CTRM Thought Leaders Roundtable #2 – Demand for Technology in a Down Market
With the dramatic fall in commodities prices through this year, culminating in a accelerated crash to 16-year lows in the last 30-days, we wanted to visit with our CTRM Thought Leaders panel to get their thoughts as to the impact of this on the ETRM/CTRM markets, and to see if there is, in fact, a silver lining or two to be had in this new market reality. Here are our questions and their answers…
Commodity Technology Advisory: With more or less all commodity prices hitting rock bottom and projections for this to last for some time, how do you see demand for technology and software in this market? Is it being impacted or are people buying differently? Are procurement times increasing and so on?
Richard Quigley: There is no doubt that the traditional trading client base that we (CTRM technology vendors) target are feeling the pain during our latest depressed commodity pricing cycle. Conversely, the commercial and industrial sector that procure raw materials for their manufacturing processes are seeing a positive effect on the margins. If you take the commodity Sugar, for example, this has nearly halved in price since September last year, standing around the $10.50 for the front month. However, classic economic theory on supply and demand coupled with this growing population of ours, with increased wealth and an appetite for processed foods, should ensure commodities prices will increase over the long run (notwithstanding a massive adoption of genetic food supplies!).
Of course depressed pricing (and market volatility) is one of those intractable elements that traders and risk managers have to deal with – and ironically both elements increase the need for good quality data and software systems to trade profitably and manage risk! Throw in compliance and more rigorous risk and reporting (external regulation, international financial reporting standards (IFRS and GAAP) and financing partners (Banks, PE) and the case strengthens even further.
Over the last two years we have seen a change in buying patterns. It may not be ubiquitous, but nevertheless companies are now spending longer evaluating every aspect of the technology on offer, including the vendor staffing profiles, financial performance and a move towards face-to-face client references. During the RFP process, there is almost without exception a demonstration of the key elements of the response – sometimes known in advance to us and other times asked on the day. Following the initial RFP process, clients nowadays typically include a Proof of Concept (POC) phase – normally paid – to demonstrate the most complex of scenarios. Although, some procurement teams have always followed this type of process, most skipped the POC and indeed telephone references were the norm. Also, the gap between the RFI and RFP was shorter. One client advised that “they had their fingers burned with another vendor and reviewed their procurement practices to ensure a more robust process”. In my experience there have been so many oversold, undelivered, over budget vendor projects, that companies are keen to ensure a strong committee based decision with well qualified information to make the right decision. This of course takes time and whereas the process used to be 3-6 months –it can now be 6-9 months for even the less complex projects.
Jan Van Den Brom: From experience, I have learned that the demand for technology and software is not related to high or low commodity prices. However price volatility is related, as then there is a need for proper risk management is more prominent. When volatility occurs, the need for hedging and active management of trade positions are essential for securing trade or purchase results. The less volatile market prices are, the longer the procurement purchase cycles usually get, as the need remains, but the urgency gets less.
Henry Bonner: Threats or actual impacts to revenue and earnings can cause market participants to scrutinize spend, so projects could be delayed or in rare cases suspended, and no doubt some software vendors are seeing some of this. In this climate, prospective buyers may look harder at return on investment and total cost of ownership, which in turn, can lengthen a procurement process. However, this is not the full picture. Depending on where they are in the value chain, some market participants benefit from low commodity prices (see comments below) – for example, processors in the Agribusiness sector.
Market participants continue to run their businesses so operational software that is required in order to remain or to become more competitive, must still be procured, and deployed. Of course, volatility must always be managed, so risk management requirements continue to be prevalent. Regulatory requirements must also be met, not only MiFID, EMIR, and REMIT, but also in other commodity industries such as traceability in the food value chain, GMO certification, identity preservation, Organic and the like.
Other areas of the business such as treasury, FX exposure etc., continue to place demands on IT and drive procurement processes in all climates.
Bec Wilson: It depends on the segment/market: In upstream and mid-stream markets the focus is shifting from buying ‘new’ or replacing ‘existing’ systems to run and maintain of existing systems.We are also seeing rationalization of systems is some cases where more than one ETRM platform exists. We see flat or potentiallyincreased demand from downstream players and retail (C&I) firms as their energy costs reduce. Deal times seem to be about where they always have been – too long.
Chris Strickland: Low commodity prices primarily affects one of our two main markets (some of the global commodity trading companies). Having said that, it hasn’t really affected the demand for the solution that we offer to them. These guys typically trade across multiple commodities and so they have multiple deal capture systems (30+ for our biggest client in this area). Historically, in order to report a consolidated/global risk number across all these different systems, they have had to try and get a number out of each and aggregate them up in some way. I think that regulators, credit rating agencies, auditors, shareholders, etc. have worked out that the ability to really dive down to see where the risk is using this type of framework is next to useless, and so that is where a system like ours comes in. This type of client might be dropping certain commodities, but at the same time, they need tighter risk reporting and this is good for us.
Procurement times are definitely increasing (and not just for this type of market participant). I used to think that it was associated with the financial crisis, and then I used to think it was the prolonged recession, but I now think that the vendors have been overpromising for so long and customers have been wising up to the fact that it doesn’t say what it does on the box. So the onus on showing what can be done in the system has increased markedly and this slows the procurement process done to a crawl, as you have to show it does what you say. A lot of people naively think they are buying a risk system when they buy an ETRiskM system. They would probably be willing to pay 1/3rd of the price if they could see 2 years into the future and see they have actually implemented a database with a deal capture front end and a whole bunch of adhoc spreadsheets hanging off the back where they run their ‘risk’ calculations.
Steve Hughes: At Aspect, we are not experiencing a slowdown in buying and YTD we have secured 9 new name projects plus 3 significant expansions in themselves valued at $1.8 million; this is a little ahead of 2014. This doesn’t surprise me. When prices are low and margins are thin, companies are looking to get more for less by optimising the supply chain and this is contributing to the demand we are experiencing. In terms of procurement times, we have carefully measured this over many years and, again, we are not seeing our sales cycles increasing at all, even for large corporations such as Hess and Sasol who are amongst the 9 new name projects mentioned above.
I believe there is an effect on those who find it difficult to flex their cost base in line with market prices and so we see a number of trading firms disappearing or struggling economically but the market opportunity is too big for it to effect our plans. With this, on one hand we are seeing some pressure to reduce the term of our contracts to mitigate some forward risk but, on the other hand, we have some clients going for a longer term (and asking for a discount) in an attempt to reduce annual costs in the short term.
For sustained lower prices generating more opportunities, I believe there are increasing opportunities and we see this in our forward sales pipeline, which again, is very healthy and above that experienced in 2014. Again, lower prices and tighter margins are helping. The other helpful factor will be increased price volatility, which will encourage trading firms to better manage their commodity portfolios, market risk and hedging strategies.
The other trend worth noting is the ‘softening’ for top tier trading firms. Today, the top tier of firms have one or likely multiple trading solutions – they got these systems from Aspect or our competition or they built them in-house; it is a saturated market where past replacement opportunities have been rare in the extreme. These systems were expensive to build and implement and so are ‘replacement resistant’ or ‘sticky’. I forecast that this market would start to soften; not wholesale replacement (although that will come) but piece by piece, desk by desk. That softening has started sooner than I anticipated and is adding to the sales pipeline.
Manav Garg: The real issue is price volatility, not low versus high prices. Price volatility continues to be a challenge in today’s markets and drives the need for the most advanced CTRM software solutions.
In addition to next-generation CTRM software, analytics have become paramount. Commodity companies need commodity-specific analytics software for better decision making.
Today’s commodities companies are also looking for ways to reap the benefits of a software solution sooner than was possible in the past. They require more flexibility in deployment options. Frequently, these customers are seeking cloud-based software solutions instead of on-premise software deployed in a company network, as well as mobile apps.
These customers appreciate the decreased implementation costs with cloud-based solutions. With cloud-based software, scalability is never an issue.
As business users have become accustomed to using mobile apps in their personal life, they are seeking mobile options with their business applications. The convenience of having access to mobile apps enables workers to accomplish more at the worker’s convenience.
Commodity Technology Advisory: Are there opportunities to be had out of sustained lower priced commodity prices? If so, what are they from your perspective?
Chris Strickland: Definitely. The current time is a good time to be in the market for providing portfolio level analytics. I think maybe company’s fall into one of two camps. The first says ‘prices are off, cut all spend on software’. The 2nd says ‘I need to get more out of my portfolio’ and that is where good portfolio level analytics comes in. In this world, the ability to analyze structured trades, look at better hedges, protect against further downside, look at optimization across portfolio elements, all come into their own. And we all know how much this is addressed by your typical ETRM vendor.
This is proving to be a good opportunity for us at the moment. LNG is also a good market for us – analytics to help with decision making in any new market tends to have importance.
Manav Garg: To better manage in today’s environment of volatile prices, commodities companies need commodity specific analytics that enable these companies to transform their performance. This recognition is what led to Eka’s development of Commodity Analytics Cloud, a cloud-based, advanced analytics solution delivering apps specifically designed for the commodities markets that address high value business issues.
These apps provide an end-to-end analysis of the entire enterprise, spanning multiple categories including positions, P&L, trading, risk, credit, finance, supply chain, reconciliation, and counterparties. With Commodity Analytics Cloud, users can choose from prepackaged apps, or create their own apps for their individual needs. Eka has put power in the hands of the business users so they can create the analytics they need without relying on the IT department. Commodity Analytics Cloud opens analytics to everyone.
Henry Bonner: Many parts of the value chain benefit from lower priced commodities so companies focused on these areas will continue to purchase software for managing their businesses and in many cases, step up that purchase.
In Agribusiness, lower commodity prices can lead to improved margin as percentage of sales, and can reflect higher volumes (heavy supply typically being a core reason for depressed prices). This can lead to an increase in purchase and sale transactions of agricultural commodities which puts more demand on software usage; all positive for vendors.
Grain companies purchasing and selling at a lower price can be more selective in their purchasing requirements dictating higher quality commodities from their vendors, and still pay a low price for grain, preserving higher margins on the higher quality grain. Processors purchase higher quality inputs allowing them to offer premium processed outputs / finished goods.
Lower fuel and energy prices will be favorable for Agribusiness for crop drying, transportation and processing – OpenLink’s solutions help companies manage this energy procurement and the agriculture commodities as well as treasury and risk management.
Jan Van den Brom: Sustained lower commodity prices are neither bad nor good for technology vendors, volatility though increases the opportunities and makes commodity traders and purchasers more aware of the need of commodity trade and risk management solutions
Bec Wilson: Yes. Some organizations may move away from large CAPEX projects to Hosted solutions and purchase a variety or technical and business solutions as a service to avoid ramp-up / ramp down costs. Also for providers with deep physical / asset mgmt. capabilities, there may be opportunities developing in supply and or fleet optimization including generation, transportation and storage.
Richard Quigley: In any down cycle, companies naturally make adjustments to ensure they can sustain reduced turnover with smaller margins: budget cuts, redundancies and a freeze on ‘non-essential’ procurement are all part of the mix. This tends to happen in phase 1 of the adjustment cycle (at least for some companies). Phase 2 is then a more strategic view of their cost landscape: internal V external, process review, duplication of systems, buy or build, cost benchmarking, vendor consolidation, etc. That is where the new opportunities lie for vendors that may not have existed in a more buoyant economy. To capitalise on those opportunities, i.e. displacing an incumbent system, vendors need to offer a system with ultimate flexibility, functionality rich, extensible, performant, off-the-shelf plugins to major third party systems, rapid deployment, solid financial credibility and a proven track record of delivering strong ROI’s. Of course the price needs to be competitive and indeed reflective of the marketplace. That being said, clients are more than happy in this new lower commodity price landscape, to contract for longer terms, up to 5 years. In a nutshell, clients want a partner vendor for the long haul, who they really believe in – that offers value for money – as well as a vision for the future that progresses the product and services.
Taking part in this CTRM Thought Leaders Roundtable were –
- Richard Quigley, CEO, DataGenic
- Jan van den Brom, COO, Agiboo
- Henry Bonner, SVP Commodities, OpenLink
- Bec Wilson, Global Head of Software Development, SunGard Energy
- Chris Strickland, CEO and co-founder, Lacima Group
- Steve Hughes, CEO, Aspect Enterprise
- Manav Garg, CEO and founder, EKA
To find out more about them and the CTRM Though Leaders program, please visit – https://www.ctrmcenter.com/ctrm-thought-leaders/
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