The information Olympics


The evidence is hard to refute: swapping spreadsheets for specialist commodity management solutions helps create a winning business that makes better decisions, faster, and with more confidence.

Eight reasons to unhitch and make the switch:

1. Meet new regulatory requirements
The sense of complacency about spreadsheets is becoming almost impossible to sustain in the light of a tough new regulatory framework. Underpinning both Dodd-Frank in the US and EMIR in Europe is the need to increase the amount of transaction data to be recorded and stored, speed up its availability, and deepen the level of detail required. Timely reporting across all regions and markets is the minimum requirement to stay on the right side of the regulator.

Spreadsheets were never developed to collate and export large, comprehensive and unified data sets from multiple sources. They do not easily offer real-time responsiveness or enterprise-wide visibility. They do not support current needs for comprehensive risk mitigation, reporting and audit requirements and the regulations are only going to get more onerous; businesses need to adopt better toolsets than spreadsheets to be compliant.

Fortunately, commodity management vendors have worked closely with regulators to develop the necessary features within their solutions so that organizations can be more compliant. In contrast, a trading operation run on spreadsheets is just one fat-finger error away from a compliance breach, fines and even jail time.

2. Break down the corporate silos
Spreadsheets multiply; firms that rely on one, tend to rely on a dozen. By their very nature they silo information when having a portfolio view of total exposure is the only way to manage risk and make decisions effectively. A critical spreadsheet with a single owner/author is an accident waiting to happen, and it happens frequently, different people owning or enabling their own part of the business through one or more uncontrolled, unsecured documents has been proven to be “the weakest link” when it comes to financial accuracy, regulatory transparency and risk management.

Trust and transparency is key to the current/future business model; the use of spreadsheets is an indication that information is inadequately shared. The inevitable lack of data integration between the number and variety of spreadsheets usually results in different parts of the business running and reporting on incomplete or even inaccurate data sets. At critical stages of the value chain the left hand often doesn’t know what the right hand is doing.

Where a commodity management system is in place, however, it shows that integrated, front-to-back, business processes have been developed, and are supported by common data and rules. This business is more efficient and less prone to the information stove-piping that plagues their spreadsheet-dependent rivals.

3. Make the right decisions every time
Consider all the information that has to be recorded for each individual deal. Purchase, sale, and transportation costs; complex structured transactions, financial instruments and hedges; contract terms, collateral arrangements and currency fluctuations; inventory lists, prices and schedules, not to mention invoices and settlement statements. Add to that the benefit of netting cash-flows across deals, aggregating exposures to the parent companies for collateral coverage, and managing to policy limits. A spreadsheet is not an effective system of record. It is too laborious, too disconnected from policy – and too prone to error.

On the other hand, commodity management systems can accurately record all transactions from order through to cash to create a single, trusted, centrally available, version of the truth across all deals, different commodities and geographies. As these specialist systems evolved over the past ten years, they have honed this capability. Smart, next-gen systems like those available from commodity management specialist Eka can provide a single view that helps increase awareness among senior managers of how defined strategies are performing, the potential financial impacts and options for risk mitigation. Consolidated exposures, cash flow forecasting and single-truth reporting offer a new level of predictability and proactivity when it comes to managing financial performance, which in turn enables smarter risk taking. It supports real-time understanding of counterparty credit risks and exposures, enhances strategic planning and business-planning processes and allows for better allocation of resources and increased operational efficiency.

4. Get a grip on your real profitability: Pay for Performance
When deals are captured in spreadsheets, records of the associated costs will often be added separately to the ERP or financial systems. But the final costs for physical deals in particular can be significant and vary greatly in real-time. Fees for transportation, brokerage, and inspection, plus premiums, demurrage and invoice adjustments can soon wipe out the predicted profit of an individual deal.

Spreadsheets have no means to formally link deals with their costs in a timely manner, and offer very limited capability for accurate reconciliations and tracking of trends. In contrast, commodity management systems allow traders to record and analyze all-in costs to ensure a proposed transaction is as profitable as first appears. They make clear the full commercial value of a transaction as it evolves over the life of the deal from a single report.

Traders can compare the forecasted pre-deal costs with actual post-deal costs to assess real profitability, and can slice and dice profitability data by trader or, container, or business unit to support and improve future-decision making. For a real-time view of true profitability, commodity management is crucial.

5. Secure your data and your business
Spreadsheets are almost always the private domain of individuals who set them up to meet an immediate or specific need, with no thought to the wider demands of system management or the business need for risk management best practice. They are by definition, uncontrolled, free-range tools which people try to maintain as best they can despite changing business rules and market data, but often these owners leave, forget some part of the logic, or use the wrong version of the spreadsheet. Thus they are a huge security risk primarily because the calculations in those spreadsheets is are vulnerable to unintentional errors or purposeful interference. Audit controls are often insufficient to prevent these data integrity issues because of the variety and subtlety of the problem(s).

In contrast, commodity management systems demand both user and group security protocols to be established. They provide for effective user permissions and access, detailed audit trails, and management approval of activity. Well-implemented commodity management systems can enforce operational controls and so reduce opportunities for fraud. Configurable business rules allow organizations to instantiate business processes and risk policies, and to monitor compliance on a real-time basis through detailed and logical dashboards and alerts.

6. Overcome the information management hurdles
For businesses that depend on spreadsheets, managing data requires Herculean effort. The accurate monthly closing of the books is just one example. The number and variety of sources to be mined, combined and validated mean that data is often cut and pasted from one spreadsheet to another, spreading errors through the organization. The task then has to be re-invented each time: with randomly created spreadsheets involved, there is no repeatable process – and the end-result is difficult and time-consuming to query. And there’s no let up: as soon as one month’s books are complete, the information Olympics start all over again for the next month.

In contrast, commodity management gives organizational productivity and accuracy. It reduces the amount of time and effort spent on manual reconciliations of internal and external data. Information completeness can be ensured and repeatable processes created to further reduce the chance of errors rippling through the organization. Businesses that have made the transition to commodity management wonder how they ever managed without it.

7. Secure the best business results
Smart commodity management systems give traders and risk managers the ability to simulate new transactions in the current book, analyze multiple scenarios and then optimize portfolios and execute on the best outcomes. Although spreadsheets can provide some of this functionality with some advanced programming, the circumstances in which spreadsheets are normally deployed suggest it is unlikely.

More to the point, commodity management systems provide this out-of-the-box and in a multi-user, real-time environment. Add in advanced analytics that are embedded in next-generation solutions like Eka, and traders suddenly have real-time access to accurate P&L, VAaR, and mark-to-market exposures. These, and other metrics, can be continuously updated, with optimized scenarios being ranked to allow a trader to quickly identify the most profitable outcomes before entering a deal.

8. Keep stakeholders on side
Like it or not, there is no escaping the corporate governance agenda. Commodity management technologies have evolved to fill this need and are increasingly seen by investors, creditors, rating agencies and shareholders as an indication that governance and risk management is being taken seriously.

The latest incarnation of commodity management systems have been designed from the start to provide a secure, official and time-stamped version of events that can be verified against external data in case of audit, research or investigation. It is a critical design feature of systems like Eka, rather than an accidental add-on.

Not only do commodity management systems ensure better, more competitive business decisions but they also provide reassurance to the markets on the validity of all financial statements and disclosures. This increases confidence at a time when it has never been more valuable. Not surprisingly, external and internal stakeholders like the demonstrable commitment to transparency that commodity management systems offer, as well as the visibility that helps mitigate multiple types of risk in today’s global and volatile markets.

ABOUT THE AUTHOR

Michael Schwartz & Roger Schaffland

<!--paging_filter--><p>Michael Schwartz is Executive Vice President & Chief Marketing Officer of Eka<br /> <a href="http://www.ekaplus.com">www.ekaplus.com</a></p> <p> Roger Schaffland is Managing Principal at Axcelerus, a commodity advisory and risk management specialist company<br /> <a href="http://www.axcelerus.com">www.axcelerus.com</a></p>