Companies can no longer afford to put off preparations for the
euro, even with the race towards e-business still to win, warns
Mark Vernon
The euro has again been in the headlines in recent weeks, and
not just because of the arguments of politicians. UK industry is
concerned about "euro-creep" - the insidious adoption of the single
currency, as companies from "in" countries effectively demand that
trade with them be conducted in the currency. This is far more
alarming for firms that are not yet ready. It undermines the
security implied in the chancellor of the exchequer's "not yet"
statements, suggesting that companies need not address euro
compliance yet either.
So is the euro high enough on UK plc's agenda? And what will it
take for business to be ready for the single currency, whether it
creeps or crashes into commerce across the continent?
Analyst opinion is that many companies both in and out of the
euro-zone are not addressing the issue of the single currency with
enough urgency. The relative smoothness of the introduction of the
euro in most European countries has encouraged many companies to
believe that adapting to it is not difficult and that they have
plenty of time left in which to do so.
However, as Michael Littlechild, a consultant at KPMG, points
out, such complacency is ill-judged. "It is our belief and fear
that as 1 January 2002 approaches some companies may find
themselves inadequately prepared for the change-over. Many more
will be facing a new world in which they are unable to compete."
And that goes both for those who are in and "out".
Added to this, throughout 1999 the programmers who would have
been deployed to help companies overhaul their IT to cope with the
introduction of the euro were busy preparing for Y2K. The strain on
resources led companies such as IBM to recommend delaying
implementation of European economic and monetary union (Emu) until
after the turn of the century.
But now another issue has become more pressing - e-business. The
advice is that companies that have yet to begin euro conversion
projects must act now, while they still have spare capacity to deal
with Emu projects. As Gartner analyst Di Maio says, "Not everything
that starts with an 'e' is e-business."
So, contrary to a good deal of popular opinion, the euro is not
a dead issue. Business & Accountancy Software Developers
Association (Basda), for example, reports that fewer than 10% of
its members have met even the first level of its checklist for Emu
compliance.
"Many companies do not have euro-compliant software in place
and, equally as alarming, as few as 5% of companies have embarked
on conversion projects to prepare themselves," says Basda member
Tim Tribe, head of product management at Coda. "Users of financial
accounting software, both within and outside of the euro-zone, need
to treat the issue with the urgency it requires to avoid the extra
costs and tremendous business risks that late conversion will
incur," he warns.
So what is the scope of a euro conversion project? The matter
originally dawned on the business community as an IT issue,
coinciding uncomfortably with Y2K, but since then has come to be
understood as an event that has a deep impact on the business,
including issues from pricing to procurement.
"By 1 January 2002 all companies conducting business in an
Emu-participating currency will need to convert to the euro. The
impact can be compared to the Y2K issue, in that all systems
processing data in Emu currencies will need to be analysed and
amended to be euro-compatible," says Massimo Rapparini, a senior
consultant at Renaissance. "However, to a certain extent, the
implications are even more far reaching than Y2K."
Some companies are therefore treating the euro as not so much a
commercial necessity, more a business opportunity - being proactive
about euro-creep and leveraging the future of their enterprises on
the trading advantage it represents. But for followers, and even
for those outside of the euro-zone, the next 18 months to 2002,
when the first phase of currency implementation is complete, will
raise a number of important issues.
Emu conversion begins with technical issues, from the concerns
of accountants such as triangulation, to matters such as layout and
design: will invoices or price tags have enough space to include
multiple currencies, for example?
Most financial and enterprise resource planning package
suppliers have now thought through these issues and an upgrade will
suffice to deal with them. "Most software vendors provide their
clients with utilities to make their application euro-compatible.
Sometimes, though, specialist skills are required to use those
utilities," says Rapparini. "To limit the information loss and be
able to continue conducting business within the Emu companies
should start by 1 January 2001 to tackle all their systems holding
Emu currency data."
However, the implications of these changes do not stop there. An
upgrade is an IT problem, but changing price structures, for
example, can send ripples right down the supply chain. On the high
street, a euro price that will appeal to customers might require
one fewer buttons on a dress in the clothes store. But in
manufacturing, where thousands of parts come together, it could
lead to the total redesign of a car.
These are still reactive concerns. But the more savvy businesses
will consider the savings that can be made too. There is the
obvious advantage in procurement where buying in a single currency
removes exchange risk. However, a euro project might also become
part of a much larger plan for an IT consolidation project,
centralising systems Europe-wide. Furthermore, the justification
for such a move has never made more sense then in the age of
e-business.
This is business. But technology is key. So the final word is
one of warning. Flexibility of Emu IT investment is crucial. The
single currency is a certainty, but it is also an experiment. It
could go wrong. So take care that technology choices now do not
lock you in later. Economic and monetary union is about as
exciting, but also about as challenging, a business change as you
get.
Euro practicalities
Planning
Resource management is the most obvious planning issue,
complicated by the fact that, for many, the core tasks need to
prioritised and secondary matters put to one side. Planning is also
important so that unexpected issues are revealed in good time. For
example, the question, "What do I need to do as a result of the
euro?" could become, "What might I do as a result of the euro?"
When issues such as price structures are involved many parties
beyond the IT department will have an interest in conversion. And
at a more advanced level, matters arising from the advantageous
redenomination of stock to capitalise on equity opportunities to
defining sales targets in new markets that open up as a result of
the single currency could emerge.
Strategies
The main strategic objective for any IT project is to minimise
commercial disruption and maximise business advantage. For this
reason, a big bang approach, possibly focused on E-day, the day
euro cash becomes legal tender (1 January 2001), is generally
rejected. The pressure on IT departments is too great, to say
nothing of the vicissitudes of negotiating with customers and
partners. So the favoured alternative is to plan a transition
period. Euro adoption will begin in one department, probably
running in tandem with legacy systems, and as errors are eliminated
and lessons learned the new currency will then be deployed in other
areas - ideally, for companies fully "in", with a completion date
of January 2002.
Testing
Research firm Ovum has estimated that of the $300bn (£188bn)
spent on converting, half will be spent on testing alone. However,
the danger is that, because of the pressure on time and resources,
testing will fall down the list of priorities. Testing for euro
compliance is also complicated by the fact that there is a
transition period in which systems will operate differently from
completion. Best practice is that testing should be regarded as an
ongoing process that runs with the project. In practical terms this
means deploying test management tools that scan code while other
development tools are converting applications. Regression
methodologies that allow non-specialist staff to supervise the
program are recommended too.
Treasury
While compliant financial software will take the treasury a long
way into the euro, policy decisions also need to be thought
through. For example, rounding regimes, effected by the rule that
euro conversion must be to six significant figures, must be agreed.
Alternatively, financial reports might benefit from the production
of new means of assessing the impact of exchange rate fluctuations.
Emu legal demands must also always be implemented fully. On the
other hand, the board and other senior managers, struggling to come
to terms with what a euro feels like might require reports in the
local denomination, with euro comparison and reconciliation. Beware
of analytical software for the desktops of high-level decision
makers that is not catered for by euro-compliant financial
packages.
Human Resource Systems
The HR areas most vulnerable to Emu change are payroll,
retirement funds, contracts and expense accounts. The main
difficulty to overcome here is the demand on systems that, in
effect, have to perform twice the number calculations and store
twice the amount of information, as well as support interfaces
between euro and local denominations.
Historical Records
A key question for any organisation converting to euros is
whether or not historical financial information should be converted
as well, and/or whether records should be held in joint currencies.
The reasons for doing so are to keep risk, trend and management
analysis online. But the complexity of fully converting legacy data
en masse will probably mean that data is more likely to be
converted as it is required. This could have a serious impact on
system performance and database capacity. Policy decisions need to
be made too, since, for example, delivering meaningful share
capital trends in two currencies will be quite a different task
from providing a history of asset values.
Useful URLs
Case study: Wellman International
Wellman International is the world's largest recycler of
plastics and a leading manufacturer of fibres, plastic packaging
and engineering resins made from both virgin and recycled raw
materials. Based in Ireland, the company manufactures 1.1 billion
pounds of fibre and 610 million pounds of resins annually at five
major production facilities in the US and Europe.
Wellman decided that early conversion to the euro made the best
business sense and used the latest version of Coda-Financials to
confront this challenge. The key reason for implementing this
accounting software was that it gave the company the flexibility it
required during the conversion period without compromising its
currency management during day-to-day processes. Apart from
becoming euro-compliant, other benefits to the company included
being able to produce its accounts in a single currency along with
all reports flowing from those accounts. Previously it produced
invoices in 22 different currencies.
Jim Greene, credit controller at Wellman, also points out that
trading in the euro eliminates the risk of gain and loss on
exchange exposure that all trading companies face. Furthermore, he
believes that conversion now can be seen as investing in the
company brand. "We decided to be proactive and convert at the
earliest opportunity. Wellman is a progressive, forward thinking
company," says Greene. By converting our corporate accounting
systems to the euro at the first opportunity we are ensuring that
others also see us as such.