||Contents : Part 2 of 2
Meeting the challenge
Build the business case
EMU is a business issue. Businesses should already be forming work groupsto consider the business impact and opportunity of EMU. The scope could range fromlimited, for organizations based far from the euro-zone, to deep and detailed for thoseobviously affected. Businesses based in EU “out” countries need toconsider EMU now. Planning for eventual entry into EMU will be much more effective ifundertaken early. Businesses based outside Europe must consider the impact on theirEuropean subsidiaries (if applicable) and their export business into the euro-zone. Theworld economy will be changed by EMU. A business based outside Europe will be affected.
What about resources? Does the business have the skill-setor the time available to undertake an appropriately detailed business impact assessment?In the next section we look at IT resources in more detail. And funding? Is there thebudget to support business impact analyses? Upgrades and changes to IT systems are notinexpensive.
Time is of the essence. It is advisable to seek externaladvice. Banks, business consultants, accountancy firms and trade associations should alloffer EMU-related services. It is important to get understanding of and “buy-in”to EMU issues across the whole organization, from top to bottom. Once the business case isconstructed, and strategies and tactics developed, it is vital to ensure that EMU-capableIT systems are in place to support this process.
Without changes, today’s business IT systems cannot handle the eurocorrectly. Systems must be upgraded or changed. Business managers and IT professionalsneed to consider:
The euro is a new currency. To handle and process both the euro and other currencies (including constituent national currencies/denominations), systems must have dual or multi-currency capability. Many do not. The systems needing this capability include financial, sales, costing and inventory.
If a system is to treat the euro in the correct (legal) manner over the first three and a half years of EMU it must recognize the special rules associated with converting into and from the euro, and between its constituent national currencies. These rules were developed to eliminate the possibility of profit due to calculation differences resulting from different methods. The following is the plan devised by the European Commission for exchange calculations.
The specific regulations are:
Conversions between constituent currencies to be calculated via the euro (so-called “triangulation”)
Fixed conversion factors between constituent currencies must be expressed to six significant places and not truncated or rounded
Intermediate calculations not rounded to less than three decimal places
Conversions from non-EMU currencies to EMU currencies must be made via the euro. The applicability of this rule in EU “out” countries is not clear
Answers must be expressed to the nearest whole sub-denomination of the euro or constituent currency (centimes, pfennigs, cents, etc) using normal up/down methodology
The impact of these rules on IT systems is:
- Ability for systems to recognize euro and participating currencies, and treat them differently from non-EMU currencies
- Necessity for new algorithms in exchange conversion routines to be used when dealing with the euro and participating national currencies
- Database changes to ensure maintenance of six significant places for fixed conversion factors
- Protection from change of these factors
- Intermediate calculation steps rounding to no less than three decimal places
Dual currency accounting
Much has been said about the necessity of maintaining accounting records in both the euro and a national currency, so-called “dual-base accounting”. There is no legal requirement to do so, even in the case of local (governmental) regulations demanding reporting in national currency where companies are adopting the euro for accounting purposes. Reporting does not equal accounting.
There are methodologies available that enable an organization to have full visibility of accounting records in multiple currencies without incurring the additional system, hardware and staff overheads that true parallel dual-base accounting involve. However, where there are valid reasons for employing dual-base accounting, systems must be upgraded to offer this functionality.
As national EMU-related law is enacted, there will be additional demands made on IT systems. It is highly important that IT systems are continually upgraded to meet these demands.
It will be necessary to:
- Monitor the evolving pan-European legal environment
- Develop additional system capability as required
Change to euro (migration)
When considering the change of the base, or operating currency of IT systems to the euro, the following aspects must be considered:
Make the change during or at the end of financial year? If the change is to be in the financial year that bridges the start of EMU (1st January 1999) the period prior to EMU needs to be translated into euro recognizing the subtly varying exchange rates against the euro experienced during this period. This is a highly complicated exercise.
Link with Year 2000 problem initiative
This is discussed in further detail in the “Year 2000” section later.
The treatment of historical data
There should be no legal requirement to convert historical data as long as summary comparative figures in euro for prior periods are disclosed in statutory accounts and reports. Historical data is primarily of commercial importance, for example, detailed sales and product cost data. Companies may want to convert such data only.
Security and recovery
Full records of pre-migration data and system state need to be maintained in the event of a migration failure
Timing and resources
This is always an area of concern when significant system changes or developmentsare concerned. There are three elements or resources to be considered; time, funding andhuman.
Is there enough time to change or upgrade existing systemsusing internal resources? The necessary audit of systems to determine the changesnecessary for the system to comply to euro-related conversion and calculation rules isextensive in scope. All areas of systems must be reviewed, and changes made, documentedand tested. A formidable task.
Modification of existing systems may seem to be the leastexpensive manner of acquiring EMU capability. However, this may be more costly thanimagined. It is estimated to cost between $1.10 and $1.50 to inspect and change a line ofprogram code. Programs requiring modification may contain millions of code lines. Thiscost may exceed the cost of a replacement “packaged” system!
If the duplicated recording of transactions is considered(dual currency accounting, discussed above) then additional hardware may be necessary,mainly faster processors and increased storage (disk space). Another area of cost.
To pay for these and Year 2000 costs, many companies arehaving to compromise the development of strategically important new IT capabilities. Can acompany avoid this sacrificing of future competitiveness by planning IT changes now?Experts say yes.
Companies must consider the aspect of human resources. Arethere sufficient system analysts and programmers available to audit and modifyEurope’s IT systems? The Year 2000 problem is causing a shortage of suitablyqualified staff. It is estimated that up to 30 percent of the IT positions in Europe willnot be filled in the next three years, because of the current demand.
The level of education, and understanding of EMU by ITstaff is also an issue. An EMU project manager of a large US bank is quoted as saying thatprogrammers can be briefed on the Year 2000 problem in ten minutes, but getting a fullview of EMU issues takes three months.
Today many organizations use personal computers that are not connected to a serveror mainframe. These PCs need to be audited:
- Are their business applications EMU capable?
- Do spreadsheets supporting important processes like budgeting, forecasting and accounting have the necessary formulae to support the euro?
- Historic data stored on PCs must be updated in accordance with the organization’s policy. This could be a manual task.
Year 2000 solution
Could combining projects dealing with the Year 2000 and EMU into one be a case of”killing two birds with one stone?” It certainly looks tempting, but is notrecommended. The combined scope may be too great.
The Year 2000, or Millennium, problem is a technical”fix-oriented”, one-off exercise while EMU is a major geographical, political,social and business dynamic that will take a number of years to mature, be fullyunderstood and assimilated. Given the great differences, the IT industry’srecommendation is to treat each event as a separate project, but keep a link between thetwo and look for synergies.
The only viable single-project approach may be to purchasea robust, Year 2000 compliant and EMU-ready packaged business system.
Education and training
To be a truly effective business dealing with EMU, staff must understand EMU issuesrelevant to their function.
- Employees that interact with customers must make financial decisions quickly. Are they briefed on all aspects of EMU and its business consequences? Are all legal, pricing and financial issues understood?
- IT staff are key team members in developing EMU strategies. Their training is vital, even if they are not modifying systems they will have to operate and maintain systems in any euro environment.
- Are financial, legal and, importantly, human resource management staff aware of all relevant issues?
A significant training effort should be initiated acrossthe whole enterprise.
Utilizing expert advice and the accumulated experience of others is the mosteffective way of getting an organization “EMU-ready”. Why is this so?
Time is of the essence. EMU is in its first stages now. Theshortest time to full business and system EMU readiness is probably through the use ofexternal advisors. They know the questions to ask, and have the transition programsprepared which they will tailor to individual businesses quickly.
Competition is growing. It is important to be at theleading edge. By working with a broad range of enterprises, independent advisors have aclear understanding of what represents best practice and best response to EMU. Companiescan tap into this to ensure that they are adopters of these best methods. Theability to benchmark proposed changes with others is also afforded by using a partner toassist in the response to EMU.
EMU has global consequences. Look for advice from aglobally oriented source. An internationally represented enterprise needs a partner who issimilarly represented. This way local issues are not missed while global issues are alsocovered. In addition, consulting costs are minimized because of staff being based close tothe client’s individual operations.
Reputable business consultants offer a broad area ofexpertise, such as business impact analysis, IT systems analysis, and training programimplementation. This means that “shopping” around for different expert help willbe avoided. Quality and standard of advice and service is better ensured and the projectmore easily managed than with different, non-connected independent advisors.
The level of understanding of EMU and its consequences is well below where itshould be. This applies to both Europe and the world at large.
EMU is a momentous world event. It impacts far moreorganizations than initially thought. It needs to be considered whether an organization isbased in Europe or not. The world’s business environment is hugely influenced by EMU,as well as the European political and social environments.
There is a significant impact on all areas of an affectedcompany’s operations, not the least its IT systems. These impacts must be understoodnow.
EMU is starting – time isagainst those who are not considering the issues. Companies must act now.