The Top Twelve: Items to Consider During the ETRM System Selection Process

We've recently met with several clients regarding ETRM (energy trading and risk management system) system selection projects and, in our humble opinion, far too often the top items of interest and discussion are off-the-mark. As such we decided a list of the primary items to consider during the ETRM system selection process might be of interest to many. If we've misses any items which you think should be on the list please let us know and we will be glad to include them in an updated version of this post.

  1. Total Cost of Ownership - If you don't consider this in your evaluation you will likely face sticker shock. Change management in an ever evolving regulatory landscape means that your ETRM system will have to be constantly evolving as well, this is where the hidden costs will surprise you. The remedy is a system based on newer technologies that come with “no coding needed”. In the long run this will result in significant savings and your IT department will not have to stretch their resources.
  2. Is the system fully integrated? This is a claim that nearly every ETRM vendor makes, however rarely is it the case. One easy way to know the truth is to ask the question, "Has the part of the system or functionality been the result of an acquisition?" If the answer is "yes" then you can be quite sure that the system will create integration issues, unless of course they have re-architected the solution onto a single platform.
  3. Does the vendor have delivery problems? This is a tough one, because they will tell you they do not and they will provide happy references, however the truth is that all older legacy ETRM vendors have had problems with delivery. Why, because hard coded legacy applications have a hard time meeting unique business requirements. If your requirements are not "cookie cutter" you may be in for a long road. ETRM systems based on newer technologies that are flexible and malleable should help mitigate the pain and costs.
  4. Does the system promote straight-through (Real-time) processing also known as STP. Again, all vendors claim this, however most cannot fully support it.
  5. Is the solution easy-to-use? A good acid test for this is to ask the vendor, "How does the system manage change?" If coding is needed to provide change, than you can be assured that additional support (budget) will be necessary, and/or IT skills in the relevant coding languages will need to be acquired to maintain the system and this can be very expensive proposition. Most maintenance contracts do not include change management. A good way to know if this will be the case is to ask the vendor "what coding language" behind the system? If the answer is a language that your IT department does not readily possess then you will need to hire a third party to mainline the system. Suggestion: Seek "No Coding Needed" template-driven architectures that don't require coding for change. Look for ETRM systems that empower the business user with the ability to manage change.
  6. Does the ETRM system meet all of your requirements? This perhaps could be argued as the most important of the ten. While this could easily be number one on the list we didn’t place it there for several reasons. Yes, this is important, however, there is often too much of an emphasis placed on this and not enough on how the gaps are going to be closed if it does not meet all of your requirements? If you find an off-the-shelf system that meets 85% of your needs then you are going to be in pretty good shape. If your business is extremely complex you may be lucky to find an off-the-shelf system that meets 60% of your needs. This is because most companies in the commodity trading business (whether direct or indirect) looks at their commodity risks differently and as such they manage it differently as well. The more important question that should be ascertained is, "How easy is it for the ETRM system to rapidly close the gaps?" Will it take a lot of customization and programming to meet your needs? Newer, more easily configurable technologies are template-based and formula-driven and architected to rapidly meet unique business requirements. If customization is needed, seek a fixed price for the customization services to help lower the delivery price risk.
  7. Are you just another number to the vendor? Unfortunately, rapid growth for many ETRM vendors has led to many clients feeling lost and left out in the cold when it comes to delivery satisfaction. Often vendors install, get the basics up and running, and move on to the next client leaving many customers with a system that they are not able to fully utilize. Many boutique vendors that are hungry for business will bend over backwards to ensure you are happy with the results. Perhaps most important to this point, seek clear expectations or requirements that can be derived and agreed upon in scope of work development sessions; good requirements help everyone understand the expectations.
  8. Front, middle and back office ETRM features to consider. Front-office considerations: How easy and quick is it to get deals into the system? Again look for template-driven deal capture systems that send much information into the system by default so that the front office staff just needs to enter the variables such as volume, counter-party and price. Also, look for easily customizable input variables (renaming, moving and hiding) capability for a more relevant & custom user experience. Middle-office considerations: Basic yet useful decision support and advanced metrics like total potential exposure (TPE) and potential future exposure (PFE) for cash and margin risk management. Also, seek a vendor with embedded credit risk functionality like and risk metrics such as CVaR. Back-office considerations: Many ETRM systems appear to address the back-office as an afterthought. Ensure that the the system offers the ability settle and shadow complex structured deals and that it provides robust hedge accounting and valuation capability (not always simple with energy commodity options) and that it can auto-generate general ledger entries. Seek a work-flow driven system that has the ability to automate many of the back-office processes.
  9. Does the vendor support process automation? Look for a vendor that offers dynamic and/or programmable work-flow that can help manage and automate many ETRM tasks. This will improve your organizations efficiency and lower your operational risk.
  10. Many vendors tout robust reporting capability however they rely on external tools to accomplish the job. Look for vendors that offer complete, web-based, embedded report writing capability that does not require coding changes to generate reports. Template-based embedded reporting capability provides the business user with the ability to easily build reports.
  11. Business intelligence - Again, most vendors tout this however true business intelligence means the ability to perform analytical processing, analytical queries or cube reporting processes. If your business requires three-dimensional analysis seek a vendor that offers true BI reporting and drill down reporting capability.
  12. Does the system properly support energy commodity options? American, European and Asian? Crude, refined products, natural gas, NGLs, power, etc? Many ETRM systems claim to properly support options but far too few actually do.

Bonus – An ideal ETRM system will be easily configurable to ever evolving business needs including regulatory requirements, business growth and/or mergers and acquisitions i.e. Dodd-Frank, EMIR, etc. An ideal ETRM solution should not require much, if any, custom programming to meet this need, it should be easy-to-configure and should provide an efficient way to manage change without having to bring in the vendor or to engage a third-party to develop a work around or to custom code the necessary modifications. Furthermore, the ideal ETRM system should be able to easily consolidate disparate systems into a “single version of the truth” of your company’s positions and requirements and should offer more than just basic ETRM functionality.