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January 18, 1999

Euro Is A Slow Go

System conversions still lag in currency transition

By Bob Violino

he first phase of the euro kicked in on Jan. 1, with 11 of the European Union's 15 countries standardizing on the currency for noncash transactions such as credit-card and check payments, invoicing, electronic funds transfer, and stock pricing. Yet with such a profound change in the European market threatening to affect everything from financial systems to supply chains, many companies, both in Europe and the United States, are taking a wait-and-see approach--or even ignoring the euro altogether.

SUPPLY CHAIN:

Global Gravity
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EURO:

Euro Is A Slow Go
System conversions still lag in currency transition

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Small But Nimble
Emerging enterprises use IT to go international

Business Intelligence:

Value Chains Go Global

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Those companies aggressively preparing for the euro see a golden opportunity to gain an edge on competitors in Europe simply by being ready to handle the new currency as it takes hold. Case, Chase Manhattan, Ford, State Street Bank, and Tektronix are among the multinationals spending millions of dollars and devoting huge staffs to the changeover, making euro readiness an IT and business priority.

But these companies appear to be the exceptions. Studies show that many companies aren't making system changes to support the euro or exploring the business opportunities the new currency presents. Only 11% of 411 IT managers surveyed by InformationWeek Research in November and December say they have completed euro conversions, while 27% say they're still assessing the systems impact. Eighteen percent are aware of the euro but unconcerned about its impact on IS, and 19% either aren't planning an assessment or aren't aware of the euro. Of those companies that plan to make system conversions, about one-third expect to complete the work within the next 36 months, while 29% don't know when they'll be done. A mere 12% of the managers see the euro as a significant challenge for managing electronic purchasing or sales applications in multiple countries.

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Even European-based companies, while ahead of their U.S. counterparts, have been slow to prepare for the euro. Some 40% of the 307 large European companies surveyed by KPMG Peat Marwick in September hadn't yet estimated the costs of adapting their IT systems and business processes to the euro.

KPMG maintains that the euro will have a dramatic impact on markets, supply chains, and sources for supplies. With one currency, companies that procure supplies in Europe will be able to more easily compare prices, which could lead to greater competition. It will also reduce accounting costs, since companies will have fewer exchange rates to grapple with, and cut out paperwork and back-office activities related to multiple currencies.

"The euro is an opportunity to simplify ways of doing business in Europe," says Michel Castiel, euro project leader in the Paris office of Case, a Racine, Wis., manufacturer and distributor of agricultural and construction equipment. "It affects business processes throughout the chain, in purchasing, manufacturing, and selling to customers. Now we see a single market in front of us."

How Important?
But many companies are still struggling to understand euro-driven changes, according to the KPMG survey. For example, only one-third of the executives surveyed say the influence of the euro on where their company sells and sources products would be very or fairly important. Half of the companies aren't jointly testing systems with suppliers or customers.

"Many users report that they plan to treat the coming transition to the euro as if it were 'just another currency,'" says Meta Group analyst Alexander Kopriwa. "This attitude grossly underestimates the euro's impact." Companies assume the euro will present no major challenges because their business practices and systems already support multiple currencies, Kopriwa says. "But implementing the euro is different from adding support for an existing currency," he says. "There is a necessity to include the euro as a 'lingua franca' among different trading partners once transaction values are converted to the euro."

Why the lax attitude? For one thing, there's still much uncertainty surrounding the currency. Although major European multinationals such as Siemens in Germany and Philips in the Netherlands are trading in euros from the start, many European companies aren't sure when they'll begin doing transactions in the new currency. Under the schedule set by the European Monetary Union, the euro and national currencies will coexist for three years. Euro coins and bank notes will go into circulation on Jan. 1, 2002; six months later, the euro will replace the national currencies of participating countries.

Another unknown is when the remaining European Union countries--Denmark, Greece, Sweden, and the United Kingdom--will join Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain in adopting the euro.

"A lot of companies are in a reaction mode. They're looking to see what the true impact will be instead of taking a proactive view and looking at how to use the euro to their benefit," says Bruce Fiumara, a euro consultant with Ernst & Young in New York. "I think in the first quarter of this year, we'll see a lot more companies taking action."

In the United States, pockets of companies, especially banks and other financial firms, are prepared for the euro, says John Devereaux, a partner with PricewaterhouseCoopers. But manufacturers, in particular, are lagging behind the institutions, he says--and companies that don't get up to speed quickly could lose business. "Some major European multinationals already are demanding all price quotes and billings in euros," he says.

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Top Priority
To avoid losing customers or potential sales, some companies are making changes to support the euro in applications such as general ledger, accounts payable and receivable, taxation, price listing, payroll, and expense account.

"It's in our top five priorities list, and may be No. 1 right now," says Steve Reese, IS director of worldwide computer services at Tektronix, a Beaverton, Ore., electronics maker that derives 30% to 40% of its sales from European operations. Reese reports no euro-related system problems since the new year, noting that the company is taking orders for products in euros from customers in Belgium.

Tektronix's system conversions were made easier by its move to unified financial systems for all its global operations. Tektronix, which has moved all worldwide financial applications, including order entry, accounts receivable, and accounts payable, to Oracle Financial Applications, completed the software conversions before Jan. 1. Among them: adding the new currency to conversion tables, calculating how currencies will be rounded, and accommodating the complex "triangulation" process, in which one currency may be converted to euros, then euros converted to a third currency.

Tektronix is now handling customer and supplier transactions in euros, says Beatrix Thoma, Tektronix's euro project leader in Vienna, Austria. The software changes were relatively painless, Tektronix says, but the company has spent hundreds of thousands of dollars and devoted eight teams of 50 full-time sales, marketing, customer service, human resources, finance, and IT people to do euro work.

For Chase, the stakes have been even higher. The bank has spent $75 million preparing for the euro and has had more than 1,000 people in 70 groups working at least part-time on euro conversions and business development. Chase has had to make changes in some 800 programs that handle euro clearings, support triangulation, accommodate the euro rounding requirements set by the EMU, and deal with historical financial data. The systems changes allow Chase to clear euro transactions and handle the transition period when the old currencies will become denominations of the euro at fixed conversion rates, says Nigel Knight, project manager for the euro at Chase Treasury Solutions in Bournemouth, England.

Chase's conversion weekend went "better than the dress rehearsals," reports Knight. But Chase and other banks have been having problems clearing some payments in euros. Among the problems: payments not getting made or being made to the wrong place, and delays in clearings because of backlogs. Knight adds, however, that the problems are in line with industry expectations.

State Street Bank began its euro preparations two years ago and is supporting the new currency in its treasury, cash-flow management, and foreign exchange businesses. A euro steering committee comprising 18 executives from key business areas has guided strategic and systems conversion efforts. James McDonald, until last month senior VP and CIO of State Street Bank, declined to say how much euro conversion has cost the bank, but he says several hundred IT people have worked on the project. State Street also benefited from having moved to a single global financial system.

Some organizations are even working with competitors to prepare for the euro. Chase is part of the Heathrow Group, an association of the 31 largest banks operating in Europe formed to address payment problems related to the currency. "If any one of the banks has difficulty clearing trades in euros during the conversion, other banks can respond," says Knight.

Case, which has manufacturing plants or subsidiaries in Austria, France, Germany, and Spain, also places the euro high on its IT priority list. "It's not something anyone considers strategic, because it's happening to everyone," says VP and CIO Rick Davidson. "But the pace at which you accommodate the euro and how you do it can be considered strategic."

Case has focused on being able to trade in euros with its retail and distribution customers from the start, Davidson says, converting code in purchase-order, invoicing, and payment applications. By early 2000, it will have converted back-office systems such as general ledger, payroll, and accounting. The company has also benefited from having a single global system that handles transactions for all the euro countries, Davidson says.

The euro will allow multinationals to make statistical comparisons--such as sales or financial performance--among their subsidiaries in different European countries without having to make currency conversions. Also, supply chains can more readily extend across borders with a single currency, and the euro could facilitate electronic commerce.Analysts say those companies waiting to see what changes the euro brings could miss out on opportunities. "The euro is going to have more of an impact than many people think," says Meta Group analyst Rob Schafer. "If you're a U.S. company and you really want to maintain a presence in Europe, you have to deal with the euro."

Even though the euro won't be the exclusive currency of the participating countries for several years, it's already grabbing mindshare. "I just went to the ATM to get some money and there was a notice telling me to be ready for the euro," says Paul Brennan, European operations director at Tektronix. "It's very much on everyone's mind."

--with additional reporting by Janine Milne of InformationWeek U.K. and Sylvie Blanc of Informatiques

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