SAP FPSL as the Missing Link Between Financial and Operational Data: From Risk Consumed Capital to Capital-Optimized SLA Decisions

Executive Summary A persistent gap exists in most organizations between financial risk measurement (driven by IFRS requirements) and operational decision-making (driven by service levels, inventory strategies, and customer commitments). SAP FPSL is uniquely positioned to close this gap because it embeds IFRS 9’s forward-looking expected loss logic directly into operationally relevant data structures. This article demonstrates how FPSL can transform operational decisions—specifically SLA agreements that require inventory buffers—into capital-aware, economically optimized choices. By using IFRS 9 expected loss as a proxy for consumed capital, companies can quantify the true economic cost of operational guarantees and compare it to the commercial benefits of offering them. The result is a rigorous, auditable method for deciding whether an SLA should be accepted or rejected, based purely on capital efficiency. 1. The Knowledge Gap: Financial Theory vs. Operational Practice Although IFRS 9 defines clear principles for recognizing expected losses, these principles are rarely translated into operational contexts such as: inventory planning, service level agreements, delivery commitments, readiness buffers, or spare part guarantees. This disconnect has a root cause: very few people understand both SAP’s operational modules and the financial logic embedded in FPSL. Operational teams focus on KPIs such as safety stock, lead times, and fill rates. Finance focuses on provisioning, valuation, and impairment. Without a unifying framework, companies cannot systematically quantify the risk cost of operational decisions—or incorporate those costs into pricing and negotiation. FPSL provides that unifying framework. It is no longer just an accounting engine; it is a capital optimization platform embedded in daily operations.” 2. How FPSL Bridges the Gap: Expected Loss as Consumed Capital IFRS 9 defines expected loss as the present value of the probability-weighted future shortfall of a financial exposure. Historically, this calculation has only been applied to credit products. FPSL generalizes the logic, enabling risk modeling on any measurable exposure—including operational ones. When operational commitments (such as high-availability SLAs) are treated as risk exposures, the expected loss produced by FPSL becomes: → a forward-looking measure of consumed economic capital This is transformative. It allows companies to quantify: the risk cost of holding inventory for a specific SLA, the marginal risk of adding a new customer to a high-availability commitment, the implied capital charge embedded in operational guarantees, and the real cost of service level differentiation. SAP FPSL becomes not just an accounting engine, but a capital allocation instrument. 3. The Integrated Example A customer requires a high-availability SLA guaranteeing immediate delivery. To meet this SLA, the company must hold inventory specifically reserved for this customer. Operational Setup Inventory value required: $54,000 Probability of obsolescence within the horizon: 30% Expected cost if the SLA is not accepted and the product is not available: $200,000 (lost revenue, penalties, customer churn, etc.) IFRS 9 Logic (through FPSL) Expected Loss: EL = Exposure * Probability of Loss EL = 54,000 * 0.30 = 16,200 However, because operational exposures often exhibit multi-factor behavior (demand volatility, aging, replenishment cycles), the total expected loss assessed through the model—including timing effects and forward simulations—results in a consumed capital of: EL (FPSL) = 41,200 FPSL therefore quantifies the economic cost of holding the SLA inventory. Economic implication FPSL Expected Loss / Consumed Capital: $41,200 Benefit of fulfilling the SLA: $200,000 Thus: Net advantage = 200,000 - 41,200 = 158,800 The SLA is economically attractive because the benefit vastly exceeds the consumed capital. This example illustrates how FPSL integrates financial logic (expected loss) with operational realities (inventory and SLA commitments) to produce a metric suitable for decision-making. “Inventory held for service guarantees is not free — it silently consumes capital and must be priced as risk.” 4. Interplay with IFRS 15 and IFRS 8 IFRS 15 – Revenue Recognition SLAs often influence transaction price, performance obligations, and variable consideration. When supported by FPSL-based risk modeling: the cost of fulfilling the performance obligation becomes quantifiable, pricing for service levels becomes grounded in risk economics, and revenue adjustments become auditable and repeatable. IFRS 8 – Segment Reporting IFRS 8 requires reporting performance by business segment. FPSL enables: segment-level risk consumption metrics, segment-level economic capital charges, and segment profitability including SLA-driven risk costs. The result is a clearer, more accurate picture of how each segment consumes capital—and how SLAs impact financial performance. 5. Capital Optimization: Accept or Reject SLAs Using FPSL The introduction of expected loss as consumed capital allows companies to evaluate SLA agreements using a simple and powerful rule: Accept an SLA if the economic benefit exceeds the expected loss (consumed capital). Reject an SLA if the expected loss exceeds the economic benefit. This transforms SLA decisions from intuition-based into optimization-based. Decision Application to the Example Benefit = 200,000 Consumed Capital (EL) = 41,200 Net Advantage = 158,800 Capital Efficiency Ratio Efficiency = 158,800 / 41,200} = 3.85 Meaning: Every $1 of capital consumed produces $3.85 in expected benefit. This is an extremely efficient SLA and should be accepted. Capital-Based Decision Framework Condition Interpretation Decision Benefit > Expected Loss Value creation Accept SLA Benefit < Expected Loss Capital destruction Reject SLA FPSL turns these judgments into auditable, model-driven outputs. “An SLA with a capital efficiency ratio of 3.85 is not a cost — it is a capital accelerator.” 6. Strategic Impact on the Organization Finance Gains a forward-looking, IFRS-consistent measure of capital consumption for operational decisions. Operations Understands the true economic cost of holding inventory for service guarantees. Sales Can negotiate SLAs with a transparent risk cost, enabling risk-based pricing. Risk Management Receives a unified measure that aligns operational risk with financial risk frameworks. Executive Leadership Can allocate capital toward the most profitable customers, segments, and service levels. FPSL becomes not only a compliance engine but a capital optimization platform. “Capital allocation should favor customers and SLAs that create value, not just revenue.” Conclusion Most companies unknowingly make SLA and inventory decisions that ignore their hidden capital costs. By bringing IFRS 9 expected loss logic into operational contexts, FPSL enables organizations to: quantify the risk cost of operational guarantees, price SLAs according to economic reality, compare benefits against consumed capital, and optimize capital allocation at a granular level. This closes the long-standing gap between finance and operations and elevates FPSL from an accounting engine to a strategic decision framework. Connect and Stay Informed: Join the Conversation: Connect with fellow professionals in the SAP Banking Group on LinkedIn. https://www.linkedin.com/groups/92860/ Stay Updated: Subscribe to the SAP Banking Newsletter for the latest insights. https://www.linkedin.com/newsletters/sap-banking-6893665983048081409/ Join my readers on Medium where I explore Capital Optimization in depth. Follow for actionable insights and fresh perspectives https://medium.com/@ferran.frances Explore More: Visit the SAP Banking Blog for in-depth articles and analyses. https://sapbank.blogspot.com/ Connect Personally: Feel free to send a LinkedIn invitation; I'm always open to connecting with like-minded individuals. ferran.frances@gmail.com I look forward to hearing your perspectives. Kindest Regards, Ferran Frances-Gil. #CapitalOptimization #IFRS9 #ExpectedLoss #SLA #RiskBasedPricing #SAP #FPSL #CleanCore #OneDomainModel #S4HANA #BTP #FerranFrances