Thanks to the COVID-19 pandemic we are all very familiar with the term ‘lockdown’. A situation where people lock themselves inside their homes to protect themselves from outside threats. Such a self-imposed lockdown also applies to energy trading firms continuing with their legacy ETRM systems, being apprehensive about the prospect of migrating to next-generation solutions. However, all of us have now come to realize that there are very costly economic and health consequences due to the pandemic related lockdowns, and this is no different in the energy trading market: Legacy (ETRM) Tools and the Cost of Lockdown.
Today’s environment is pressing organizations to become more agile. We are living in an increasing competitive and fast-paced world. Conditions that put pressure on companies to change. Forward looking companies are leveraging next-generation solutions to accomplish what their competitors are still doing with inadequate systems that cannot solve their challenges. Those willing to take risk, step out of their comfort zone and into the discomfort of uncertainty will be those who will reap the biggest rewards.
The ‘laggers’ are placing themselves in lockdown, trying to ‘play it safe’ with Legacy ETRM systems that were never designed for real-time operations, or for physical transactions, where settlement and accounting was an afterthought, or where the system misses the data structure and processing requirements for regulatory reporting. Similarly, in-house developed systems are challenged by constant market changes that requires firms to redo their work – a factor that has the potential to exponentially raise the cost of operations.
Many companies use Return on Investment (ROI) to evaluate the efficiency of an investment. In the context of the costly consequences related to lockdowns, we could reverse that by looking at the opposite of ROI, where Return is Loss, and Investment is Savings. We could use the same potential sources/areas of value that either reduce a pain or enable a gain when implementing a next generation ETRM system. Then consider when by holding on to a legacy ETRM system, the associated cost.
|NO increases in:||NO Reduction in:||NO Improvements to||NO Creation of:|
|Profit||Cost||Ease of use||New products/services|
|Efficiency||Defects, complaints||Capabilities||New business|
|Value of Offerings||Administration||Information||Digital systems|
|Retention||Number of systems||Reporting|
Estimate the Dollar/EURO cost for each outcome that applies and will accrue when NOT implementing a next generation ETRM system and sum those missed benefits to estimate the total value of your cost (losses).
As an example, assume a next-generation ETRM will reduce the administrative work the traders currently need to do, and effectively reduce trading headcount by 2 people. Assume a trader generates $5 million per year revenue. When not reducing headcount but taking advantage of an increase in revenue, as trading efficiency increases, the result of the outcome of a new ETRM system is effectively 2 extra traders = $5 million * 2 = $10 million in missed revenue when staying with the legacy system.
Another example: a next generation ETRM system will provide better visibility and management of the trading portfolio (open positions, inventory levels, etc). In particular, the improved near-real-time reporting will help resolve problems faster and facilitate trading opportunities. Assume this will improve the odds of winning business or preventing losses, estimated as $2 million annually. Another costly miss for companies in a self-imposed lockdown apprehensive about the prospect of migrating to next-generation solutions
Most legacy systems were designed with the back office as an after-thought. As are result, companies are deploying a small army of settlement analysts to manually account for their structured trades and imbalance calculations, using standalone spreadsheet-based solutions. A next generation ETRM system provides an integrated solution where the back-office will benefit from straight-through-processing and built-in workflow management thereby streamlining the contract-to-bill process. Taken together, the savings and efficiency improvement will be substantial (3-6+ FTEs). If an average fully loaded salary was $100k per FTE, a cost saving of $100k per year is used for each person eliminated (or available to be reassigned to more value-adding activities).
Driven by continuous change, challenges and chances, trading companies are forced to constantly look at automation, optimization, control, and analytics, while lowering their cost of trading. Many of them are held back by underperforming software, either disconnected spreadsheets, legacy in-house built systems, or vendor-supplied solutions incapable of adapting to new business processes. Modern business is about speed plus disruption. In times of disruption, the current playbook just doesn’t work. Neither will your legacy systems. Emerging from the comfort of your self-imposed lockdown will not only give you a breath of fresh air but access to next generation technology and implementation approach that enable you to operate in an environment where flexibility at a lower cost is required.
Pioneer Solution is now part of Hitachi ABB Power Grids. Its award-winning TRMTracker system delivers an Energy Trading and Risk Management (ETRM) solution that combines a lower cost of ownership with a modern and configurable approach to business applications. TRMTracker has been ranked by the Energy Risk Software Survey as Best Front Office software, Best Middle Office Software, and Best Integration Capability in the 2020 rankings. Trading & Risk Management (hitachiabb-powergrids.com)