Euro looms large

Euro looms large

Danny Maco walked out of the European Economic and Monetary Union (EMU) conference session looking shell-shocked. For one hour, he and roughly 200 GartnerGroup Symposium attendees listened with dropped jaws while analyst Darlene Brown delineated how the move to a single European currency will require massive changes to their business processes and IT systems.

According to Brown, conversion to EMU currency, commonly known as the euro, will cost companies five times as much as preparing systems for 2000, and this expense is not just a European problem. It affects any company with divisions, partners, or customers in Europe, including almost the entire Fortune 1000, Brown says.

"I almost went to another session, but I'm glad I didn't because this is serious," says Maco, information and communication systems manager at Saes Pure Gas.

He adds that piling euro conversion on top of the millennium project could cause management overload.

"Our executives are still reeling from the year 2000," Maco says. "How am I going to educate them about this?"

How indeed? If all goes according to plan, on January 1, 1999, the euro will become a wholesale currency used in bookkeeping and noncash transactions.

On January 1, 2002, euro bills and coins will be launched. Six months later, individual European denominations will be retired, and the euro will be the only valid currency in countries that include Belgium, France, and Germany. Between 1999 and 2002, multinational companies' enterprise systems will have to be bilingual in both the euro and local currencies in order to deal with banks, customers, suppliers, and divisions that convert to the euro at different times during the transition period.

Preparing systems to handle the euro will cost companies roughly $US100 billion, Brown estimates. To make matters worse, the first major milestone is only 14 months away, but 70 per cent of 101 non-financial firms surveyed by GartnerGroup say their organisations are not adequately aware of the issue. Meanwhile, conversion costs will continue to rise if companies remain oblivious, she says.

Is GartnerGroup indulging in some kind of scare-fest? Could Brown's gloomy estimates about euro-conversion costs and awareness possibly be on the mark?

"No" says one session attendee, a chemical industry CIO, with a grimace. "If anything, she is being too conservative."

Others experts agree with GartnerGroup's fundamental premise, if not the company's actual numbers.

"EMU is a bigger issue than year 2000 for those companies that are affected by it," says Martha Bennett, vice president of European research in Giga Information Group's England office. "The [compliance]-cost range I am seeing is $US20 million to $US300 million, depending on the organisation and what systems it's got."

Assuming analysts and users are right, euro-compliance will be a key make-or-break issue for companies planning to play in next century's global markets, and IT preparedness will largely determine whether companies succeed or fail.

In some ways, euro conversion is akin to the 2000 problem. Both issues have high-cost implementations, terminate on fixed dates, affect competitors at the same time, confuse executives, require scads of nitty-gritty coding work, and are inescapable.

But most experts say the differences are greater than the similarities. Year 2000 is a technology issue. If companies' systems are not prepared for dates after December 31 1999, calculations with date fields will become corrupted and systems will stop working. The concept is easy to grasp, and although the solution - fixing the date fields - is expensive and labour-intensive, it is not complex.

BUSINESS PROBLEM. In contrast, euro-compliance is a business issue with IT implications. Lack of preparedness for the euro in 1999 will have the more subtle and complex consequences of business gained or lost.

For instance, the euro gives companies the opportunity to generate vast savings on treasuries and bank-transaction costs. Companies that are not prepared to do business in the euro early in the transition period will not see those savings.

"Say I start out with 1000 pounds, travel through 15 countries, and only change money at the border," says Martin Mackay, director of global financial services strategy at PeopleSoft's office in England. "Based on exchange rates and transaction costs, I come back with 650 pounds. By reducing the number of currencies to one, I eliminate the loss."

Also, the euro is expected to affect pricing practices in European markets. Today, companies commonly charge different prices for the same products depending on whether they are sold in the German deutsche mark or the Italian lira, for example. When prices are in euros, differences will be readily apparent; therefore, pricing differently for different countries won't work, according to Michael Klemen, director of corporate cross-application marketing for SAP AG, in Germany.

"Pricing transparency will change consumer behaviour," Klemen says. "So we need to reconsider logistics, sales pricing, and distribution."

Because of the differences between 2000 and euro-conversion projects, experts advise companies to handle them separately.

"Merging year 2000 and EMU [issues] is an absolute road to disaster," GartnerGroup's Brown says. "These are not similar projects. You have a huge increase in risk by combining the projects."

However, some users disagree.

"There is definitely correlation in financial applications," says Barbara Schmit, director of IT for Computer Network Technology. "When you go into those applications and search for dates, you can also search for dollars."

Whether they combine projects or not, IT managers preparing IT systems for the euro face big bills. GartnerGroup estimates companies will pay roughly $US1.10 per executable line of code just for internal reworking of data-processing systems. Much of the cost is attributable to adapting financial systems such as invoicing and payments to handle the euro and the local domestic currency simultaneously during the 1999 to 2002 transition period. This process includes setting up conversion calculations at the transaction and balances level, and reconciling different accounting practices. (For instance, Italian companies round numbers down from 0.99, but most companies in other countries round up from 0.5 and down from 0.49.)The conversion schemes are further compli-cated by EMU rules. For instance, one rule known as "triangulation" requires that when converting from one currency to another (the deutsche mark to the French franc, for instance), companies convert to the euro in between and display the results to no fewer than six significant figures, according to Mackay. Companies have to write these new rules into financial, manufacturing, payroll, and reporting systems.

PC SUPPORT. Other IT costs include upgrading packaged application systems, converting historical data, testing, and updating PC desktops. For example, Microsoft says it will ship updated versions of the Windows 95 and Windows NT core fonts (Times New Roman, Courier New, and Arial) that include the new euro symbol later this year. If EMU rules or company policy require that the symbol be used, IT managers will themselves be upgrading many desktops. Also, they will have to train users how to access the symbol using keyboard shortcuts because today's keyboards do not support the symbol. GartnerGroup estimates PC-conformance costs such as these will range from $US147 to $US745 per PC.

"The issue is extensive," says Ian Williams, director of product marketing for Baan, in the Netherlands.

"When you change over your base currencies, it isn't a matter of going into your balance sheet and ledgers and just exchanging them. Everything right down to product costing, labour costing, inventory - everything - has to change," Williams says.

Complicating matters significantly is the fact that although the euro-conversion dates are set, members of the Brussels, Belgium-based EMU are still hammering out the transition's vital details. Some examples of unresolved questions include whether companies convert to the euro before each line item or at the sum, which produces different results; how to resolve differences resulting from rounding; and whether companies that switch to the euro early in the conversion time frame will submit tax returns in euro or national currency, Giga Information Group's Bennett says.

"We can't program something they can't yet articulate to the detail we need," Computer Network Technology's Schmit says.

POLITICAL UNCERTAINTIES. Another hurdle is that 2000 projects are lapping up companies' financial and human-resources staff. In the GartnerGroup survey, 70 per cent of users said they need to increase staff and are having trouble doing so. Shortages of experienced staff will lead to messy coding and result in higher testing and implementation costs. Furthermore, the longer companies wait to attack euro conversion, the less available and more expensive skilled staff will become.

"The mindset that 'if we can't fix it, we'll hire someone to fix it' is ingrained," Saes Pure Gas' Maco says. "My concern is that if we hold off too long, we'll be looking for resources and finding they are unavailable. What is a company to do at that point?"

Clouding the issue is political uncertainty about exactly which countries will join the EMU and when companies should begin their euro-compliance.

"The banks will switch right at the beginning," Baan's Williams says. "Big corporations are going to want to go early. Smaller companies will think they will wait until the final moment and do a one-time switch. But I think they'll find that it's not as easy as they [think it will be] and that there's nobody to help them on New Year's Eve, 2002."

Among the chaos and confusion, there is a glimmer of hope. IT managers who move can mitigate conversion consequences. For instance, those who face the problem first will pay 20 per cent less in labour and consulting costs than latecomers, and they will be in position to trounce ill-prepared competitors, according to GartnerGroup.

Many euro-watchers expect companies outside the United States, banks in particular, to be the first to use euro-compliance to their advantage. For instance, banks that are prepared to handle the euro can provide conversion services for their customers for a fee.

"We're aware of the problem because we have to do business with so many countries, but inside the US, the market is so big, companies don't have to think globally as much," says Juan Ignacio Cahis Llugany, head of the technology and data processing department for Banco de Chile, in Chile.

AWARENESS. Perhaps the largest challenge facing US-based IT managers is euro-awareness, so many firms are creating awareness teams.

"I spend a lot of time talking to customers about this issue," PeopleSoft's Mackay says. "Six to nine months ago, customers were just bringing me in for presentations. Now they're creating euro projects to look at the problem."

He estimates that 45 per cent of PeopleSoft's US customers and 75 per cent of its European customers are studying the euro's business and IT ramifications.

To deal with the EMU uncertainties, companies can conduct iterative, scenario-based planning. In a scenario-planning session, a project team contemplates the impact of its company for a given situation.

For instance, what happens if England joins the EMU or France requires reports to be filed in euros? Sketchy information will make the planning process difficult, but it is still necessary, users say.

"With the euro, there are too many variables right now, but I don't think those variables are going to go away," Maco says. "So we have to consider different scenarios."

Also, companies can start advanced preparations, such as putting currency indicators in new applications and including EMU-compliance clauses in new contracts with vendors.

Companies that have installed package applications from the major vendors may be in better shape than others. SAP, PeopleSoft, Oracle, and Baan are very aware of euro-conversion challenges and have plans in place to address them.

However, experts say users still should not be complacent.

"Everything is at the announcement stage, and it is by no means clear that the package-application vendors will be able to deliver on their promises in the time required," Giga Information Group's Bennett says.

And even if the vendors deliver on time, they can't address the entire problem.

"It's more than just our systems. There is always a lot of legacy code as well," SAP's Klemen says.

Dealing with the double whammy of 2000 and the euro may require more effort than most companies feel they can muster, but companies that choose to ignore the euro until the last minute may be in for a rude awakening.

"The EMU will create an economic area that will be at least as big as the US," PeopleSoft's Mackay says. "From 1999, it becomes one of the world's most important currencies."

So the advice of experts well-versed in EMU issues to IT managers boils down to this: stick this issue among the top five items on your to-do list.

Some helpful EMU Web sites:

KPMG survey of European companies' EMU projects European Commission of England, EMU section's euro-font facts but differentMerging euro- and 2000-conformance projects increases the costs and risks of both due to the projects' differing characteristics, according to GartnerGroupEMU characteristicsStrong business driversNew developmentMilestones of 1999 and 2002System functions changedUser and customer training requiredSubstantial documentation requiredSome uncertainty about result of noncomplianceYear 2000 characteristicsNo business driversLegacy systemsMilestone of 2000System functions unchangedLimited end-user trainingLimited documentationNo uncertainty about result of noncomplianceSource: GartnerGroupHow some package applications vendors will support the euroAccording to Baan, its enterprise resource planning system currently handles multiple currencies. The company is extending BAAN IVc, scheduled to ship by year's end, to execute financial accounting in three currencies simultaneously and to display the euro symbol. Companies can work in their local currency and view reports in both their local currency and the euro.

Oracle says it will address available European Economic and Monetary Union (EMU) requirements in Oracle Applications Release 11, due in the first quarter of 1998. Such requirements include reporting in national and alternative currencies, cross-currency settlements, revaluation and translation, triangulation, and round standards.

PeopleSoft's architecture allows users to run ledgers simultaneously in different base-currencies today, say company officials. PeopleSoft 7.5, due in the second quarter of 1998, will include capabilities such as automatic conversion of transaction currency to multiple base-currencies - including the euro - in payables and receivables modules, and support for EMU rules.

SAP AG says it already has multicurrency capabilities and that users can store information and display vouchers in as many as three currencies, including the euro, simultaneously.

In addition, SAP is programming EMU rules into a free R/3 upgrade, due in early 1998; the company will display a working application on December 11, 1997, at the SAP Euro Info Day in Mannheim, Germany.

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