 ETRM Software Market Heats Up - By Gary M. Vasey, Ph.D. Daily IssueAlert 4/7/2004 Free After an unusually prolonged period of industry uncertainty, the Energy Trading, Transaction and Risk Management (ETRM) software market is heating up again. It was the collapse of the merchant segment that created the uncertainty and it is the ripple of impacts from that event that are now fueling renewed demand. Industry issues such as the implementation of Sarbanes-Oxley and better corporate governance generally, counterparty credit issues, increased focus on assets and asset-centric trading, for example, are all directly or indirectly attributable to the fall of Enron and the other mega merchants. It's not just regulation and shareholder pressure that is driving the changes, indeed, the industry has learned a thing or two over the last several years and organizations such as the Committee of Chief Risk Officers (CCRO), and its recommendations, are also having an impact. Spending Increasing in Response to New Business Issues According to the Meta Group's 2003/2004 Energy Utility IT spending survey, IT spending in 2003 was led by spending to address security concerns. However, energy trading and risk management also saw greater investment with 43 percent reporting increased expenditures and 30 percent reporting level spending for the year. Meta's analysts see utilities' spending increasing again in 2004 by a modest amount based on the need to prepare for Sarbanes-Oxley, security, possible FERC mandates to improve grid reliability, the resurrection of wholesale market operations, and a stronger U.S. economy generally. UtiliPoint's own research also points to increased spending in the energy trading and risk management area. Its ETRM software demand survey of most of the key vendors points to steadily increasing demand for systems. In fact, a number of significant software licensing deals have already been announced by vendors including Allegro Development, a UtiliPoint client, Triple Point Technologies, New Energy Associates, KWI, also a UtiliPoint client, and Kiodex, for example. One company seeing increased demand is Houston-based supplier, Softsmiths. “We do see demand picking up and we're well positioned to capitalize on those opportunities with our current product and service offerings. While we are seeing longer than average sales cycles and tighter budgets, we are also seeing an increasing number of inquiries as evidenced by the considerable increase in requests for proposals over the last six months. This makes us very optimistic that demand for IT products and services, in general, has turned upwards and that our product offerings are in demand,” reports Hugo Stappers, vice president of Sales & Marketing for Softsmiths. Similarily, Chris Fountain, chief operating officer of KWI says that it is also “seeing very good pick up in demand this year in North America. Our sales pipeline has grown significantly since Jan. 1.” Mr. Raj Mahajan, president of ASP risk solution provider Kiodex that recently announced record revenue growth for its last quarter agrees. “We see demand increasing as a result of Sarbanes-Oxley, both for risk management software that emphasizes controls and market data that injects independence into the contract valuation process." What is Fueling this New Demand? While demand is being driven by new requirements resulting from business issues associated with the implementation of Sarbanes-Oxley, better credit management and risk reporting, it is also being driven by a more fundamental structural shift in the industry. With the demise of the larger merchants, buyers and suppliers of energy commodities now have less ability to outsource procurement/supply, scheduling and risk management functions. Consequently, utilities and producer/marketers alike are revisiting their requirements to procure and sell energy commodities and have to address risk management, credit management, accounting standards and other significant business processes impacting operations. As the industry has moved back to a more asset-centric business model, business processes have also been more focused on managing, optimizing and leveraging those assets. This trend has also had an impact on software requirements with energy firms seeking good software tools to help manage the physical aspects of their business including tracking, measuring and reporting volume and other physical risks. “Interestingly, customers have changed their approach to the vendors somewhat. Given the budget constraints, they are certainly more cautious, but they have also become more knowledgeable—first, they have put more effort into understanding their software requirements, and second, they have done better research as to which vendors are best qualified to meet their needs,” says Softsmiths' Stappers. “Clearly, companies are trying to make the right systems decisions and ensure that they implement systems that fully deliver. They share with us their requirements for flexibility, with adaptive and configurable business solutions that easily integrate with their existing infrastructure to leverage existing software investments. Driven into a 'back-to-basics' physical environment, they are focusing on portfolio/operations optimization, where visibility is critical and real-time access to information imperative.” For many energy firms, the need to have better and faster access to more accurate information about their business and to be able to verify this information, is forcing trading and risk management software out of the spreadsheet era. For many years, energy firms have utilized spreadsheets and other stand-alone tools to track trading activity, positions and hedging activities. Under the new spotlight of increased scrutiny, spreadsheets have become a significant and avoidable business risk. Open to willful or accidental abuse, spreadsheets cannot be used to track trading or other limits, make it difficult to see a complete and timely picture of the enterprise's business and lack the security of access and audit trailing capabilities of more robust commercially available software. “The business seems to have stabilized late last year after a couple of years of uncertainty and now additional concerns over implementing regulations such as Sarbanes-Oxley, FAS 133 is clearly driving increased demand for commercial software, “ says KWI's Chris Fountain. For energy firms that have commercial software packages installed already, it is the impact of the last two to three years of uncertainty on the vendor community that is driving demand to replace those systems. Merger & acquisition activity between vendors in the industry has left some software products with a potentially shorter lifespan as the vendor withdraws support for older products while other vendors have had a difficult time addressing the industry's new requirements during a period of reduced cash flow. For some energy firms, business plans have changed dramatically as speculative trading activities have been curtailed in favor of trading around assets or as retail de-regulation failed to materialize as quickly as once was expected. The net result being that the energy company recognizes that it has the wrong type of software installed and needs to replace it. This is resulting in a wave of software replacement activity that is also contributing to increased demand. Selecting the Right Solution Remains Difficult The energy firm looking for a commercial packaged software solution faces a somewhat difficult task. Over 60 suppliers offer a variety of shades of software and all are eager to win new business. The key to selecting a suitable solution is to understand the business's requirements in some detail since, superficially at least, many of the software packages available today sound as if they have similar functions and features. However, while there are similarities in requirements across all companies that sell or procure energy and energy-related commodities, it is the differences in requirements that need to be considered carefully when reviewing potential software solutions. For example, what types of reports are required by the business? For a producer/marketer, various types of net back and Weighted Average Sales Price reporting capability is essential and these and the supporting calculation detail is not available in all software packages. Similarly, a utility with various types of generation assets may need to study carefully how well a particular software package can model and reflect those physical assets in its overall portfolio. Some are capable of utilizing very sophisticated models while others will rely on a simple approximation. Despite the difficulties involved in selecting an appropriate solution, the ETRM Software market is rapidly maturing and, although there may not be a perfect software solution or set of solutions for all energy companies, a commercial solution brings with it a number of imperative advantages over spreadsheets and other in-house tools. These include faster access to more accurate business information and the ability to provide an audit trail of activities. In today's energy business environment with regulatory, corporate and shareholder pressures on corporate governance and financial reporting and the general increasing pace of business, energy companies are seeking commercial solutions at an increasing pace. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2004. UtiliPoint International, Inc. All rights reserved. |
