More businesses who buy agricultural commodities should be
considering investing in commodity trading and risk management, or CTRM,
systems as the cost and complexity of implementing them reduces.
Increasing use of the cloud has seen CTRM become a more
affordable option, says Somil Goyal, executive director at consultancy EY.
"It can probably cut the cost by 25% or more across the
board. The cloud will make things far easier and a more attractive proposition,
but there aren't too many companies offering it yet."
CTRM systems have traditionally been regarded as being
expensive, sometimes difficult to implement, and often overly-complex.
Mr Goyal says all traders will have risk and management
systems, and while they may not be totally happy with what they have got, they
will rely on them.
However, he believes there is a much bigger group, those
companies who buy and use agricultural commodities, which should be seeing CTRM
as a useful part of their business.
Key considerations for CTRM
* Think about the functionality required. Do you need it to cover specific commodities or regions?
* Spend enough time considering how to make it work for your specific business.
* Consider features such as integration and how easy it is, and the level of support offered.
* If you are dealing with a company offering systems internationally, consider how good their support will be in your locality
* Consider the ongoing costs.
Source: Somil Goyal, EY
"The adoption rate for these companies is very low, at
about 20-25%, with the others making do with other types of system.
"These companies often feel CTRM is too complex and too
expensive for them.
"I have spent a lot of time telling companies about
CTRM, and they are open to the idea, but convincing them it is a good fit for
their business is hard."
'Risk is the biggest
Norbert Verhagen, managing director of risk management
solutions provider Tradesparent, agrees.
His system will pull data from all information sources used
by a company to build an overview, and is used by traders and processors.
"Risk is the biggest challenge to this industry, and
companies struggle with knowing what is in their books and what their risk
Mr Goyal admits cost can be a factor which dissuades people
from investing in CTRM, with some of the established systems costing large sums
to develop for each company.
He says the newer cloud options cost "substantially less",
often "hundreds of thousands" of pounds to get started rather than upwards of
£1m. Ongoing costs also tend to be much less with cloud systems.
"For that second group, this 'light touch' option might
be a good way forward, but it has been less successful than I initially thought
it would be.
"Clients get the idea, but I think they have been unsure
about whether systems developed for traders are the right thing for them.
A light, cloud-based option with proper integration into
their systems might be the key."
Mr Goyal also believes developing a "killer app" will be the
key to more enthusiasm for CTRM among processing companies.
Tradesparent has recently launched an app, allowing users to
create their own views, reports and tables from all company data.
"We've tried to make this flexible and customisable, so
people can see exactly what they want for their part of the business."
'Will save money'
Mr Verhagen is hopeful that developments like this will see
greater investment in systems.
"Generally, companies work with a variety of systems. Various business lines often require different systems and are regularly location specific.
"We see that more and more companies take a 'best of breed' approach, reducing the number of systems and therefore accepting the fact that 'one system for all' is hard to accomplish in our industry.
"Today, the market is low, so margins are low, and the
first reaction of companies to this is to cut costs and IT.
"If we can enable systems like this, which work with current
data and IT, it will save companies money."
Mr Goyal warns that over-complicating what it required is
the biggest mistake companies make when they are considering a CTRM system.
"Sometimes a long time can be spent developing
functionality which is only used by one or two people - there is a temptation
to create too much complexity."
He has some key considerations for anyone contemplating a
CTRM system (see panel), but says the main focus must be on looking at scenario
analysis and the impact of future events.
"It has to tell you what the profit and loss impact