Bringing strategy back

Oct. 10, 2013
Customization can increase implementation costs while offering limited competitive advantage to the user.

Customization can increase implementation costs while offering limited competitive advantage to the user.

Prashant Shah,
Roger Schaffland,
and John Schimelpfenig

New York, NY

Ask yourself this question: What was the total cost of recent investments in energy and commodity trading and risk management (E/CTRM) system implementation by you or your peers?

  1. Less than $1 million
  2. $1 million to $5 million
  3. $5 million to $10 million
  4. $10 million to $50 million
  5. More than $50 million

For smaller organizations, would options b) or c) be surprising? Investments of $1 million to $5 million are increasingly becoming the norm for smaller companies.

For larger organizations, would option e) surprise you? In fact, the authors are aware of at least two oil and gas companies that have spent more than $100 million towards their E/CTRM implementation.

No matter the size of your organization or the scope of your implementation, recent cost trends are indicative that total E/CTRM investments may perhaps exceed your preliminary estimates.

Why is the cost of E/CTRM implementation escalating?

Consider this: At the beginning of the 21st century, anecdotal evidence suggests CTRM/ETRM implementation costs typically averaged $ 1 million or less. Often those implementations focused on acquisition of trading and risk management software to address specific operational needs.

Business users today often seek to incorporate multiple commodities, geographies, and requirements within a single, end-to-end solution. Thus, implementations today tend to have broader goals and a wider range of activities with the increased spend related to geographical footprint, multiple commodity coverage, physical footprint, global derivatives markets, logistics and operations, business process improvements, and new regulatory requirements.

Added to these are the risks and costs of global projects, such as planning and timing of regional product roll-outs, availability of internal business resources, and scarcity of subject matter specialists in external resources – all of which contribute to unanticipated costs of scope creep, miscommunications, and misalignment of expectations.

Besides the more comprehensive business requirements and therefore the need for more software functionality, there are substantial project costs associated with complex software customizations to meet more expansive business requirements. In the planning stages for CTRM/ETRM implementation, the understanding of the degree and complexity of software customizations has not always held the proper focus.

While the above are legitimate reasons, they miss a key point – the extent and degree of customization. It appears with the increase in the apparent maturity of ETRM systems, the degree of customizations have also increased. And it is an area where focus has been limited. The reason is not that business and information technology managers are unconcerned about customizations – in fact, they are very concerned – but they often neglect one key area of focus – competitive advantage.

Where does your competitive advantage lie?

A commodity transaction can be broken up into its value chain – pre-transaction activities, actual transaction and post-transaction activities. There are many business processes that support each of these activities. Some of these high level processes are listed below (see related Figure):

Pre-transaction activities:

  • Conduct market research
  • Perform pre-trade scenario and portfolio analysis
  • Manage counterparty and contracts
  • Manage credit risk
  • Perform valuation and cash flow analysis
  • Manage reference data

Transaction related activities

  • Execute deal and capture transaction
  • Capture market prices
  • Perform risk analysis & valuation
  • Do real-time reporting

Post-transaction related activities

  • Manage confirmations & contracts
  • Measure and monitor risk exposures and profits
  • Undertake risk & management reporting
  • Manage scheduling and physical operations
  • Manage inventory & storage
  • Operational cost management
  • Perform settlements
  • Perform accounting and reconciliation
  • Taxes
  • Manage compliance

So, where does your competitive advantage lie? Is it in the pre-transaction activities or post-transactions processes? Do pre-trade analytics provide you with a competitive trading advantage, or does your advantage exist in the costs and efficiencies of your global transportation and logistics network?

Go back to the aforementioned list and consider those processes that truly offer you a competitive advantage, and consider the customizations undertaken or planned to match existing business processes, what percentage of those customizations was on business processes that actually offer a competitive advantage?

Leverage E/CTRM investments

One way to reduce CTRM/ETRM implementation complexity and cost is to link your customization to business processes that accrue the greatest competitive advantage. Having a proprietary process to model deals can offer a competitive advantage but doing scheduling for natural gas differently may have limited competitive advantage. Utilizing proprietary valuation to value your transactions offers a competitive advantage but using off-the-shelf valuation models for margin calls with your counterparty may be more appropriate.

Doing so can offer many benefits:

  • Reduced implementation complexity
  • Reduced implementation time, especially testing time
  • Reduced implementation costs
  • Smoother and faster upgrades, including installation of patches and bug fixes
  • Interfaces – potential ability to utilize vendor provided interfaces with minimal modifications
  • Support advantages from a relatively simpler system to support

But there are some factors to consider:

  • How will you manage the need for "additional" fields that the vendor software does not offer? Can you utilize attributes or other non-specific data fields?
  • How will you determine system rationalization/system retirement – replacement of legacy systems with single vendor?
  • What additional "value add" processes will you need to automate – i.e., adding shipping and logistics software to a trading & risk management system?
  • How will you address managing resulting change and user resistance?


E/CTRM implementation projects continue to grow larger and more complex. The number and degree of customization is one of the key reasons for increasing complexity. Linking customization of key business processes to competitive advantage can offer one way to reduce the number of customizations and thus the implementation time and costs.

About the authors

Prashant Shah, Roger Schaffland, and John Schimelpfenig are principals at Axcelerus, a specialized E/CTRM consulting practice.