Feature

E is for euro

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

  • Euro FAQs: members.aol.com/eurofaq/

  • Treasury "getting ready for the Euro" pages: www.euro.gov.uk/

  • European Commission Euro page: www.eurunion.org

  • Euro Business Network?: www.eurobusinessclub.nl

    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.


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    This was first published in September 2000

     

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