ctrm value survey and anaysis
DESCRIPTION
The environment of physical energy and non-energy commodity trading and marketing has grown increasingly complex, marked by globalization bringing about rapid changes in supply and demand patterns, increased regulatory scrutiny and evolving trading and reporting rules, volatility along the entirety of the physical supply chain, and increasing uncertainty as to future price movements.TRANSCRIPT
In Cooperation with
Allegro Development
Commodity Technology Advisory LLC19901 Southwest Freeway, Suite 140Sugar Land, TX 77479281-207-5412www.comtechadvisory.com
CTRM Value Survey and AnalysisNovember, 2013
CTRM Value Survey and Analysis
© 2013 Commodity Technology Advisory LLC 2
Report Background and OverviewThe environment of physical energy and non-energy commodity trading and marketing has grown increasingly complex,marked by globalization bringing about rapid changes in supply and demand patterns, increased regulatory scrutiny andevolving trading and reporting rules, volatility along the entirety of the physical supply chain, and increasing uncertainty asto future price movements. In order to react to these changes quickly and appropriately, participants in these markets mustincreasingly rely on a sophisticated infrastructure of software and technologies to ensure a complete view of their tradingpositions and external market conditions that can quickly and severely impact their values. The core component of thesenow requisite trading and marketing technologies are energy and commodity trading and risk management (CTRM) systems.
As market complexity has increased and multi-commodity trading has become more common, CTRM solutions have had tobecome more sophisticated and provide a greater depth of capability in order to capture and value the uniquecharacteristics of the multitude of physical commodities being transacted along the physical supply chain, from source tomarket. Given the capabilities of these CTRM systems, they do represent a significant investment for any trading ormarketing organization, generally trailing only the large scale ERP solutions, like SAP, in terms of costs to purchase andimplement.
Allegro Development, one of the world’s largest CTRM solutions providers, engaged Commodity Technology Advisory toconduct a survey of a number of their clients to determine their views as to the value of their investment and the operationaland financial impacts of deploying Allegro’s CTRM solution.
This report summarizes the results of that survey and discusses the key considerations for any company seeking to developtheir own assessment of the value of their CTRM technology investment via a Return on Investment (ROI) calculation.
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SUMMARY - PERCEIVED VALUE
The survey respondents provided a current estimate of the value received from their softwareinvestment (ranked very positive thru very negative). Given the investment required to implement andintegrate an enterprise scale CTRM solution, it is expected that companies who have had the system in
production for a very short period of time will not have yet recouped that initial investment.
Only one of the respondents indicated they had calculated a Return on Investment (ROI) value relativeto their CTRM purchase and implementation.
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RESEARCHDEMOGRAPHICS
Commodity TechnologyAdvisory interviewed
individuals at 20 Allegrocustomers over a several
week period in thesecond quarter of 2013.
The companies andindividuals participating
in this project wereinitially contacted byAllegro to seek their
participation.
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IMPROVING ACCESS TOINFORMATION
One of the primary goalsof all purchasers of a CTRM
system is to improve theavailability of information
to all users, particularlythose whose performance
will have the greatestimpact on the bottom line.
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REDUCING COSTS AND INCREASINGEFFICIENCIES
Realizing positive value for a CTRM system is in largepart dependent upon improving operational
efficiencies while containing costs
Impr
ovin
gEf
ficie
ncie
s
Con
tain
ing
Cos
ts
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RESPONDING TO CHANGESIN BUSINESS AND MARKETS
CTRM systems should facilitate growth,including growth of current business and
expansion into new markets andcommodities
IMPROVING CONTROLS WHILE MAINTAINING USERSATISFACTION
Research has consistently shown most users will prefer spreadsheetsfor managing their individual business responsibilities; reducing the
plethora of risk exposures associated with spreadsheets whilemaintaining high user satisfaction is clearly a positive net benefit
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RESPONDING TO CHANGES INBUSINESS AND MARKETS (CONT’D)
The scalability provided by structured CTRMsolutions, like Allegro, enables business to grow
their market reach and capabilities withoutsubstantial incremental increases to their
technology spend.
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Determining Return on Investment (ROI)Determining the return on investment (ROI) for a CTRM software acquisition can be challenging as one of, if not the,
primary drivers of such a purchase is risk reduction - including price, credit, regulatory, operational and execution risks.Deploying a modern CTRM solution, like that from Allegro, will when compared to a spreadsheet or manual process,
reduce the risk exposures in virtually all areas of your business while simultaneously improving information visibility andenabling better and more profitable decision making. Precisely valuing an avoided event is not possible, but utilizing your
company’s past experiences can inform the value you may or may not place on reduced risks and can be an importantdeterminate in valuing your software investments.
Other benefits can be more readily measured and are based on your company’s past and current experience in utilizingsoftware to capture deals, manage positions and risks, account for your business, and analyze and report activities.
Whether your most recent experience prior to implementing a new CTRM solution was the use of spreadsheets, a customdeveloped solution or another vendor product, many of the changes in terms of costs and benefits can be reasonably
measured and used to calculate an ROI for your latest software investment.
Return on Investment = (Benefits - Costs) / Costs
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COSTSInitial license fees or incremental ongoing service orrental fees vs. the similar costs of replaced systemLicense fees for add-on modules or ancillarysoftware such as database solutionsSupport & Maintenance costs – incremental vendorS&M contract cost and internal staff vs. similarcosts of replaced systemAdditional fees – escrow for source code etc., ifhigher than replaced systemEstimated procurement costs (cost of personnel,facilities and equipment involved in theidentification, testing, and contracting of thesoftware)Implementation costs including both internal andexternal costs related to human and technicalresources for data conversion, training, integration,and testingCosts associated with parallel testing/usage duringUAT.Periodic upgrade project costsInternal hardware costs including maintenance –live, test and other environmentsOperational issue costs as a result of softwaredeficiencies – if anyWork around costs (man hours, software, customdevelopment) – if anyCost of on-going or periodic training
BENEFITSValue of reduced headcount costs across business process or possibly switch from direct full-timeinternal staff costs to variable, on-demand external headcount costs via use of third partyconsultantsReduced operational risked via saved penalties and fees as a result of reduced errors in areas suchas scheduling, Invoicing and paymentsReduced cost of credit and credit facilities due to better management of both cash and credit –this is on both sides in offering and receiving optimal collateral to support actual trading needsReduced FX costs due to better management of FX and reduced need for FX conversionAbility to optimize trading data costs – i.e. consolidate and reduce Bloomberg, Reuters, and otherdata feed requirements?Improved Market Risk Management – improved hedge performance, improved decision making,etc., yielding improvements in P/L, MtM, and cash management and reduced exposure tonegative credit events such as margin calls.Improved counterparty relationships as a result of more timely confirmation and settlement –improved market reputation will reduce costs of finding and negotiating agreements withcounterpartiesReduced technical and business maintenance and workaround costs vs. replaced systemImproved identification of trading opportunities resulting in better resultsImproved visibility into current performance reduces management and external (banks,shareholders) anxiety which in turn has an impact on capital requirements and staffing.Improved ability to forecast business performance potentially reducing capital requirements andimproving stock performanceImproved auditability and controls reduces chance of compliance issues and decreases costs of anaudit.Improved tracking of payment terms and slow payments resulting in faster cash collection ortrading decisions – i.e. no trade, buy only etc.Marginal ability to attract better quality staff
Benefits and Costs to be Considered When Calculating ROI
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About Commodity Technology Advisory llc
Commodity Technology Advisory is the leading analyst organization covering the Energy and Commodity Trading and RiskManagement (E/CTRM) technology markets. We provide invaluable insights, backed by primary research and years ofexperience, into the issues and trends affecting both the users and providers of the applications and services that are crucialfor success in markets constantly roiled by globalization, regulation and innovation. The company is led by Co-ManagingDirectors Patrick Reames (USA) and Dr. Gary M. Vasey (Europe), who collectively have more than 60-years of experience inthe energy and commodities industry.
Commodity Technology Advisory19901 Southwest Freeway, Suite 140Sugar Land TX 77479+1 281 207 5412 (USA)+420 775 718 112 (Europe)
www.comtechadvisory.com
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About Allegro Development
Allegro is a global leader in energy trading and risk management solutions for power and gas utilities, refiners, producers,traders and commodity consumers. With more than 29 years of deep industry expertise, Allegro’s enterprise platform drivesprofitability and efficiency across front, middle and back offices, while managing the complex supply chain associated withphysical commodities.
Allegro provides customers with agile solutions to manage risk across natural gas, power, coal, crude oil, petroleumproducts, emissions and other commodity markets, allowing decision makers to hedge and execute with confidence.Headquartered in Dallas, Texas, Allegro has offices in Calgary, Houston, London, Singapore, Sydney and Zurich, along with aglobal network of partners.
www.allegrodev.com