Allegro CTRM Value Study Report 2014
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The 2014 CTRM Value Survey conducted by Commodity Technology Advisory reveals insights into the perceived value and ROI of Allegro's commodity trading and risk management systems among its clients. Key findings indicate that 87% of respondents view the investment positively, with significant improvements in visibility, access to information, and operational efficiency reported. Despite the high costs associated with implementation, the survey suggests that structured CTRM solutions, like Allegro, are integral for adapting to market changes and improving overall trading effectiveness.
Allegro CTRM Value Study Report 2014
- 1. CTRM Value Survey and Analysis 2014 Allegro CTRM Value Study Report Commodity Technology Advisory, LLC www.comtechadvisory.com 19901 Southwest Freeway Suite 140 Sugar Land, TX 77479 Phone: 281 207 5412 1
- 2. CTRM Value Survey and Analysis Report Background and Overview The environment of physical energy and non-energy commodity trading and marketing has grown increasingly complex, marked by globalization bringing about rapid changes in supply and demand patterns, increased regulatory scrutiny and evolving trading and reporting rules, volatility along the entirety of the physical supply chain, and increasing uncertainty as to future price movements. In order to react to these changes quickly and appropriately, participants in these markets must increasingly rely on a sophisticated infrastructure of software and technologies to ensure a complete view of their trading positions and external market conditions that can quickly and severely impact their values. The core component of these now requisite trading and marketing technologies are energy and commodity trading and risk management (CTRM) systems. As market complexity has increased and multi-commodity trading has become more common, CTRM solutions have had to become more sophisticated and provide a greater depth of capability in order to capture and value the unique characteristics of the multitude of physical commodities being transacted along the physical supply chain, from source to market. Given the capabilities of these CTRM systems, they do represent a significant investment for any trading or marketing organization, generally trailing only the large scale ERP solutions, like SAP, in terms of costs to purchase and implement. Allegro Development, one of the world’s largest CTRM solutions providers, engaged Commodity Technology Advisory to conduct a survey of a number of their clients to determine their views as to the value of their investment and the operational and financial impacts of deploying Allegro’s CTRM solution. This report summarizes the results of that survey and discusses the key considerations for any company seeking to develop their own assessment of the value of their CTRM technology investment via a Return on Investment (ROI) calculation. Copyright 2014 Commodity Technology Advisory llc 2
- 3. CTRM Value Survey and Analysis Copyright 2014 Commodity Technology Advisory llc 0 1 2 14 6 SUMMARY - PERCEIVED VALUE The survey respondents provided a current estimate of the value received from their software investment (ranked very positive thru very negative). Given the investment required to implement and integrate an enterprise scale CTRM solution, it is expected that companies who have had the system in production for a very short period of time will not have yet recouped that initial investment. Note: One respondent felt it was too early to in their life with the system to determine the overall value of the investment. Of the two that indicated their investment was breakeven, prior to deploying Allegro, one was utilizing a small scale vendor supplied risk system and the other was utilizing multiple vendor supplied systems. The one negative return indicated they were in the middle of an upgrade to V8 and expected that rank to improve once the project was complete. 87% believed the value received from their investment was Positive or Very Positive Would you recommend Allegro to industry peers that are looking for an commodities trading solution? 100% Yes No 100% of the respondents indicated they would and/or have, recommended Allegro to industry peers 3
- 4. CTRM Value Survey and Analysis RESEARCH DEMOGRAPHICS Commodity Technology Advisory interviewed individuals at 24 Allegro customers over a several week period in the third quarter of 2014. The companies and individuals participating in this project were initially contacted Legacy System Prior to Allegro Commodities Traded Copyright 2014 Commodity Technology Advisory llc by Allegro to seek their participation. Twenty-two of the respondents were using V8+ and two were using V7+ Respondent Company Types Utility Merchant Power Gen Producer Trader, Merchant Refining Coop Others 0 5 10 15 20 Natural Gas Oil or Oil Products Power Coal Emissions Freight Renewables Ngls Other None, Start-up Business Spreadsheet/Homebuilt Vendor Supplied 16 7 1 4
- 5. CTRM Value Survey and Analysis Strongly Disagree 0 0 Copyright 2014 Commodity Technology Advisory llc Strongly Agree Strongly Disagree Strongly Agree 0 0 1 9 14 IMPROVING ACCESS TO INFORMATION One of the primary goals of all purchasers of a CTRM system is to improve the availability of information to all users, particularly those whose performance will have the greatest impact on the bottom line. 0 1 8 10 5 Strongly Disagree Strongly Agree Improved visibility into daily positions/exposures Improved access to information for traders Improved the visibility and access to logistical information and optionality for schedulers and/or transportation/ transmission personnel 4 12 6 4.5 4.1 3.9 5
- 6. CTRM Value Survey and Analysis Reduced the human effort associated with managing Reduced time and effort in calculating valuations Copyright 2014 Commodity Technology Advisory llc REDUCING COSTS AND INCREASING EFFICIENCIES Realizing positive value for a CTRM system is in large part dependent upon improving operational efficiencies while containing costs Reduced time and effort required for month-end close Strongly Disagree Strongly Agree process 3.8 Strongly Disagree Strongly Agree business 3.9 0 3 5 7 9 Strongly Disagree Strongly Agree 4.0 1 1 6 10 6 0 2 4 9 7 6
- 7. CTRM Value Survey and Analysis REDUCING COSTS THROUGH ERROR Reduced the number/scale of errors associated with data Copyright 2014 Commodity Technology Advisory llc REDUCTION A structured ETRM/CTRM system will help reduce user error through data validation and ensure accurate calculations of prices and volumes Strongly Disagree Strongly Agree entry 4.1 0 0 5 11 8 Reduced errors associated with settlement and invoicing Strongly Disagree Strongly Agree 4.0 0 0 6 10 7 7
- 8. CTRM Value Survey and Analysis RESPONDING TO CHANGES IN BUSINESS AND MARKETS In a rapidly changing business and regulatory environment, your CTRM product vendor must constantly stay ahead of market requirements and provide the tools and flexibility for each customer to address their specific needs Ability to more readily react to industry changes utilizing Copyright 2014 Commodity Technology Advisory llc Have been able to develop an effective regulatory compliance program utilizing Strongly Disagree Strongly Agree Allegro. 3.9 Strongly Disagree Strongly Agree Allegro 3.8 0 0 11 7 6 1 1 2 8 6 8
- 9. CTRM Value Survey and Analysis CONTAINING COSTS Vendor supplied and supported systems will invariably cost more, on a direct basis, than spreadsheets or internally developed solutions. However, that calculation will change significantly when one includes indirect costs and System upgrade/maintenance effort and time have been risks/exposures. Strongly Disagree Copyright 2014 Commodity Technology Advisory llc Strongly Agree reduced 2.9 Reduced our overall system cost since migrating to Allegro Strongly Disagree vs. previous system Strongly Agree 3.0 3 6 6 6 3 1 5 13 4 0 9
- 10. CTRM Value Survey and Analysis RESPONDING TO CHANGES IN BUSINESS AND MARKETS The scalability provided by structured CTRM solutions, like Allegro, enables business to grow their market reach and capabilities without substantial incremental increases to their 75% 75% 67% 63% 80% Copyright 2014 Commodity Technology Advisory llc technology spend. Has the number of daily transactions increased since implementing Allegro? Yes No Has the notional value of your transactions increased since implementing Allegro? Yes No Have you expanded your footprint of Allegro by adding additional components? Yes No Has your business grown into new commodities/market since you implemented Allegro? Yes No If so, did you implement Allegro when expanding your business into these new markets? Yes No 10
- 11. CTRM Value Survey and Analysis Do you feel that Allegro enables you to deploy and/or integrate new, complementary technologies for better commodity Copyright 2014 Commodity Technology Advisory llc management? 96% Yes No ETRM/CTRM SYSTEMS ARE THE CORE OF YOUR TRADING AND MARKETING TECHNOLOGY INFRASTRUCTURE CTRM systems should integrate easily to other systems and data feeds; additionally, they should be architected to facilitate business growth through expansion of capabilities in order to enable better decision making 11
- 12. CTRM Value Survey and Analysis SUMMARY OF RESULTS – 2014 V 2013 Line Description 2014 2013 1 Improved visibility into daily positions/exposures 4.5 4.1 2 Improved access to information for traders 4.1 3.9 3 Improved the visibility and access to logistical information and optionality for schedulers and/or transportation/transmission personnel 3.9 3.5 4 Reduced the human effort associated with managing business 3.9 3.6 5 Reduced the number/scale of errors associated with data entry 4.1 4.1 6 Reduced time and effort in calculating valuations 4.0 3.9 7 Able to more readily react to industry changes due to Allegro 3.8 3.7 8 Able to develop an effective regulatory compliance program utilizing Allegro 3.9 3.3 9 System upgrade/maintenance effort and time have been reduced 2.9 2.6 10 Reduced our overall system cost since migrating to Allegro 3.0 2.9 11 Reduced time and effort required for month-end close process 3.8 3.9 12 Reduced errors associated with settlement and invoicing 4.0 4.0 13 Has the number of daily transactions increased since implementing Allegro? 75% 80% 14 Has the notional value of your transactions increased since implementing Allegro? 75% 71% 15 Have you expanded your footprint of Allegro by adding additional components? 67% N/A 16 Has your business grown into new commodities/market since you implemented Allegro? 63% 50% 17 Did you implement Allegro when expanding your business into these new markets? 80% 80% Copyright 2014 Commodity Technology Advisory llc 12
- 13. CTRM Value Survey and Analysis Determining Return on Investment (ROI) Determining the return on investment (ROI) for a CTRM software acquisition can be challenging as one of, if not the, primary drivers of such a purchase is risk reduction - including price, credit, regulatory, operational and execution risks. Deploying a modern CTRM solution, like that from Allegro, will when compared to a spreadsheet or manual process, reduce the risk exposures in virtually all areas of your business while simultaneously improving information visibility and enabling better and more profitable decision making. Precisely valuing an avoided event is not possible, but utilizing your company’s past experiences can inform the value you may or may not place on reduced risks and can be an important determinate in valuing your software investments. Other benefits can be more readily measured and are based on your company’s past and current experience in utilizing software to capture deals, manage positions and risks, account for your business, and analyze and report activities. Whether your most recent experience prior to implementing a new CTRM solution was the use of spreadsheets, a custom developed solution or another vendor product, many of the changes in terms of costs and benefits can be reasonably measured and used to calculate an ROI for your software investment. Return on Investment = (Benefits - Costs) / Costs Copyright 2014 Commodity Technology Advisory llc 13
- 14. CTRM Value Survey and Analysis Benefits and Costs to be Considered When Calculating ROI BENEFITS ƒ Value of reduced headcount costs across business process or possibly switch from direct full-time internal staff costs to variable, on-demand external headcount costs via use of third party consultants ƒ Reduced operational risks via saved penalties and fees as a result of reduced errors in areas such as Copyright 2014 Commodity Technology Advisory llc scheduling, Invoicing and payments ƒ Reduced cost of credit and credit facilities due to better management of both cash and credit –this is on both sides in offering and receiving optimal collateral to support actual trading needs ƒ Reduced FX costs due to better management of FX and reduced need for FX conversion ƒ Ability to optimize trading data costs – i.e. consolidate and reduce Bloomberg, Reuters, and other data feed requirements? ƒ Improved Market Risk Management – improved hedge performance, improved decision making, etc., yielding improvements in P/L, MtM, and cash management and reduced exposure to negative credit events such as margin calls. ƒ Improved counterparty relationships as a result of more timely confirmation and settlement – improved market reputation will reduce costs of finding and negotiating agreements with counterparties ƒ Reduced technical and business maintenance and workaround costs vs. replaced system ƒ Improved identification of trading opportunities resulting in better results ƒ Improved visibility into current performance reduces management and external (banks, shareholders) anxiety which in turn has an impact on capital requirements and staffing ƒ Improved ability to forecast business performance potentially reducing capital requirements and improving stock performance ƒ Improved auditability and controls reduces chance of compliance issues and decreases costs of an audit. ƒ Improved tracking of payment terms and slow payments resulting in faster cash collection or trading decisions – i.e. no trade, buy only etc. ƒ Marginal ability to attract better quality staff COSTS ƒ Initial license fees or incremental ongoing service or rental fees vs. the similar costs of replaced system ƒ License fees for add-on modules or ancillary software such as database solutions ƒ Support & Maintenance costs – incremental vendor S&M contract cost and internal staff vs. similar costs of replaced system ƒ Additional fees – escrow for source code etc., if higher than replaced system ƒ Estimated procurement costs (cost of personnel, facilities and equipment involved in the identification, testing, and contracting of the software) ƒ Implementation costs including both internal and external costs related to human and technical resources for data conversion, training, integration, and testing ƒ Costs associated with parallel testing/usage during UAT ƒ Periodic upgrade project costs ƒ Internal hardware costs including maintenance – live, test and other environments ƒ Operational issue costs as a result of software deficiencies – if any ƒ Work around costs (man hours, software, custom development) – if any ƒ Cost of on-going or periodic training 14