In-Depth
Euro Change: Are U.S. Firms Prepared for the Second Wave?
With this issue of ESJ, most companies are entering or have already begun their fourth business quarter. For the information technology executive, the fourth quarter often means increased pressure to support the line units during a difficult year. Even in the best of years, the fourth quarter is not a good time for IT resources to be distracted by system and application support problems. Year 2000 is an unwelcome contender for already stretched resources. Unfortunately for some firms and their preoccupied IS staffs, the Year 2000 projects may be a relatively small wave that precedes a much larger one not yet seen on the event horizon.
If your company is in the Fortune 1000 bracket or if you conduct business in one or more European countries, there is yet another issue impatiently awaiting your attention. In affected companies it is most likely referred to as the euro conversion project (or something equally innocuous) and it will very likely have a direct affect your firm’s business software and, in some instances, on the hardware (keyboard) as well.
The euro conversion project is easily, but mistakenly, assigned initially to the controller or the accounting/finance department manager. It seems logical because it is finance-related. But as the financial managers gain a perspective on what lies ahead, they will undoubtedly realize the project’s immensity and daunting complexity. Any misstep in getting ready for the euro can adversely affect the company’s competitive position in the European marketplace and delays in being ready will hurt its bottom line. That is usually the point when the IS or IT executive is asked if someone from the technical staff could sit in on a meeting and possibly lend some assistance. Beware! Before stepping in, you need to have an understanding of what is taking place.
The Euro Business Case
A huge wave of change is currently building in Europe. Eleven specific nations have committed to a massive conversion from their own currency to a new currency regulated by a central bank. These nations include Italy, Portugal, Spain, France, Germany, Austria, Finland, Ireland, Belgium, Netherlands and Luxembourg. Britain, Denmark, Sweden and Greece plan to initially maintain their own currencies. On January 1, 1999, the European Monetary Union (EMU) will introduce a single currency. The resulting linked economy will immediately rival the United States as the world’s largest free-trade single currency. If the euro succeeds, other nations, which have grown tired of fighting national inflation battles and, lacking clout on the world currency front, will begin negotiating for their own unified currency system. Latin American banking and trade organizations, for example, are watching the progress of the euro very closely.
In the U.S., ensuring that Year 2000 issues are addressed (and hopefully resolved on critical systems) has, thus far, taken a front seat in most companies to getting started on a euro conversion. A recent Ernst & Young poll surveyed the progress of 200 multinational U.S. corporations with regard to their euro conversion efforts. Not totally surprising, the results indicated only 45 percent had project teams in place to evaluate how the euro and resulting new economy would affect corporate profitability. Of those with teams in place, less than 20 percent had begun to analyze the potential consequences or explore new trading opportunities. The Ernst & Young data suggests a major lag. This lag may damage current customer relationships, as well as impeding the ability of U.S. companies to compete in the European Union marketplace
European counterpart companies surveyed by Ernst & Young are already well ahead. Nearly 70 percent have set up teams who are today searching for ways to leverage their startup time advantage. Interestingly, European firms are conversely lagging in their Year 2000 corrective efforts. It will be interesting to see which firms picked the correct problem to solve first.
The euro makes setting prices for goods, on a country-by-country basis, less viable. With lower trade barriers and one currency, pricing discrepancies, formerly hidden by volatile exchange rates (which today vary from country to country) will immediately be noticeable and probably will no longer be tolerated. For example, American companies doing business in Germany, France and Italy have traditionally enjoyed a "Country upcharge." Such added charges vary from country to country and fluctuate with exchange rates. It is highly unlikely that it will continue once a more-stable euro is in place. This change will, in effect, reduce profits.
This column, over the next several issues, will compare and contrast the euro conversion effort against the more visible (in the U.S.) IT focus on the Year 2000. The comparison is intended to provide the ESJ reader with a better initial point of reference.
To begin with, the points of origin between these two technical challenges are as different as they can possibly be. The scope and depth of Year 2000 was severely underestimated and it took (and continues to take) a lot of effort to keep people from ignoring it. The euro, until recently, is a problem that was not clearly defined. In essence, one was a legacy of two-digit code, the other an emerging and still unsteady monetary system. It is the politics of the new euro currency that will continue to keep the IT planners, who must create data definitions and conversion engines, just a bit off balance. Large-scale IT financial systems rarely do well when the processes behind them remain volatile, or when the system must be rushed into production with too little time to test critical algorithms. Managing money, whether it is deutsche marks, lira, dollars or euros, is always a critical business function.
A second and more telling comparison between Year 2000 and project efforts to prepare business systems for the euro is the measure of complexity. Year 2000 efforts are (albeit, large-scale) "no brainer" fixes. The technical and business process issues involving euro conversions are much trickier to resolve. Euro conversions will require a healthy mix of technical skill as well as business savvy.
Ed Severs, chief operating officer for ADPAC, a San Francisco-based mainframe software firm has developed an interesting chart in which the key phases of Year 2000 are compared with euro.
Major Phase or Hurdle | Year 2000 Project | Euro Conversion |
Widespread awareness | Required internally and externally with business partners, vendors and suppliers. | Required of companies suppliers and business partners who trade and compete in Europe. |
Establishing the scope and breadth of the problem | Required for project planning. | Required for project planning. |
Conversion | Required prior to Year 2000, if possible. Not particularly difficult to do. | Very difficult to do. May involve maintaining duplicate ledgers, parallel processing or a phased approach. Report and track by 1999 and put into use by 2002. |
Testing | Critical to success and the largest percent of time needed to ensure success. | Critical and requires excellence in both financial areas and IS/IT. |
Audit | Critical in Year 2000 as databases and systems continue to make date calculations out past the magic year. Important to show due diligence should litigation against the company occur. | Critical to ensure that systems are meeting euro conversion criteria, rounding amounts correctly and identifying discrepancies for careful examination. |
Conclusion
According to London Gartner Group data, the euro conversion worldwide is expected to cost between $100 billion and $400 billion. The move to the euro forces businesses with divisions, partners and suppliers in Europe to re-examine how their business systems will accommodate the change. The euro fundamentally changes the way business is done in Europe. Failure to adapt can mean loss of market share to more agile competitors. IS and IT organizations will need to pay close attention to the still-emerging business issues as they plan changes to affected business systems.
ABOUT THE AUTHOR:
Bill Pike is President of PIKE Communications, a business communications firm in Los Angeles, and an IT industry observer and writer on various high-tech topics. He can be reached at (310) 391-1862 and via e-mail at Pikecom@earthlink.net.