)
Articles Archive
 |
September 2004
Commissioning an ETRM System — Do's & Dont's
By MATTHEW FRYE
Can't balance your books, don't know your positions, reorganizing your trading
business? Do you lack accurate, timely display of your credit exposure?
If you've answered 'yes' to any of these questions, it may be time to check on
your software and the state of your IT systems. They may be out of date,
incompatible with older or newer platforms, or simply not able to adapt to the
needs of your organization in today's fast evolving energy markets. But what
steps can you take to keep your business competitive, composed and compliant?
The energy trading business, like it or not, is dependent on technology that covers each component of a transaction's lifecycle - from deal capture to risk management, from nominations to confirmations and settlements, and from scheduling to volume management - and everything through to accounting, treasury and other operations.
Finding a robust solution can be challenging at best. You should consider those that can easily integrate all of the assorted trading and related activities, tie the disparate middle- and back-office software systems into a cohesive, functioning whole, and allow you to view, report and record a transaction at each step of the way.
Most energy companies seek straight-through-processing (STP) solutions to maximize efficiency, reduce costs, adapt to business growth demands, meet regulatory requirements, and keep their books in order from end-to-end. Finding one that can adapt to your specific needs and give you room to grow is perhaps the most important business decision you'll make in the years to come.
The process of selecting the right ETRM solution boils down to careful planning, assessment and buy-in from all of the parties affected within your organization. But any complex decision process brings the potential for pitfalls and unforeseen complications. You need a 'roadmap' for success to implement an effective, end-to-end solution that meets the unique requirements of your business operations.
First Steps: To Consult or Not? Build vs Buy?
Depending on your organization's focus or type, financial status, whether it is public or private, its number of employees, and the coverage required, you should decide early on whether or not to hire a consulting firm. Consultants can be involved in any phase. Organizations most often benefiting from consultants either have small-scale IT departments, or a long standing relationship with a consultancy as a business partner. If you are pressed for time or budget, such constraints may limit your choice of whether to use a consultant.
Many ETRM software providers see prospective clients that really need a complete overhaul of their business processes before any vendor selection starts. It is in your best interest to hire a consultant if you suspect your organization needs to restructure the flow of its business processes.
When time is the main constraint, and when internal resources are stretched too thin to conduct an intense data analysis and gather the requirements associated with the selection, use a consultant to get an independent analysis. If you choose to 'go it alone', your internal IT resources and staff must have a strong background in assessing vendor packages and making successful selection decisions.
Another consideration is whether to build or buy. Depending on your organization, it may be optimal to build your own ETRM system or purchase software components from a vendor. Be forewarned: 95% of companies can't re-create the 'staff years' associated with a successful STP application, although certain components can be built. You should ensure that your internal IT resources have the capabilities to build a solution that completely integrates the existing framework with all your built or bought components. If you are building an STP system to manage end-to-end transaction visibility, an expert ETRM partner will certainly enhance your success.
Phase One: Scope of Work
The next step is to define the scope, problems or issues, and document expectations. You should develop a 'Needs Assessment' plan that addresses the following concerns:
- Excel-based or antiquated systems, which you have either outgrown or found inadequate to meet anticipated growth.
- Changing business requirements through mergers and acquisitions, new projects, new regulatory or compliance requirements, new commodities or key personnel changes, or others.
- Lack of data transparency, where your system does not provide access to all decision criteria, or is not timely or available to react quickly to current market dynamics.
- Past patchwork approaches using multiple vendors creating orphaned systems, information silos with multiple databases, speed of information withdrawal, etc.
The return on investment (ROI) requirement should be part of your project expectations right from the start. There is no exact formula for calculating a new system's ROI, but based on the assessment of your current environment, the best ROI should consider risk and future loss avoidance.
Identifying internal stakeholders and selecting project sponsors who own and manage the selection process is another important step. A successful project usually requires at least one executive sponsor's involvement, and some projects have steering committees that include executives and key IT managers.
The biggest recipe for failure is to assume that an ETRM project is like shopping for a software package at a local computer store. The chosen vendor will not simply show up with an install disk and require minimal client interface. Success requires enormous involvement from management and employees.
This can be an extremely complex, time consuming process that works best with cooperation and information sharing before a vendor can accurately map the client's business into the new application. All parties using the system need input from front-, middle- and back-office, and your IT department should play the pivotal role in pulling it all together. So, plan for a significant time commitment from a representative group of stakeholders during the entire term of your project.
Without top-down support from senior-level management, your project could falter. Be sure to identify the project leader(s) and make them accountable to at least one senior level executive for best results. All groups within your organisation should be part of the process. Otherwise, you will discover missing requirements at the end of the project. Companies taking a phased-in approach to their commodities trading practice, say, trading in natural gas today and power tomorrow, should involve all the stakeholders who will sooner or later use the system. Avoiding the need to replace a system at a later stage is best achieved by including possible future users from the very beginning.
Phase Two: Your Vendor List & RFP
Once your internal team is formed and the needs assessment has been defined, now is the time to consider which vendors to approach. A general rule of thumb is to consider only those vendors showing continuous investment in their product line. This is usually a valid indicator that the business is stable and growing.
Look for signs of a broad customer base, tenured track record, and financial stability. Software companies run the gamut. Some are start-ups, here today and gone tomorrow. It's best to build a shortlist of those with clear financial strength. Tenure in the market is also telling; generally, the longer a vendor has been in the ETRM market, the more features and functions it can offer as these are largely a reflection of their install base. If you're their first customer, you might be entitled to a healthy discount to offset your risk of driving the development of a new application.
At the same time, start planning the details and vendor questions in your request for information (RFI). The purpose of good preparation at this phase is to get an answer to the overiding question: Can your system do this? Budget is also an important factor - you should clarify your budget before initiating the request for proposal (RFP). Many companies first send out an RFI to obtain estimates from the vendors they've targeted, and then develop their budget and a formal RFP.
Once you gather all the responses to your RFP, and collect all the basic information, the next step is to take time to review the answers and prepare a summary of each vendor's capabilities. Often, companies develop a ratings scale based on the most important criteria, grading each vendor on its responses and pricing. By now, you begin to have a clear snapshot of the vendors who stand out from the rest.
Phase Three: Pop the Hood & Check the Engine
The vendor demonstrations begin. Demos can last from half a day to as many as several days per vendor. Allow enough time for the demos, and include all the important stakeholders at the meetings. Make efficient use of your time by preparing and distributing a detailed agenda in advance. Avoid rambling if possible.
A demo of a full-cycle approach to your business system, step by step, is a good way to organise the meeting. The best demo shows 'cradle-to-grave' transactions that span the lifecycle of a trade through each and every module - from the traders to risk managers, schedulers, treasury, contract administration and accounting. Giving each vendor an opportunity to pre-process some data in advance makes for a more efficient demonstration meeting.
Within an ETRM system, most companies look for one vendor to serve front-, middle- and back-office applications. Large, fully integrated companies often use SAP, Oracle, or other legacy Enterprise Resource Management (ERM) software to process accounting, personnel and customer relationship management activities. In that case, choose a vendor with integration capabilities for ERM systems. Whether or not your software can run on either Microsoft or Linux systems may also be a strong consideration. The vendor should be operating system agnostic, allowing for multiple options as your business changes and expands down the road.
You'll finally be ready to select the winner based on your review of the best feature and functionality matches, capacity to grow the applications as your business grows, plans and visions for the future, due diligence on references and the overall economic value of the alternatives.
Key Player
Selecting the right ETRM vendor is like choosing the right player on a winning team. Keep in mind that your software provider should be someone you can and want to 'play' with, as a central figure on your IT team. Do build a relationship with a provider you trust and respect. Post-installation, maintenance, upgrades, new releases, and ongoing services will continue far into the future with the right player. You should work together on a game plan for future improvements as technology evolves, including projections for software improvements.
This is a long standing partnership. It takes time to build, much careful planning, and a mixture of trust and respect to implement the right system and make its future work for your business.
Matthew Frye is managing director of OpenLink's Houston, Texas division. He has 20 years' experience in energy markets, including trading, risk management and operations software. Frye leads a team of business analysts and software engineers focused on dynamic, integrated solutions for energy trading firms.
As seen in Commodities Now magazine - September 2004
Copyright © 1997 - 2004 Isherwood Production Ltd. All rights reserved.
)