Evolving ETRM Usage: Process control, Efficiencies and Effectiveness
ETRM system implementations have grown beyond the traditional Position and P&L controls to providing organizations the processes to seek efficiencies in their trading operations. The evolution of that thought process is leading more organizations to expect support for effectiveness functions added into the solution systems. This article explores some of the considerations and practices being sought or employed by ETRM users as they move up the maturity curve of implementation.
The ‘Control’ Phase:
Looking back at the last decade, there is no doubt that the expectations from an ETRM system implementation have risen significantly. The early paradigm was to ensure daily position and P&L reporting and for the system to be the source of record for audit purposes and process controls. Even today this forms the backbone of any implementation. Having the flexibility to track positions from planning stages through execution of contracts, managing movements and inventory to liquidation and representing the delivery risk, the fixed price exposure and the pricing exposure remain key ingredients of initial phases. Providing transparency to the calculation of forward curves, transaction prices and thus the P&L on transactions allows for the tracking of market risk. The success of the initial implementation is in finding the balance between standardized processes that enable a companywide shared understanding of the numbers reported – while allowing flexibility in handling deviations which are so common in the commodities trading industry. The key process challenge continues to be ensuring the data in the system reflects the latest information available across the organization and the ability of the system to reflect the impacts of the changing information to each individual user’s role.
Looking at this early implementation model the theme has been ‘control’. The utility of the ETRM system in this phase is in providing visibility upwards and across the organization in terms of changes in the current state and the impacts to the business drivers. The combination of system and processes support the risk control aspects of the transaction lifecycle. Initial improvements in the decision support for the various roles interacting with the system are in controlling costs, controlling document flows, controlling credit exposure etc.
The ‘Efficiency’ Phase:
Immediately after the initial phase the focus turns to increased automation of the information flows. Now the utility of the system is more in its role as a hub for electronic information traffic. This replaces the swivel chair operations where effort is spent not only in re-entering information from one system to another but also the reconciliations that go into keeping the systems in sync. Processes which have been standardized in the first ‘control’ phase lend themselves to various levels of automation. Common interfacing at this phase include settlement and month end accounting records being sent to the GL system and payment information being fed back into the ETRM system from GL. Movement actuals and inventory levels from terminals, racks, tankage or inspections at the ports are prime candidates for some level of automation. Document creation such as contracts, confirms, nomination documents, invoices and LOIs offer an area of significant automation too. Efforts by organizations such as LEAP to bring together market participants and establish standards for the interchange of information having great success in many of these areas. These standards are also reducing the total cost of implementation of these efficiencies if the ETRM solution is creative in providing the rules engines that are generic enough and will manage the business processes at each company by their unique needs. With LEAP’s efforts in getting consensus on standards of information flows between counterparties making great progress, there is already a key part of the market that has already provided full electronic information exchange. The ICE, Nymex and many brokerage houses today already have established standards for providing the market platform and trade information to their customers for the most liquid instruments. Most of these data flows are already well tested, secured and allow themselves to be configured to enable significant automation on moving executed trades from the platforms to the ETRM system. Other areas lending themselves to automation are in LC and treasury management systems, specialized scheduling and tank management systems, specialized risk systems for VaR, CFaR, specialized tax management systems etc.
The ‘efficiencies’ phase of the implementation is tricky in mating existing business rules in the ETRM system with the desired business rules unique to each company and sometimes different among business units within a single company. The other universal problem lies in translations between reference data and ensuring that updates to reference data are shared among the hub and satellite systems. However, when planned and executed correctly the gains of the efficiency phase have the quickest ROI and spare the organization significant energies to focus back onto the business instead of keeping systems functioning. Savings are measured in reduced need for data entry and reconciliation, quicker turnaround on decision points and faster transaction lifecycle, reduced error handling and IT support and intervention etc. Improvements in decision support are realized in terms of the timing of the information availability, accuracy of the information and the ability to handle more information such as detailed specs, detailed credit status and costs of deviations etc. Key challenges are in the ability to accurately depict the end state of the workflow with the automation included and work through actual business scenarios through the current state, the transitional states if any and details around the cutover into the final state where most problems seem to occur.
The ‘Effectiveness’ Phase:
Many trading organizations and their IT teams have matured beyond the above two stages in their exploitation of ETRM solutions and are seeking. The requirements we get most often are what we call the ‘effectiveness’ utility of the ETRM system. There appear to be two themes in these needs. Firstly to look at the ETRM hub system as a hypercube of data that can be easily sliced and diced to provide business decision support and intelligence. The most common request is to be able to accurately pinpoint P&L changes and attribute it to changes in curves and its impact to trade cost or trade value or changes in actual qty over scheduled qty or changes in additional costs or changes due to new trades or changes in hedges or pricing events etc. and then drill down to better understand where the money is being made or lost. Similar requests come in easily testing ‘what if’ scenarios for roles such as trading, risk, scheduling, accounting and credit and the specific requirements of each of those roles from a position, P&L or cost basis. Other requests in this reporting ‘effectiveness’ framework are in hypothesis testing mode. Examples would be to trend changes in quality on supplies from a vendor or P&L trends on particular blending transactions or yield matrices or trends in P&L caused by flexibility in credit terms to certain counterparties etc. The ETRM provider needs a highly flexible reporting solution to enable the user to get answers to questions without needing to rely on IT or the vendor. The second theme is in supporting workflows and pushing information notifications to users. Thus affected users are informed as the ETRM information hub is updated by new data flows or events. The key requirement is to provide a flexible rules engine that each user can configure to their own workflow and each business unit can configure to their process. The outputs can be in the form of reports, notifications, alerts and alarms or task reminders basis some event and business rules defined in the rules engines. The challenge here is for the ETRM system to afford the user flexibility to setup their business process and control functions in a proactive way and make it easy for the effort put into the setup to be used by others in similar situations or to add on to.
This recent quest for ‘effectiveness’ functions within ETRM systems is aimed at helping organizations leverage their unique competencies and position in the marketplace. Additionally to provide intelligence based on the information companies already have but probably are not using entirely or continuously. Finally to enable better execution of the trade lifecycle by reducing the repetitive tasks into a series of event template reactions and focusing human energies on the value added steps. Supporting all these needs in a generic manner which also lends itself to quick implementation and exploitation is the challenge for the ETRM vendors and the IT organizations supporting these systems. The cost of lost opportunities and the costs saved through exploitation of such functions are so large as to make the investments insignificant in comparison. However there is a continuous conflict between the levels of effort required to make the solutions work under vastly different business processes and the need for speed and accuracy in getting the answers back to the business users. We have seen early movers reap great benefits in seeking better P&L through flexible credit offerings, better blending and grade matching operations, better negotiating capabilities, improved cost/P&L estimation and quicker reaction times to market opportunities.
Within the ETRM implementation maturity cycle at any organization there are different groups seeking priority for their agendas. An exercise such as creating a book structure to give the easiest access to position and P&L needs to reconcile the interests of risk management, trading desks, operations, accounting and often credit groups. Add to that implementation needs, performance and other IT needs and the whole process can get significantly slowed down in achieving the goals desired. It has been our experience that having significant participation from the various business groups is the only way to ensure that the evolution of the usage can be planned for and executed against in a sustainable and continuous manner. When there is energy around the exploitation of the benefits by the business users, there has been much better handling of the inevitable hiccups that occur along the way. The sharing of the common priority set enables the user community to recognize how they individually fit into the final state of operation. Success can also be accelerated by business users partnering with internal IT and external consultants to go through the design, build, test, deploy cycle and take ownership of the final solutions or processes.
Within the organizations seeking to exploit their ETRM investments in this ‘effectiveness’ stage of evolution – there seems to be a lot of energy generated in the effort to harness the creativity and competencies of the various player groups in this phase. This is of itself of great value to the growth and competitiveness of the organizations in addition to the benefits of a more controlled, efficient and effective set of processes.