User Interfaces



Designing Composite Application

• Service Identification • Service Decomposition • Service Mapping • Defining the Business Objects • Designing the Process for NTW BPM

Developing Composite Application

• Developing the Service Layer

• Developing the User Interface Layer • Developing the Process Layer

• Integrating in Enterprise Portal

Configuring Composite Application

• Configuring CAF • Configuring Enterprise Portal

Transporting & Packaging Composite Application Transporting CE (UI, BPM, CAF), EP artifacts.

Architecture layers -- Technology Components Portal / Internet access point - NTW EP

Composite - NTW CE (UI, CAF, BPM)

Service Provision Layer



Service Provisioning - IS-Banking and other Backend applications,

Service Bus and Repository - PI / SOA Middleware / ESR

Work plan

i. Map end to end Business process to SAP. ii. Test the entire Business process end to end. iii. Customize NPAS to Indian scenario. iv. Design/Develop the GUI (Graphical User Interface) v. Go To market Strategy – PPT & Brochures vi. Training

Note: i & vi have been completed. We are now working on ii to v. In v the PPT is ready, we have to fine tune it and develop the brochures A sample of NPA’s to be developed is embedded below:

C:\Partho\Intelli\NPAs.xls

Sales Target Customers: It can be targeted to Banks and NBFC’s.. Most of the Banks are potential customers but NBFC will not need the end to end scenario as the bouquet of products/services is limited on this front. SAP Business Suite: The customer does not require the full business suite. They can take only those modules that required. For example if the customer has all the required modules excepting CML, then the customer can go for CML only. New customers would get ECC 6.0, but if the customer is already running on an older SAP version, it is better to have ECC 6.0 with EHP 4.0 (entry level to Business suite) Here the user will take IS-Banking and GRC, which comes with ECC 6.0.



The customer would have to take User Licenses. We would need to hard sell to SAP to get a fine price for the License Costs. Market Size: The market size is global. We can take this solution to probably each and every bank in the world. This can be target to any geographical location. Once being tested successfully in India, we can release the country version by adding country specific features as well as regulatory provisions. Asia and Africa are soft targets and we can pick up good business here.

Savings/Earnings vis-à-vis investment from the customer

a. By consolidating all the functions under one head banks save on time, improve efficiency and can respond to customer very fast as they know under what transaction the customer is interacting with them. By having access to all the relevant information in one place, the bank is better place to take critical decisions on the risk to take on any of its clients and this being dynamic and net based, the access to this information is available to the decision makers and stakeholders from multiple places and not just the intranet.

b. As the entire business process can be mapped, the same business users under Cash Management can monitor the transactions, thus saving on manpower. Good for analysis and will be planning.

c. Banks earn from commissions and penalties such as limit burst, cheque bounce, etc. Can design reports/queries that can access information from multiple databases/applications now. This ensures better control on Revenues and helps plug leakages. Proper use or event triggered messages and transactions will ensure better compliance and incomes.

SAP Revenue Commitment that they will get us: This has not been quantified. SAP wants to take this product globally as another solution offering. We need to factor with SAP of being the natural choice of implementing this solution and having the first right of refusal in case we cannot handle any specific project. We also need to factor with SAP on marketing other SAP solutions and implementing it such as a customer may want us to implement a HR Solution, which is not linked to Channel Financing.

Typical implementation size & Duration: 4 functional and 4 Technical Consultants. It would take maximum 6 months as for a complete End-to-End implementation of Channel Finance.



Note: From a functional perspective, 6 months is OK as an average timeline for any implementation. The solution combinations are many. Mainly eSOA and patching legacy systems together with some part of SAP Banking & the other Modules; implementing the whole of IS Banking and other parts of SAP, etc. A full blown IS banking implementation will take close to a year. Blueprinting itself will take 3 months at least in this case. Any other combination of solution will take approximately 6 months.

Financials Resources required: (For setting up the in-house box)

Field of expertise Level Resources Man Months Functional (configuration and solution testing) (SAP Banking, FSCM, GRC

Senior Consultant FICO F4 1 4 FICO F3, 2 4 DMS L2 1 2 Consultant SolMan F3 1 3

Basis Consultant - Basis TE4 1 2

ABAP ABAP Consultant - (TE3) NTW 1 4

Net weaver (Java expert to design the web portal)

Workflow L3 1 2

Developer L2 1 2

HW, SW required: SAP IDES ECC 6.0, IS-Banking and SAP Solution Manager Note: We presume that this section is for the SOLMAN for in-house box configuration and testing only. We are not looking at using only standard reports for demo. In case we need any custom reports, we may need more ABAP effort. Duration to build this and hence the total cost of implementation: 4 months Ongoing costs: This is for further development such as in Phase II where we will add mobile alerts, etc.

• Resource Cost – Salaries • Establishment Cost



Other Costs: Travel Cost – Client Visit

Costing Summary

Note:

1. Exchange Rate is taken as 1 US$ = Rs. 50.72 2. If we exclude the license cost, then all other costs are Rs. 3,456,568

Financial constraints: No financial constraints as there is no development except for GUI and the whole project would be over in maximum 4 months Payback period and return on investment (ROI): 2 implementations would payback our investment if we look at an ad hoc figure of minimum Rs. 50 lakhs per implementation. Risks: Need to be compatible with the existing application. The major risk factor is that we do not have prior experience to validate our expectations using eSOA in Channel Financing as we will not have any other financial application systems to work with in-house while developing the product.

Revenue Revenue can be broken up as per the following: Implementation revenue: As this application looks standard with all SAP Modules, an end-to-end implementation would take around 960 man hours. The consultants on the job would be: 1 FICO Consultant (L4) – 480 man hours 1 FICO Consultant (L3) – 480 man hours Any other work would have to be estimated such as customization of NPAs.



Annual Maintenance Contract (AMC): 1 functional and 1 Technical Consultant would suffice. This can be done offsite. Royalty: This needs to be worked out with SAP Upgrade revenue: The next version would include mobile alerts and Net Banking apart from improving the feel and look of the standard features in the GUI. This would have to be estimated when we chalk out next version.

Benefits derived Increased customer satisfaction Best partners of SAP and leveraging SAP Modules

Value Addition This process helps to know the missing details or link between Risk and Credit, for example; Bank Statement does not tell when the loan would be over nor there any provision for the customer to intimate about the completion of loan. Let’s Take a Simple case study:

Month Earnings Expenses Feb’09 1000 100 (Savings) 200 (Expenses) 500 (Car Loan) 150 (Consumer Loan) 50 (Personal Loan) Total 1000 Here, Consumer loan last installment is on Feb’09 and the customer will have surplus amount of 150/-. So he wants to take new loan from Mar’09. But this information about 150/- Surplus is not reflected anywhere in the Bank statement. Thus prima facie, the entire loan gets rejected and customer is not intimated why the loan is rejected. The above issue was detected while studying the various modules and this issue though not a part of Channel Financing, can be easily resolved.



Project Management Framework

Governance The governance structure is as follows:

a) Partho Hemendra Chakraborty (Project Manager) b) Sameer Rahim Shadab (SOA) c) Geetha Pilli (GUI)

Quality management

a) Methodologies and standards as followed by Intelligroup. b) Change, issue, and problem management as followed by Intelligroup. c) Review and acceptance procedures as followed by Intelligroup.

Project Responsibility

Partho H. Chakraborty .



Note: Names if any, are Suggestive only and without any relation to any real

entity whatsoever. It is only to give a feel and touch of how transactions can be structured and names are indicative

This article is meant for education purposes only and it is not be

reproduced for any commercial purpose by print or electronic medium whatsoever

This case study is written by: Partho H. Chakraborty A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore - 560 037, India Tel: +91 80 420 50293, Cell: +91 99863 22504 email: [email protected]; [email protected] Skype: parthohc01


mailto:[email protected]

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Business case channel financing ver 1.5

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