To win in today’s complex business environments, companies must utilize large volumes of data to inform decision-making. The ability to automate the management of this data is crucial to realizing its value fully. This is driving the need for business transformation with digitization and advanced business models that address rapidly changing expectations and regulations.

Essential to any business success is having the right data to make rapid and precise decisions in this quickly changing environment. But there are challenges:

  • New business environment are increasing the complexity of financial management, creating the need for more extensive and precise data.
  • Finance professionals need transparent access to data and key performance indicators (KPIs) and often require real-time analyses and recommendations in order to take appropriate action.
  • Most companies do not have the detailed information required for individualization because the manual workloads and costs necessary to obtain and process it are prohibitively high.
  • Because companies cannot consider a product’s entire lifetime in forecasting revenues and margins, they struggle to design the best combinations of product and service offerings and to set optimal prices.
  • Traditional financial indicators are no longer the only decisive factors in measuring a company’s success at creating value. Non-financial dimensions, such as environmental, social, and governance (ESG) factors, are gaining importance due to regulatory and legislative developments and new societal demands. Today, most companies are not able to correlate non-financial information with financial information. Companies are struggling to make data-based tradeoff decisions, such as the effect of specific emission reduction goals on the profitability of different products.

To address these challenges, we joined forces with partner Boston Consulting Group (BCG) and combined SAP solutions and our strength as the leading enterprise software company with BCG’s deep industry and functional expertise.

Together with BCG colleagues Marc Rodt, partner and director of the Center for CFO Excellence, and Patrick Weber, project leader, we came to the realization that by applying the known concept of digital twins to the finance world, we can make significant strides forward in helping to solve these challenges.

Introducing “Digital Financial Twin” for Informed Decision-Making

The collaboration explored the concept of digital financial twin, defined as a digital representation of financial and selected non-financial metrics, including those measuring relationships, structures, and processes across the entire product lifetime and value chain. This twin precisely allocates metrics to products, services, suppliers, customers, and employees.

A digital financial twin addresses the challenges mentioned above by precisely allocating financial and non-financial information to products, sections of the value chain, or organizational units. This allocation is made possible first by the expansion of classification attributes for data and second by the availability of modern in-memory databases that can aggregate data in real time.

In the automotive industry for example, an individual car would have a digital financial twin  represented by using the vehicle identification number (VIN) as attribute and carrying all financial and non-financial data regarding this car for its entire lifetime, from its development to its end of life.

A digital financial twin could provide four key benefits:

  • Detailed control information down to the individual product level
  • Transparency into value contributions over the entire product or customer lifetime
  • Integration of non-financial information with traditional financial metrics
  • Information availability in (near) real time

How to Implement a Digital Financial Twin

The first requirement for implementing a digital financial twin is having a next-generation enterprise resource planning (ERP) system and data layer based on modern cloud-based architecture. Many companies may need to upgrade or replace their legacy ERP systems to better integrate automation and human decision-making into their finance functions. Companies can transition to this landscape by building a data and digital platform that decouples the data layer from the next-generation ERP and any existing legacy systems.

But implementing a digital financial twin is not just a technology change. It will require non-technical changes that allows the company to apply the capabilities, adjustment to accounting standards and processes, as well as downstream consolidation and reporting processes, shifting from IT to finance when it comes to controlling the data, letting go of legacy systems, and making the commitment to transform.

Building the Foundation with SAP Solutions

As a market leader in enterprise application software, SAP helps companies of all sizes and in all industries. SAP S/4HANA Cloud provides an integrated, intelligent ERP solution that runs on the in-memory database SAP HANA and can serve as the foundation to the digital financial twin. For organizations on legacy systems daunted by the requirements of such a twin, we offer RISE with SAP, a comprehensive solution with SAP S/4HANA Cloud, coupled with SAP Business Technology Platform, analytics, and business process intelligence with SAP Signavio and SAP Business Process Intelligence, along with guided journeys and outcome-driven services from SAP and partners.

The BCG and SAP collaboration explored digital financial twin, a concept that will revolutionize informed decision-making for businesses. Read about digital financial twins, including the step-by-step business approach to achieving it, in the full co-written paper.

Stefan Paetzold is chief business enterprise consultant at SAP.
Bernd Weissenmayer is principal business enterprise consultant at SAP.