Using SAP Analytics Cloud and a Value Driver Tree for visual planning and simulation (Part 1 of 5)

Customers are often looking for new options and new functionality to learn more about their information, but this time I would like to share with you what I would call a hidden gem in SAP Analytics Cloud, which is the Value Driver Tree. But before we go into the details on how you can use a Value Driver Tree as part of your own deployment, lets learn a little but about what a Value Driver Tree actually is and what the intentions are for a Value Driver Tree.

Lets start with a quote by Andreas Cambitsis (2012):

A value driver tree is a way of visualizing a model of a business in a way that links the value metric (what management or stakeholders care about) to the operational drivers (the things that can be influenced to change the value metric). In this respect a value driver tree is the visual representation of a mathematical model of a business (or a portion thereof). Most of us are familiar with spread sheet-based models of a business, often used for planning or budgeting processes. In essence all these models are nothing more than a series of mathematical relationships relating input variables to output variables. The complexity often comes in the number of the variables and relationships, how they are organized, and how transparently these are represented.

Source: http://saimm.org.za/Journal/v113n10p769.pdf

I personally especially like this description as it highlights several key aspects of a value driver tree:

• A value driver tree links the value metric to the operational drivers, so in other words it links the value to the influencing factors.
• A value driver tree is a visual tool creating a visual relationship between input and output.

Value Driver Tree – a proven approach

Originally this started in the 1920s with the usage of the DuPont model.

The key aspect of the DuPont model wasn’t necessarily to use the visual representation of a value tree, but instead the actual model itself and to evaluate a company’s Return on investment by breaking each measure further down and to create basically a network of measures that helps to understand the impact a small change would have.

One critical aspect of the Value Driver Tree concept is, that it is not just a tree structure, but in fact it is a network that visualizes the chain of consequences.

Source: https://www.superchargedfinance.com/blog/how-to-define-value-drivers

As we can see above, elements such as Sales Expenditure not only relates to Revenue, but also to Cost of Sales, as well as Operating Costs (Cost to acquire) and it shows that the benefit that such a Value Driver Tree can deliver to you is not just about the different style of visualization, but instead it is about the transparency that is being created across a large set of interconnected measures.

 Current Challenges

Perhaps let’s take a simple example of two different companies (source: https://www.craftingcases.com/profitability-tree-guide/).

When you just take a quick look at both examples you might get the impression, that both companies aren’t doing too good, because both of them are losing actually money. But the further you look into the details, you will notice that Example #1 is doing relatively well compared to Example #2, simply because their products are profitable and they could become a profitable company, assuming they sell a little more. In Example #2 the situation is very different, because with each product that the company is selling, the company is losing money.

So for company #1 the focus should be on selling more and for company #2 the focus should be on reducing the product costs (or increase the price). But ask yourself if you would have been able to make this quick insight as well, if all what you would see from both companies is a balance sheet or income statement ?

So what are some of the typical challenges that you as customer might be facing ?

• A very common problem is, that people keep using spreadsheets to create “data models” and either those spreadsheets will become personal data instead of corporate wide used data, and over time those spreadsheets simply become difficult to be maintained.
• Very often also – partially because of the spreadsheet usage – the information is outdated.
• The tools are often not providing a true holistic view and are not able to show how elements are interconnected and how a small change will impact other measures.
• The topic of a “simulation” is often seen as complex topic and difficult to setup and therefore its often put aside without realizing the actual benefit.

So based on these challenges, the result is that very often customers look at KPIs in isolation and are not able to review different kind of scenarios across their complete organization.

A New Approach is needed

This is where the Value Driver Tree as part of SAP Analytics Cloud can help providing you with a holistic view on the important measures of your complete organization, instead of looking only at a particular department and visualize, how for example hiring five additional workers will help you reach your revenue goal even with the increase in labor cost. A Value Driver Tool is a great visual tool that you can not only use to show interdependencies, but it is also a great option to quickly validate your assumption, run through a set of simulations and gain that transparency across your organization. Especially the ability to quick go through a variety of scenarios will help you to quickly build consensus and a common understanding across all your KPI and speed the cycle on aligning on business goals. 

SAP’s Value Driver Tree provides you with an unique method of understanding and modeling the relationship between key drivers of your complete company. The Value Driver Tree allows you to visualize the influencing factors for your KPI’s and run simulations so that you better understand how these influencing factors impact your overall business.

 In the next article we will use a simple example – such as our household income – and create a new model in SAP Analytics Cloud and generate a Value Driver Tree based on the model.

Find out more on SAP Analytics Cloud and its unique Value Driver Tree:

SAP Analytics Blog

Innovation Stories

SAP Analytics Cloud Trial

SAP Analytics Cloud – Value Driver Tree