Technology - Project management - A stitch in time

Companies entering the energy sector have a fairly short window of opportunity to get up and running. City Practitioners Ian Bentinck and Jeremy Taylor examine some of the technological and project management issues that can arise

While firms are looking to move rapidly into energy trading, implementing the technology needed to underpin trading operations can be complex and difficult, so companies often find themselves overrunning schedules rather than gaining time. To avoid this trap, a number of points are worth bearing in mind.

Firstly, a firm must decide on the level of future involvement. Is it looking to dip a toe into the water and deal in energy financials only, or to engage heavily in physical trading, for example in swing options? Secondly, does the company already have experience of the sector? Firms with no traditional involvement often fail to appreciate how different energy trading is to, say, financial markets, and as a result underestimate the number of policy and project management decisions, or the scope and level of difficulty involved, particularly where physical trading is concerned.

The herding instinct

When looking to implement new energy trading systems, companies - and notably financial firms - are very often driven by concerns of speed. The emphasis on speed often leads firms to bypass the vendor selection process and simply opt for the market leader. This is in direct contrast to utilities, which tend to have lengthy selection processes in place.

However, following the herd does not always represent the best option, and although a product may be extensively used and highly reliable, firms should bear in mind that sometimes even the most capable of trading systems does not fulfil all processes. The me-too attitude is particularly apparent amongst banks, where firms tend to choose systems based on the choices of other banks. This can lead to difficulties, as individual firms have different aims and goals for their own systems.

The four major vendors - Caminus, KWI, OpenLink and Murex - each have their own strengths and weaknesses. Some are stronger on specific commodities products, while others offer greater strengths in terms of financial analysis and risk, or superior capabilities on the physical and delivery side.

Furthermore, one system will not cover all processes. Depending on the system chosen, a bank may need to outsource certain processes, such as scheduling, risk models, VAR engines, demand forecasting or optimisation modules. Companies must therefore determine their business aims and thereafter select a system that meets these needs. Otherwise, if a firm's aims are not the exactly the same as those of other similar organisations, it may be left baffled when the system does not work for it, and as a result spend longer on configuration.

A little time spent upfront on system selection can mitigate a host of problems and delays (such as waiting for the vendor to develop requirements, resulting in time-consuming testing or having to develop expensive and often unstable workarounds), and ultimately result in earlier delivery of the system.

When building an energy business in a firm that does not traditionally deal in energy, system implementation can be tricky. Firstly, when marrying together new energy trading technology and existing systems, firms may find their own lack of integrational framework an obstacle. Large financial firms, whose IT infrastructure often consists of a wide number of software packages loosely patched together, are particularly severely affected in this respect.

Secondly, new energy trading technology introduces different service qualities to technological architecture, and in consequence systems both upstream and downstream may be unable to cope.

Typically in the case of financial sector firms, existing systems are simply not geared up to the position-keeping required for energy. Energy trading systems break trades down into 'sides' and 'legs', while financial systems are geared up to looking at deals at the book or portfolio level. As a result, installing the new system is not unlike fitting a square peg into a round hole.

Other factors, such as the high number of integration points - risk engine, credit engine, trade warehouse repository, separate price sources and so on - can make implementation even more complex. This isn't helped by the fact that vendor software is sometimes unsuited in terms of integration points.

Extending existing operations

Clearly, a number of firms within the energy sector may be looking to expand existing operations, rather than simply starting from scratch. Building onto existing businesses can have its own set of complications. In particular, there is a danger that, because of the piecemeal nature in which new trading teams are added, separate silos served by their own back offices will develop within a firm's commodities business.

While it is not always possible to avoid this happening, the setting-up of new trading operations can be structured in such a way that future consolidation efforts are facilitated. In particular, firms should ensure that common static data exists between teams, and there should also be coordination of discounting and pricing methodologies. At the same time, workflow and its documentation should be identical between the businesses. Joint coding standards are also important, while scripting standards must also be high. Other issues such as reporting must be tackled. For example, if one business is reporting in dollars while another reports in euros, aggregating risk across the whole business will require a common risk unit to be defined and agreed.

Culture clash

The speed with which implementations progress does not hinge solely on technical issues - the mindset of those involved also plays a significant role. Risk measurement is a point in case. New entrants to the energy markets must quickly adjust to the fact that delivery risk is as important as market risk. (Understanding delivery risk is also essential to making correct technology choices. Energy trading systems have very different event management cores to those in place in banks' risk management systems, and simply building out existing systems is not feasible, due to the potential scale of the build-out, lack of cost-effectiveness and amount of project risk entailed.)

However, this emphasis on delivery risk creates something of a cultural clash within financial firms, particularly as they have traditionally focused on measuring market risk. This cultural clash intensifies as financial firms looking to make a speedy entry into energy markets simply buy systems without having staff in place, then search for individuals to operate them.

As those hired may be drawn from utility backgrounds, a very different perception of how to do things exists between these individuals and the banks that employ them. This has profound implications for project management decisions, and even getting agreement as to project requirements can be extremely difficult. Good negotiating, influencing and decision-making skills are needed to determine when and where it is appropriate for each of the different viewpoints to be given precedence.

Ian Bentinck, managing practitioner at City Practitioners. Jeremy Taylor, practitioner at City Practitioners. Email: ibentinck@citypractitioners.com, jtaylor@citypractitioners.com

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here