We may not be part of EMU yet but the euro, launched this month, will still have a huge IT impact on UK business. Alexander Garrett explains how to deal with it.
In the dimly lit conference room of a hotel in Solihull, a short animated figure in a dark suit and silk bow tie is addressing an audience of IT managers, software consultants and finance directors. 'This', he announces with a showman's flourish to the projector screen, 'is a bigger problem than the Year 2000 and triangulation put together.' The three words on the screen are Accounting Conversion Utility. What they spell, according to Dennis Keeling, chief executive of the Business & Accounting Software Developers' Association, is the name of a suite of software that every company in each country that adopts the euro will eventually have to run just once. Its function? To convert the entire gamut of data the organisation holds, from open orders and invoices, to balances, historical data, reports and spreadsheets, and personnel and payroll information, all into Europe's new currency.
On the face of it, this is the sort of problem that would make an accountant wake up screaming in the night. You can't run the utility at the year end, when one year's figures are neatly tied up, because the auditors will be poring over the accounts, and there are adjustments to be made which may take a couple of months to sort out. So you are faced with the prospect of having to convert your accounts to the new currency in the middle of a financial year - it could take hours, days or even weeks to run, according to Keeling - and possibly having to convert every individual transaction that year into the euro. Before somebody in the audience collapses with a coronary, Keeling quickly reassures them that most UK companies don't have to face up to this problem - yet. Even those in Euroland he advises to wait as long as possible.
Keeling is something of a guru when it comes to the IT implications of European Monetary Union (EMU). He has enjoyed tete-a-tetes with, among others, the European Commissioner, Yves-Thibault de Silguy, and former prime minister John Major on the subject. He knows the rules on converting French francs to Deutschmarks via the euro off by heart, and claims to have coined the term 'triangulation'. He's even written a 'white paper' all about it.
His advice is: don't panic, but make sure that you are well-prepared. Over the next few months, IT departments are going to be spending a lot more time and energy on preparing for the euro. By the end of the first week of this month, City banks will already be up and running, after a frantic weekend spent converting all of their assets, debts and exposures in Euroland to the new currency. The major high-street banks are reported to have each spent over £100 million already.
For the rest of UK business, there is no Big Bang, and the level of response is likely to vary considerably. Some believe that a small, local business, dealing with other similar enterprises, can afford to do nothing. Others are not so sure. For most companies, the minimum level of euro-preparedness will be the ability to quote a price in euros, to raise an invoice in euros, and to accept a payment in euros. However, if it is an isolated transaction, the price could be worked out on a calculator, the invoice altered manually, and the incoming payment turned back into sterling by your bank manager.
Larger companies will need their IT systems to handle pricing and invoicing automatically. Multinationals and those with significant business in Euroland may want to go one stage further, and hold an account in euros. They may want to pay some of their own suppliers in the new currency or transfer some of their debt into euros, with the much lower interest rates on offer. These are strategic decisions which IT systems will have to cope with. The ultimate step, which few UK companies are expected to take short of a decision to enter EMU, is to switch to the euro as your base currency. That is where the dreaded conversion scenario comes into play. Some IT suppliers such as IBM believe it can be carried out in phases; others disagree.
There is general agreement, though, that in the short term, the biggest crunch will be felt by UK suppliers who are asked by their UK customers to invoice in euros. Mohammad Haroon, an adviser from the Treasury's Euro Preparations Unit, cites a company in Wales which employs four people making metal clips for precision castings. It supplies another company in Wales which employs 20 people, which in turn supplies a company in Derby that sells the finished product to London Underground. The company in Derby has a French parent which has decided to account in euros: it has told the 20-man company to invoice in euros, and that company has decided it wants to share the exchange rate risk, so has told the four-man outfit to do likewise.
'They've accepted it, because they had no choice,' says Haroon. Some believe that the process of 'euro-creep' will turn into a canter, then into a gallop through the UK economy as customers asked to invoice in euros look to pass on the currency risk to their own suppliers. Companies such as Siemens, Rover and ICI have already started the ball rolling, by making it clear that they will be expecting UK suppliers to do business in euros starting in 1999.
Vernon Ellis, the manag-ing director of Andersen Consulting in Europe, says that while many larger UK companies are in 'reasonable shape', smaller companies such as suppliers who have never had to deal in other currencies are far less so. 'I think a lot aren't ready, but they are beginning to be aware that they will have to be ready quickly, even if it means they have to do it with plasticine and sealing wax to begin with.'
So what does becoming euro-ready involve? Peter Robertshaw, EMU roll-out manager for the software house, SAP (UK), says there are four levels of response. To simply transact business in euros, you need an accounting system that can handle multiple currencies; the euro simply becomes another currency. A second level consists of complying with EU rules, such as triangulation, which involves a formula for converting one euro denomination to another by converting to the euro first. Strictly speaking, that is not necessary when converting from sterling. A third level of readiness entails building additional features into your IT systems which are not essential but will make it easier to do business.
Budgeting or reporting in euros are two examples. The fourth, most demanding level is the conversion to euro as your base currency. SAP is planning to take that step itself in the second quarter of the year. As Robertshaw puts it: 'What we've got to do for our customers, we've got to do for ourselves.'
Converting individual figures in a program from one currency to another might not seem like rocket science. But as one observer puts it: 'It is essentially trivial, but it is pervasive.' And the problem is that the wide disparity in value between the different currencies which make up the euro, together with the rules on decimal places, significant figures and rounding, all mean that discrepancies will result and could throw accounting systems out of balance.
Users of enterprise-wide systems such as those from SAP or Oracle can depend upon their vendor to carry out much of the work needed. So can those with mainstream accounting systems such as Sage or Pegasus. Those in most trouble will be users of bespoke software, particularly if it was programmed to use sterling as a single currency. 'In our experience, 80% of programs are affected, but only 10% of the code,' says Keeling. 'One developer told me that he had found 186 instances of currency conversion in a system, and that meant they had to change 186 programs.'
Robertshaw sounds a common refrain when he insists that EMU cannot be treated as an IT problem without first considering the strategic needs. 'Year 2000 was an IT problem with business implications,' he says. 'This is a business problem with IT implications.'
Some believe it is not enough to simply have the ability to transact in euros. 'It is a question of whether you want to comply or to compete,' is how Grant Phillips, director of Barclays Corporate Banking, puts it.
Jacques de Cock, head of the external euro programme at ICL, says that the pressure to do busi-ness in euros, and take on the exchange rate risk, will leave UK companies at a fundamental disadvantage. 'The companies which are being forced to invoice their UK customers in euros will have to hedge on those domestic sales. It is making the whole of the UK economy some 3%-4% less competitive than the rest of Europe,' he says. De Cock suggests businesses should consider running dual currency treasury management and take advantage of options such as a low-interest euro overdraft.
The euro also provides an opportunity for those looking to get into e-commerce. If you offer a euro quote over the internet, then for the first time a potential customer in Germany will be able to instantly compare your price with that of the competition.
Until now, most UK companies have been planning for the 'UK-out' scenario. With increasingly enthusiastic signals emanating from the Government, they are already turning their attention to 'UK-in'. UK entry to EMU is unlikely to happen in less than three years but if and when it does, there will probably be a much shorter transition period, and the coins and notes will be in circulation from day one. This means that no one can afford to wait for a referendum before they start the serious business of planning how to convert their company's IT systems fully to the euro.
In the more cut-throat business environment that the euro is expected to usher in, embracing the new currency will be one of the factors that separates winners from losers, and much of that responsibility will fall on those who control the IT systems. At the end of his conference, Keeling signs off with a sobering message: 'The next year or so may be the most stressful in our careers.'
Stephen Alambritis, Federation of Small Businesses
A lot of people are thinking that 'the euro won't affect me' because they only trade in the UK. But the pressure is coming from above. There are many large companies already putting pressure on small suppliers to invoice in euros, and those who don't comply may lose out - they may be dropped as suppliers. But it's an opportunity as well as a threat - if you can quote prices in euros then you may gain business because prices in euros will be more transparent. In our most recent survey, we asked our members what thought they had given to preparing for the euro and 21% said they had given it no thought at all. A lot of small companies are not up to speed on the technology side because they haven't got the resources. For some, the cost of upgrading or buying new equipment is going to be the biggest obstacle. That said, some 80% of our members have less than 20 employees, and a high percentage are sole traders, and if you really are a small firm and you are just dealing with a local customer base, you might decide that you have no need to do anything at all right now.
Peter Everett, vice-chairman, EMU steering group, ICI
Our businesses have each been empowered to look at the implications of EMU for their own business processes, if and how they need to change to accommodate the new environment. They will certainly be looking at the supply chain, at their sources of income and what proportion comes from Euroland, and at how they can match off euro income against euro expenditure. So those of our companies which are sourcing in the UK and selling to Euroland, will be looking to their UK suppliers to get them to invoice in euros. Our businesses in countries like Germany and Holland will simply become Euro operations, wall-to-wall. If the euro becomes a roaring success, then ICI and other companies would look towards rapidly adopting the euro as their house currency. For all businesses, large and small, the biggest issue is probably the increased competition born out of the euro. Second-tier SMEs see the barriers being removed, because foreign exchange conversion costs represent a high proportion of their transaction costs, and significant exchange rate shifts can currently wipe out their profits.
THE CORPORATE BANKER
Grant Phillips, director, Barclays Corporate Banking
In the UK, companies such as Rover Group which are asking their suppliers to switch to euros, are really hoping to pass the exchange rate risk down the supply chain. They have been suffering as a result of the strength of sterling. They can't tell you to invoice in euros, but they can ask you to. If you are a small firm in the supply chain to Rover Group, and they ask you to switch to euros, how much clout have you got to say that you will stick with sterling? What any company really has to ask themselves is: what does your customer want? And what are your competitors doing with the euro to get your customers away from you? This is not the Year 2000 problem. If you are not ready for 1 January 2000, then that is a life-threatening situation for your company. If you are not ready for the euro, there isn't a 'drop dead' date. But you'll see the impact when your sales manager comes back from a trade fair in Frankfurt waving his competitor's price list in euros, and he says: "I just can't compete with this." You have two choices: you can either regard the euro as something to comply with, or something to help you compete. Companies like DHL are treating it very much as the latter - they will do business in whatever currency their customer wants them to. For the smarter operators, the euro really gives some meat to the single market for the first time.
THE IT CONSULTANT
Rob Wirszycz, director of marketing and strategy, EDS
The UK started on Year 2000 earlier than the rest of Europe but it has perceived EMU as something to cope with, rather than something to prepare for - there has almost been a feeling of unreality about it until now. Our perception is that there hasn't been a great deal of EMU work taking place so far, and the UK will wake up in the early part of 1999. If you are facing the advent of the euro without even a plan, then you are probably being a bit flippant. EMU has the potential to affect the whole spectrum of IT systems. There are very few accounting systems that can accept the euro, and so most people will at the very least have to upgrade. And one of the biggest areas of risk in a company is in spreadsheets, because these are the instrument of business modelling, and the data have to be completely reliable. I don't think UK companies will be at a widespread disadvantage in 1999, but if they haven't prepared by 2001, then they will be. The greatest potential problems will come for those who sit in complex supply chains.
THE EUROLAND COMPANY
Gerard Gent, euro projects director, Siemens
We have 12,000 suppliers in the UK, but we haven't addressed them formally on the subject of the euro so far. Siemens UK has made it clear that there will be no compulsion to deal in the euro. But we want to enter a dialogue with suppliers and, where it suits both us and them to switch from sterling to the euro, then we want to do so. The situation with Siemens in Germany is different. If they have an Italian supplier and a UK supplier, both bidding for the same contract, and they are head to head on cost, quality, delivery times and every other measure, and the only difference between them is that the Italian company is quoting in euros and the UK company can't, then that might well be the determining factor. We are not about to go blacklisting suppliers on the basis that they won't use the euro, but we are anticipating that as the result of seepage up and down the supply chain, we are likely to see greater demand from our own customers to do business in euros. There's certainly an exercise everyone should carry out to see where in the supply chain they will be affected. It is also worth remembering that preparing for the euro as a house currency takes a long time. We started in 1995 in Germany. So can you assume you will be ready in time if the UK decides to join EMU?
John Kelly, sales manager, Aquaman
We have informed all our distributors that from 1 January we will have a euro account and a euro price list. We have invested in new software which allows us to run dual pricing in sterling and the euro. This company makes waterproof cases to protect mobile phones, cameras, global positioning systems and other devices, and 92% of sales are exports, with the vast majority going to Euroland. The decision to transact in euros was not a case of our distributors telling us we had to do so, but with sterling being so strong there was a fear that we would lose sales otherwise. The distributors are trading companies which are trading with other countries and, in the past year, our distributor in France, for example, has been paying FF3.5 more for each pound sterling. The distributors each have the discretion to set prices in their own territory, so our quoting them in euros will mean that they can set their prices confident in what they will have to pay. We also have a number of direct customers and I'm sure that they would want us to do business in euros. What we produce is unique, so it is not a question of us losing out to the competition. But any steps we take are designed to keep ahead of the competition.
EURO ACTION PLAN: WHAT YOU SHOULD DO NOW
1. Establish executive responsibility for Economic and Monetary Union preparations. If necessary, form an EMU committee to ensure that all parts of the business are represented.
2. Carry out a business impact study. This should find out what your competitors are doing and what your customers' expectations are, as well as how your business will be affected by developments such as transparent pricing.
3. Decide what changes you will have to make immediately to accommodate the euro. Do you intend to offer prices in euros, to write invoices in euros, to accept payments in euros, or to pay your own suppliers in euros?
4. Carry out an IT impact study. Which systems are likely to be affected? Are they bespoke or packages? If the latter, then find out from the vendors when they will have euro-compliant upgrades available. Ask whether your bespoke software could be replaced by a package; if not, then decide who will be responsible for making the necessary changes: your in-house staff or an outside contractor.
5. Consider the 'UK-in' scenario. If the UK were to enter EMU in, say, 2002, how long would your company need to prepare to convert your accounting system and all your data to the new currency?