InformationWeek
Defining The Business Value Of Technology
January 26, 1998
The Euro: Are You Ready?
Probably not, since preparing systems to handle the unified European currency could be as complex as the year 2000 fix and nearly as expensive. But the job must be done 12 months sooner.
By
Bob Violino
The European Monetary Union currency, called the euro, will be phased in over three years, beginning on the first day of 1999 when p
articipating countries start using it for non-cash transactions. Under the EMU timetable, euro coins and bank notes will go into circulation on Jan. 1, 2002. Six months later, the euro will replace the national currencies of the participating countries and become their only valid currency.
The planned change will affect not only IS managers working for European companies, but also those at U.S. companies that have European units or partners-and these days, that's nearly every company. For technologists, the message is clear: Get your financial computer systems ready for the euro-or risk losing business. "If your customers in Europe demand euro support and you don't have it, you won't be able to offer bids and could lose business," says Nick Jones, research director of Gartner Group Inc.'s European office in London.
The euro is "creeping up on CIOs' radar screens," adds Rowan Snyder, chief technology officer at accounting and professional services firm Coopers & Lybrand in New York. "We're trying to understand the impact on financial systems."
That impact is expected to be substantial. Industrywide, software conversion costs in Europe alone will top $100 billion, estimates Gartner Group. This estimate includes the costs of upgrading larger corporate systems, but not PCs
or the software that will also need to support the euro.
Also, the euro issue, combined with mounting year 2000 conversion efforts, will create an even greater strain on already tight IT resources and could extend the IT labor shortage to 2004, predicts Meta Group Inc.
IS managers in the United States. could be off to a poor start. As they initially did with the year 2000 situation, many IS managers are downplaying the magnitude, difficulty, and cost of converting systems to handle the euro.
Two-thirds of the 100 IS managers with responsibility for European systems surveyed by InformationWeek in December are either evaluating the currency change or have completed evaluations, and nearly all of them say they'll need to upgrade or convert systems. Yet the same two-thirds also say they don't expect the euro conversion to be especially difficult.
They're in for an unpleasant surprise, say IS managers already at work on the changes. Euro conversions can be even more difficult than year 2000 conversions, they warn. "If you got 100 programmers in a room, they could be briefed on year 2000 in 10 minutes," says Nigel Knight, product and project manager for the euro at Chase Manhattan in Bournemouth, England. "With the EMU, it takes a good three months before you get the full view of the issues."
Adds Michael Klemen, director of cross-application marketing at German software vendor SAP: "Many U.S. companies are still asleep about the euro. They must be made aware of this issue."
At IBM, officials have already said they expect their euro-programming costs to exceed the year 2000 conversion costs for the company's European operations.
Chase Manhattan, General Motors, and Ford are some of the other U.S.-based multinational companies that have launched aggressive IS programs to prepare for the euro. They're finding it a tough job. For example, with each systems change-such as converting an invoicing program to handle euros-companies must consider the impact on customers that don't yet trade in euros. "It's like an onion," says Knight of Chase. "You keep peeling off all these layers, and with each layer there will be a lot of tears shed."
Off-Puttin
g Complexity
Many companies are likely to get tripped up by the complex conversions they'll have to make during the transition period when European national currencies and the euro coexist -- Jan. 1, 1999, to Dec. 31, 2002. "You will need to be able to handle transactions not only in U.S. dollars, but also in euros and in the local currencies," says Devereaux of Price Waterhouse.
While many IT vendors are working to ensure that their products can handle the new currency (see related story, "
Euro Help On Th
e Way
"), ultimately, it will be up to IS managers to make sure their own systems are euro-ready. "There's an assumption that the package vendors will solve the problem for you," says Gartner's Jones, "but that's wrong."
While vendors can provide base-level support, Jones adds, they can't configure their products to meet a company's business requirements or changes. User companies may have to restructure databases or internal accounting, and convert historical data. Also, vendors can't provide compliance for all of a user company's trading partners.
Adding to the confusion, European Commission rules will permit countries to adopt the euro at any point during the three years starting in 1999, so there's no telling precisely when a European customer or supplier will switch its accounting systems to the new currency. "Some invoices will be in euros, some in other currencies," says Bennett. "Will you be able to run parallel books? That's an IT consideration."
Some companies could start doing business in euros as early as next year. "At some point you'll need to provide price lists in euros," says Gartner Group's Jones. "And you may find that someone in your supply chain may want payment in euros."
One big plus: Most U.S. organizations already have financial systems that can handle transactions in several currencies. But a lot of them might not meet the requirements of the conversion rules. For example, today when a system is converted from one currency to another, it multiplies by a conversion factor, and when it goes
from the second currency back to the first it multiplies by an inverse conversion factor. But inverse conversion won't be allowed under the euro conversion rules, so all systems following this practice will have to be altered.
Although many of the political questions surrounding the euro have been answered, uncertainties remain-including exactly which countries will move to the new currency, and when. Eleven of the 15 countries in the European Union are committed to adopting the euro: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Still unsure are Denmark, Greece, Sweden, and the United Kingdom. A clearer picture of the euro timetable is expected to emerge when the European Commission meets this spring to evaluate the participating countries.
But the advice from analysts is: Don't wait for the political resolutions. "You can't put 100% certainty on what will happen, but at least if you know your exposure, you'll know how much time you'll
need to make changes," says Giga Group's Bennett. "If your risk is that you can't book invoices anymore if they don't come in a particular currency or you have to do thousands of manual conversions because the systems can't handle them, there are enormous business consequences."
Chase determined last year which of its systems would be affected by the euro conversion, and began revamping software
code in September, Knight says. The bank expects to complete most of the needed conversions by the end of March and start testing systems by June. "A large number of systems in Europe will be affected, but also systems in Asia and New York, because increasingly we run global systems," Knight says. Nevertheless, he says, Chase is "comfortable" that it will be ready to support the euro in its services beginning Jan. 1, 1999.
Not Quite Comparable
Ford, with nearly one-third of its worldwide manufacturing capacity in Europe, conducted a 120-day study of the currency situation last year and has since assembled a euro team that includes IT executives. "We're taking the view that the euro is li
kely to go ahead, so we have to be prepared," says Nick Smither, manager of worldwide finance systems for Ford in Dearborn, Mich. "We're looking at every application."
Ford has completed assessments of its systems in Europe, Smither adds, and is now evaluating systems in other parts of the world that may have to handle euros, too. By using a mix of internal and outsourced programming work, Ford expects to be prepared to exchange euros with auto and truck customers, dealers, and suppliers by the start of next year.
So does rival GM. "If someone walks into a dealer to buy a car in euros, we need to be in a position to support the dealer and handle those transactions," says Debby Hopkins, chief financial officer of GM Europe in Zurich, Switzerland, which accounts for more than 20% of GM's worldwide sales.
GM has assembled a full-time team of 14 people to work on the euro changes; it expects to expand this to nearly 100 people with help from outsourcer EDS. Also, migration to SAP's R/3 enterprise cl
ient-server system, which will be euro-ready when the new currency is rolled out, will help solve much of the problem, Hopkins says.
For IBM, which spends about $10 billion on procurement and employs nearly 69,000 people in the expected euro zone, the currency will affect 80% of its IT application portfolio in Europe. John Downe, EMU executive for IBM Europe in London, declined to estimate the cost of IBM's euro conversion, but says it will exceed that of IBM's year 2000 conversion in Europe. The latter figure could account for 10% of IBM's total IT expenditures in Europe over the next three years, Downe adds.
Little Surprise
Other companies are in the early stages of investigating the euro's impact on their IT systems. McDonald's Corp., which operates some 3,500 fast-food restaurants in Europe, is assessing the euro, and is also closely monitoring political developments in Europe.
To speed the conversion along, some IS managers may merge their euro and year 2000 conversion efforts. That's the route being recommended by Meta Group. It's advising clients to combine common efforts-such as systems analysis and cataloging-to determine which applications will need to be converted. Companies should also test methodologies to avoid wasting valuable programming resources and tools, Meta
Group advises.
Combining year 2000 and the euro conversions is a minority view. While some companies-including GM and Ford-are doing EMU work in conjunction with year 2000 fixes, about two-thirds of the IT managers in the
InformationWeek
survey say they don't expect to combine their euro and year 2000 conversions at all.
Either way, IT and business managers face a monumental chore. It's a job that will demand their attention as the century draws to a close, and put a lot of dollars-and soon, a lot of euros-at stake.
n the next 12 months, many IS managers will need to complete an assignment that's at least as complex as the massive year 2000 fix. This project is fraught with more uncertainties than the date-field conversion, it's likely to be just as costly at least in Europe, and-to top it off-it has to be done a full year sooner. What is this IT monster? The arrival of a single European currency.
Yet many companies have delayed assessing the cost and difficulty of converting
their financial systems to handle the euro. That's mainly because, until recently, political and regulatory wrangling have left them uncertain about exactly when the conversion will take place and which countries will adopt the currency. These uncertainties are quickly fading. "The bets from Europe are that there's a 90% to 95% chance of this happening," says John Devereaux, head of consulting firm Price Waterhouse's banking practice in New York. "Everyone is starting to wake up to the fact that it could be a big deal for their IT infrastructure."
The adoption of the euro will affect a multitude of systems and applications, including general ledger, accounts payable and receivable, taxation, price lists, payroll, expense accounts, and historical databases. It will also affect EDI and other electronic-commerce systems. On a more mundane level, the euro symbol will need to be incorporated in computer keyboards, screen and printer fonts, and applications.
Some IS managers are beginning to see the light. Nearly 40% of those surveyed by
InformationWeek
estimate their euro changes will cost more than $1 million. Nearly one quarter of the respondents put the figure at more than $2 million.
Martha Bennett, VP of European research at analyst firm Giga Information Group's London office, agrees that euro conversions can be more complex than year 2000 efforts. "With year 2000, the IT people can figure out what the problem is and fix it," she explains. "But with EMU, every part of the organization has to be involved. You might have to reorganize your business, including streamlining the supply chain and relocating manufacturing."
Time For Assessment
For that reason, all U.S. companies with subsidiaries, business units, or partners in Europe need to assess their exposure. Giga's Bennett says the questions to ask European partners and business units are: Do they have multicurrency systems? Will they be able to handle the euro conversion rules? When should they su
pport price lists in euros?
Taking Action
Some companies aren't wasting any time getting ready. Chase Manhattan, which has a huge and growing corporate cash-management business in Europe, has set up a bankwide euro team. It also has 60 smaller teams in individual product, geographic, and functional areas. "This is being looked at globally to make sure the bank is ready," says Knight. "The euro issue has strategic consequences and fundamentally affects our business, which is very much about handling different currencies."
Though Knight declines to specify exactly how much Chase will spend to modify these systems for the euro, he expects the cost will fall at the lower end of the $100 million to $300 million being estimated for large banks. By comparison, Chase estimates its year 2000 fixes will cost as much as $250 million.
As part of its euro strategy, IBM is keeping customers, suppliers, and employees up to date on its euro activities through an intranet. IBM has also formed a euro task force with representatives from accounting and finance, distribution, customer administration, human resources, IT and business information, product marketing, procurement, and treasury. The task force
has set January 2001 as the date for conversion of all internal systems and business processes to handle the euro. But many of IBM's systems will have to be ready well before then. "Some of our customers have said they'll be working in euros by Jan. l, 1999," says Alec Nacamuli, principal for the euro and payments practice of IBM Consulting Group.
But other advisers say that while year 2000 and euro conversions can be managed through a central project office, they should still be handled as separate projects. "When you're working on code, one could interfere with the other," says William Ulrich, president of consulting firm Tactical Strategy Group Inc.
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