Otto Group -

Overview

Introduction of a Payment Factory

Target Operating Model
with SAP S/4HANA
June 2022

1
Introduction of a Payment Factory Target Operating Model with SAP S/4HANA
Agenda

1 Introduction

2 Overview of the Status quo of the Otto Group’s outgoing payment transactions

3 Project Approach

4 Results of the As-is Analyses

5 Target Operating Model

6 Business Case

7 Transition Roadmap

Q&A
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Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 3

Business segment overview
Highly diversified operations across retail, logistics and financial services

FY21/22 Platforms Brand Concepts Retailers Services Financial Services otto group

Fulfilment
Significant scale and
Europe3)
diversification across
market leading businesses
with a portfolio of strong,
established brands
Revenue1) €6,546m €5,525m €2,507m €626m €813m €16,060m

EBITDA €71m €512m €92m €199m €334m €1,204m2)

1) Revenues with customers outside the Otto Group including revenues from
customer financing
2) Including others, holding costs and consolidation effects of €(4)m
3) Hermes parcel distribution activities operated as a partnership with Advent
International. The Otto Group retains 25% in Hermes UK and 75% in Hermes
EBITDA margin 1.1% 9.3% 3.7% 31.8% 41.1% 7.5% Germany and consolidates the activities using the equity method.

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 4

Geographic footprint
Globally diversified footprint with operations in more than 30 countries

Revenues by region FY21/22 Revenues by segment FY21/22 Market presence Otto Group

1% Germany 5% Platforms
16% 4%
16% Brand Concepts
Rest of Europe 41%
Retailers
22% USA
61% Services
Rest of the World 34% Financial Services

EBITDA mix by region FY21/22 EBITDA by segment FY21/22

4% Germany 6% Platforms

26% 28% Brand Concepts

40% Rest of Europe
Retailers
42%
USA
Services
17%
31% Rest of the World 7% Financial Services
Well balanced and diversified earnings across segments and
geographies with sizeable presence in Europe and United States.

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 5

 Status quo

Overview of the Status quo of the Otto Group’s outgoing

payment transactions

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 6

Today, payment transactions in the Otto Group are based on a heterogeneous system and process landscape with a large number of
electronic banking systems and interfaces
Status quo

Current world Target overview Payment Factory

• Current Electronic Banking System is

outdated and needs to be replaced
eBanking • Heterogeneous system landscape
with outdated file interfaces
• Low level of standardization and
domestic

automation
• Payment flows can’t be controlled in

domestic
central cash management system
international

• Security and compliance risks

• …

international
Governance Technology Processes Organization & People

low average high low average high low average high low average high

Benchmark* Benchmark* Benchmark* Benchmark*

Good-market-practice is marked as „average“ in benchmark

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 7

 Project approach

As part of the pre-study, a target model for a payment

factory was to be developed that would best fit the Otto
Group today and also tomorrow.

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 8

The future of the Otto Group's payment processes was designed along the following design dimensions and evaluated for feasibility
Project approach

Phase Phase Phase

01 02 03
Analysis of the as-is Definition of the Business Case /
Governance situation Target Operating Model Plan for Action

Organization • Calculation of the business case

Delivering Change

Analysis and description of the Description of the Target Operating

current state: Model and alternative solution incl. risk-opportunity analysis
Processes models along the design dimensions: • Definition of the project plan
• Outgoing vendor payment (alternative implementation
processes • Governance
plans for the implementation)
Technology • Current system landscape • Processes • Creation of a requirements
catalog for a system selection
• Stakeholders (group companies • Organization & People
for the target operating model
People as well as holding areas) • Technology
Driving Change

Change
Management

Projekt
Management

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 9

Design dimensions and elements that have been evaluated and considered during the whole project lifecycle
Project approach

Governance Target Operating Model Processes

The future of payment processes in the Otto
• IHB | PF Structures Group • IHB | PF Processes
• IHB | PF Service Model • Master data | Payment types
• IHB | PF Governance Model • Payment routing | POBO | COBO
• IHB | PF Involved third parties (e.g. banks, • IC-clearing
suppliers) • Cash pooling
• Other processes like
• eBAM or Sanctions Screening
• Local processes

Organization & People Technology

• IHB | PF Company /Service Unit • IHB | PF Infrastructure/ Interfaces

• IHB | PF Location/ Responsibility • IHB | PF clearing/ routing system
• IHB | PF Participating subsidiaries • IHB | PF payment platform
• IHB | PF Persons • IHB | PF additional systems

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 10

Project methodology and timeline
Project approach

Project approach Project timeline

The project was carried out in three phases. An as-is analysis, a The project was carried out in a period from June 2021 to October 2021
development of the target model and finally a business case
calculation and rollout planning were carried out.
14.06.2021
Project Kick-Off
Phase 1
Joint Effort Conducting the as-is analysis

The collaboration in the project took place virtually between the 29.07.2021
Otto core team, PwC and the PoC companies. Presentation of results of the
as-is analysis
Phase 2
Definition of the Target Operating
Model (TOM)
Holistic analysis 02.09.2021
The analysis of Otto's Payment Factory "feasibility" was Presentation of the Target
conducted using the design dimensions of governance, Operating Model (TOM)
organization & people, processes and technology Phase 3
Business Case / Plan for Action
17.09.2021
Best Practice Presentation of results Rollout Plan
In the development of the Payment Factory, a best / good & Business Case Calculation Project conclusion
practice approach was followed on the basis of benchmarking,
Submission of the final report
which takes into account the most modern payment solutions for
Otto in the target model

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 11

 Results of the Analysis

Overall, Otto Group has initial approaches that

correspond to the organizational form of a payment
factory but also had shown areas for improvements
along all design dimensions

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 12

The Payment Factory as a missing and necessary element of an In-House Bank for the operational group-wide payment management
Results of the Analysis

1 2 3 4
Governance Technology Processes Organization & People
Benchmark*

low average high low average high low average high low average high

• Governance/compliance • Heterogeneous system landscape • Low standardization and • Specialized knowledge in payment
requirements are not yet • Current payment solutions are automation; security gaps in KGN transactions is held in individual
sufficiently implemented in terms reaching end-of-life indicate (more often) insufficient subsidiaries
of processes security level • Despite the Otto Group Holding's
• Technically obsolete file interfaces;
• Bank master data is maintained in-house developments are hardly • Cross-group clearing of OGH is a centralized payment transaction
upstream in the KGN to varying migratable in the face of upcoming process that is not common in the services, payment transaction
degrees / quality technical enhancements to the SAP market and cannot be integrated responsibilities are largely
• Embargo and sanctions checks are system. into SAP S/4 organized on a decentralized basis
Findings

carried out decentral in the • System discontinuities between • Payment flows cannot be used for
subsidiaries and in some cases ERP, HR and e-banking system central cash management
inadequately
• There is no strategy for the Group-
wide further development of the
ZV.

The Otto Group has implemented first elements and services of a payment factory. These services are currently only used by a comparatively small number of subsidiaries.
Furthermore, optimization potential is evident along all dimensions - particularly in the dimensions of governance, technology and processes.

* Good Market Practice ist in der Benchmark als „mittel“ gekennzeichnet

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 13

 Target Operating Model

There are alternative expansion stages for the further

development of payment management. From expansion
stage 1 onwards, we speak of a payment factory.
Expansion stage 2 is recommended.

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 14

Selection of processes and functionalities for a step-by-step Payment Factory roll-out
Target Operating Model

Expansion stage 1 - Implementation of the Technical Core

3
By implementing the PF Technical Core, the first payment services can be offered centrally.
Existing bank connections and payment processes are lifted onto the Payment Factory. • Robotics in payment processing
• Predictive Analytics
Expansion stage 2 - Expansion of PF functionalities
• eBam
Integration of PF into the leading CM system and extension of PF with additional processes

2
within the SAP standard - such as the POBO procedure.
Expansion stage 3 - Perspective extensions
Extension of PF with artificial intelligence and additional processes

1
with high integration effort (COBO). • Extension of the "Technical Core"
• Extension of the MBC to include additional
• Advanced Payment Management (Core) communication channels such as SWIFT, H2H or API
• Integration of the Payment Factory into the Cash
Funktionalität

• Inhouse Cash (Core)

Management solution
• Bank Communication Management (Core)
• BAM - Bank Fee Management
• Bank Account Management
• Replication of bank master data
• Multibank Connector (EBICS and Corporate Seal)
• Fraud pattern detection and sanction check

• Internal payments • Payment on Behalf of • Collections on Behalf of

• Payment in the Name of • SWIFT Forwarding • Process optimization through automation
Prozess

• Central bank connection and BAM • Group-wide evaluation and reconciliation of bank charges
• Central bank statement validation and distribution • Central BAM with bank master data replication
• Platform for manual payments
• Exception and format handling in payment transactions

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 15

The Payment Factory will be implemented with the help of an SAP-integrated IT architecture
Target Operating Model

Payment Factory IT architecture Project object

The technical scope SAP ECC SAP S/4HANA

Payment files (Idoc)
The core of the Payment Factory consists of an SAP IHC Bank Statement
APM Protocol / Bank Protocol (Pain
SAP-integrated solution. The components are: 002 Idoc) Netting, POBO Bank Protocol
IHC Bank Statement (Idoc)
Payment run Pooling, COBO
• SAP Inhouse Cash (SAP IHC) Bank statement CM information,
Payment files

open items etc. (Idoc)

• SAP Advanced Payment Management (SAP APM) management
Bank master data replication
SAP BCM SAP BRM
Payment release Bank Fee
• SAP Bank Communication Management via IDOC
Status monitoring Management SAP MBC*
• SAP Bank Relationship Management eBAM
Other SAP
Payment files (e.g. xml) Banking connection
• SAP Cash Management (SAP CM) APM Protocol / Bank Protocol
SAP APM SAP CM via EBICS
Formatting Cash position Swift
• (expected) SAP Multi Bank Connector (SAP (Pain 002 Idoc)
IHC Account Statement (Idoc)
Routing liquidity forecast H2H
MBC)* Payment run Bank master data replication
via IDOC Validation Payment statistics API
Bank statement CM information,
management open items etc. (Idoc)

statement
account

Bank statement
(Idoc)

Bank Protocol
file (Idoc)

IHC

Payment files
Payment
Non-SAP Middleware tbd
CM information,
open items etc. Format mapping Reporting / Planning
Bank master data replication via XML Connectivity / File transfer Fraud pattern detection*
file
Payment run
Bank statement Payment files (e.g. xml)

management APM Protocol / Bank Protocol (Pain 002 Idoc)

IHC Bank Statement (Idoc)

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 16

 Business Case

The business case includes quantitative and qualitative

assessment factors and describes the corresponding
effects in different expansion stages

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 17

The business case includes qualitative and quantitative factors as well as the evolution of these factors in the different stages of expansion
Business Case

Project and license costs

Licenses, Implementation. Consulting, PMO

Transactional costs due to external payment volume

Reduction of payment volume via external bank accounts
Quantitative
factors Bank charges for bank accounts
Reduction of bank accounts by up to 78% in expansion stage 2

Process efficiency
Automation, process reliability, reduction of time-consuming "low-value" tasks
Business Case IT security and simplified system landscape
Central guarantee of security standards, Reduced number of bank connections and interfaces

Fraud prevention
Fraud pattern recognition, sanction and embargo screening, freeform payments instead of manual payments
Qualitative Compliance
factors* Standardized testing and release workflows, audit-proof log files in the end-to-end process

Liquidity management and transparency

Transparency of cash flows, active management of liquidity outflow, working capital management

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 18

The introduction of the Payment Factory offers great added value for the affiliated Group companies and the Otto Group
Business Case

Expansion stage – 1 Expansion stage – 2 Perspective

Core functionalities Core & extended services Process optimization & Robotics

Offer first centralized payment services Process integration into CM system and expansion of Automation & Optimization
central payment services (Robotics, eBAM)

• Bank connection of all participating

Functionality

subsidiaries runs centrally via Payment • Payment Factory provides virtual bank accounts to
Factory. participating Group companies
• The content of transferred payment files is • Bank Account Management (BAM) is provided • Robotics in payment transactions
not (yet) changed. centrally by Payment Factory • Predictive Analytics
• Internal payment becomes possible • eBAM
• Payments in the Name of • Collections on Behalf of (COBO)
• Payments on Behalf of • Process optimization through
• Fraud Protection
• SWIFT Forwarding possible automation
Process

• Technical bank connection

• Group-wide optimization of bank charges
• Central bank statement processing
• Central bank account management
• Exception and format handling
• Replication of bank master data
• Manual payments
Costs

low average high low average hoch low average high

Benefits

low average high low average high low average high

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 19

 Transition Roadmap

The project plan at a glance

The project will proceed along coordinated expansion
stages and waves over a period of 6 years

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 20

The project will proceed along coordinated expansion stages and waves over a period of 6 years
Transition Roadmap

Over a period of 6 years, 206 KGN will be connected to the globally defined PF processes. The project procedure is divided into 5 waves, each with two expansion stages, which were developed in
the preliminary study for the Payment Factory together with Otto. In wave 1, selected pilot companies, which will serve as implementation templates for later rollouts, will be connected to the PF.

Jahr 2022 2023 2024 2025 2026 2027 2028

Project phase Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Wave 1
Expansion stage 1
Expansion stage 2
Wave 2
Expansion stage 1
Expansion stage 2
Wave 3
Expansion stage 1
Expansion stage 2
Wave 4 & 5
Expansion stage 1
Expansion stage 2
Prepare Explore Realize
Deploy Run Gate 1 Gate 2 Gate 3 Gate 4 Gate 5

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 21

 Questions?

Introduction of a Payment Factory Target Operating Model with SAP S/4HANA 22