Of all the pressing issues on Pete Janak's mind early last year, the unified currency in Europe was not one. Then he heard a wake-up call. Flying to London to meet with other CIOs in January 1997, Janak expected year 2000 programming issues would consume most of the conference room oxygen. The CIO of one of the US's largest automotive and defence manufacturers was astonished to find his colleagues abuzz over Europe's forthcoming Economic and Monetary Union (EMU) and its currency, the euro.
The European Commission (EC), the governing body of the European Union (EU) that oversees EMU, had fixed January 1, 1999, as the euro's launch date, and the CIOs at the conference were anxiously assessing IT implications. Companies conducting business within or with Europe would have to rewrite billions of lines of code. Reprogramming information systems wouldn't require rocket-science genius, but the effort would cost $US150 billion to $US400 billion worldwide, according to Nick Jones, director of research and a vice president at Gartner Group in London. And nobody could anticipate how the new code would work in the interconnected systems that run the global economy.
Making matters even more difficult, the European Commission had yet to nail down the specifications of the systems architecture.
Janak was not alone in his innocence. Outside Europe awareness of the euro was generally low; strategists, neck-high in year 2000 issues, regarded the currency change as a highly uncertain European affair. Upon his return, Janak tried to rouse his TRW Inc colleagues. "I came back and said, 'Hey, we may be having a problem with this euro thing'." But, he says, "Their reaction was, 'Oh geez, those guys will never make that date anyway. There won't even be monetary union.' We were kind of hoping it would slide a little bit."Eventually, Janak did persuade TRW executives to look at the euro issue more closely. Unless the Cleveland-based company is willing to risk its $US3 billion in revenues that originate in Europe, TRW must accommodate EMU, says William Aamoth, assistant treasurer, international. Now a full-time project manager is helping business unit and IT managers anticipate the euro's impact on processes as wide-ranging as finance, customer support, human resources and marketing.
By the time this story goes to press the EC should have determined which member countries meet the economic criteria for joining EMU in 1999. Most likely, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain will form the core group, and the United Kingdom, Denmark, Greece and Sweden may join later. In January, the EU's new European Central Bank will fix the exchange rate between the euro and each participating country's currency. Those countries will use the euro in large financial transactions. From 1999 through 2001, organisations in EMU countries may use either their domestic currency or the euro as their primary currency, and on January 1, 2002, the European Central Bank plans to introduce euro bills and coins for retail use. Three to six months later, participating countries will withdraw their local currencies, and the euro will stand as EMU's only currency.
As it turns out, the euro is not just a European affair. More and more companies are realising they must prepare to deal with it. Economists expect EMU will rival the United States for economic and financial dominance, and the euro will challenge the US dollar and Japanese yen as reserve currencies in global trade. Replacing as many as 15 European domestic currencies and unifying a huge marketplace, the euro will affect legal contracts, financial management, sales and marketing tactics, manufacturing, distribution, payroll, pensions, training, taxes and, of course, information systems. "I don't think there's a system here that goes unaffected. It's very similar to year 2000 but with more variables," says Jim McGuire, a national managing partner for KPMG Consulting in the US.
Several quirks make euro computations more complicated than traditional currency conversions. EC requirements that dictate conversion calculations to six significant figures -- 1.92573 deutsche marks or 1906.48 Italian lire, for instance -- present problems for many systems. Furthermore, results may be rounded up from .005. That standard defies, for example, Italian convention: The lira is such a tiny unit of currency that Italy rounds down from .99. The conversion is also complicated by EC rules that will require companies converting to or from an EMU participant's domestic currency to convert first to the euro and then to the target currency. Financial systems don't currently support that unique triangulation process.
Even systems that can bill and track payments in several currencies cannot necessarily support more than one base currency. During the transition, divisions operating in EMU countries may have to conduct business using two or more base currencies in order, for example, to run reports in euros for their company's European central management and in the domestic currency for the host country's reporting requirements.
"One belief is that if a system handled multiple currencies, ipso facto, it handles the euro. That's not so," says Sarwar Kashmeri, president of Niche Systems, a financial systems consulting firm in New York City.
In light of those challenges, it may seem almost trivial to mention that PC fonts don't support the euro symbol, and programmers will have to install keyboard shortcuts to accommodate it. But the task will be far from insignificant. Gartner Group predicts that updating end-user applications and preparing keyboards will cost from $200 to $1100 per PC.
The EMU doesn't exist yet, and many variables remain unknown. There is no guarantee that even the 11 likeliest candidate countries will join. And to compound the confusion, each EMU member will individually determine the date by which it will require tax returns in euro. There is but one certainty: the euro will not affect all multinationals equally.
Because Logistix has no major divisions in EMU countries, it will need only one base currency. The California-based company distributes and fulfils orders of CDs, floppy disks and documentation for brand-name software vendors operates its European distribution hub in Dublin, Ireland. Logistix is considering letting buyers pay their bills in euros right from the start, and its bank will convert payments to US dollars for deposit. Logistix will record euro transactions in its accounts receivable program, using euro-compliant R/3 updates from SAP AG. Logistix is prepared to issue euro packing slips and invoices that address triangulation and rounding requirements in mid-1998.
For companies with large divisions and major customer bases in several EMU countries, the euro's impact may be more complex. With 70,000 employees in Europe, IBM, for instance, generates voluminous business from customers in every European country. For nearly two years, IBM has been wrestling with euro issues, and already the company has devoted 500 people to the transition at least part time.
"The euro percolates into every single corner of the business," says Peter Cruttenden, leader of IBM's internal euro project based in Paris. IBM's EMU project is split into six areas: customer requirements and opportunities, customer service offerings, internal business processes and IT systems support, implications for IBM products, communications covering customer and employee awareness, and a project to study the implications of individual governments' approaches to the transition period.
Two main considerations will determine when IBM converts to the euro: its customers' plans and its internal re-engineering timetable. If IBM moved before its customers, they would be obliged to translate IBM's invoices, purchase orders and other statements to domestic currencies compatible with their systems. By the same token, IBM can't lag behind its customers.
Meanwhile, IBM is re-engineering its business practices, installing new client/server systems and coming to grips with year 2000 compliance. It would be wasteful to convert legacy code to the euro only to replace it with new systems a couple of years later.
So starting in January 1999, the company plans to accept payments and invoices in euros, but its divisions will continue to use local currencies for internal operations such as accounting and external documents such as contracts, proposals and invoices. For the next two years, IBM's banks will convert euro payments to the local currency of each subsidiary's account. To track euro payments, IBM will make small coding changes to its accounts receivable programs. Current plans call for its divisions in EMU countries to convert such internal systems as invoicing and reporting by January 1, 2001. At that time, the company will shift all operating files to euros, and to support comparative analyses, it will convert certain historical data as well. That most extensive phase of the change, Cruttenden says, will affect 80 per cent of its applications over a number of years.
Because money is their business, international banks will feel the euro's impact intensely and immediately. Wall Street banks must be ready to buy, sell and trade in euros by next January. Bill Irving, a partner in charge of capital markets consulting at Coopers & Lybrand LLP in New York City, estimates that each major bank will spend an average of 1 per cent to 3 per cent of its annual operating budget -- $US20 million to $US50 million -- to reprogram its information systems.
Beginning next January 1, European stock exchanges will quote all equities of EMU nations in euros. Accordingly, banks like New York City-based J P Morgan & Co will buy and sell those securities in euros. And because EMU candidate nations intend to restate outstanding government debts that same day, J P Morgan will, over the new year's first weekend, convert government bonds to euros that are on today's books in such local currencies as deutsche marks or francs. When the bonds are multiplied by the euro exchange rate and calculated to six significant figures, the results will include decimals. Some governments will keep the bond values in decimals, while others like France will have their euro bonds stated in whole numbers, settling the difference with the banks, notes Susan Kirchhoff, a vice president and global EMU program director for J P Morgan. For instance, while the actual conversion rates won't be set until December 31, 1998, a 1 million French franc bond might convert to 166,854.10 in euros. The French government would "cash out" the 10 euro cents, meaning it would pay the difference to the bank. The company will need to write code that will convert re-denominated stocks and bonds -- as well as its historical data -- to a common currency, but it has yet to decide whether that currency will be euros, deutsche marks or a synthesis of EMU currencies.
J P Morgan has been analysing the business implications of the euro for years but began serious work on its infrastructure in the first quarter of 1997.
Kirchhoff says the bank's divisions are devising detailed technical specifications and some have begun writing code. To ensure next January's conversion goes smoothly, the bank will test general ledger and cash systems across all the business units during this year's third and fourth quarters, and it will run several mock conversion weekends.
While most US companies are ahead of their European counterparts in preparing for the year 2000, they lag behind in euro-readiness. "Outside of high-tech and finance, where there's a real imperative to pay attention, there's not much awareness of this issue at all," says Joshua Greenbaum, a senior consultant and director of the packaged software strategies service at Hurwitz Group in Massachusetts. Greenbaum, author of a study on the euro's implications for US business, says, "It's somewhat typical of American companies and their attitude toward Europe in general."Some executives simply hope the euro issue will just dissolve before they have to deal with it. "The firms I work with are operating on the assumption that the Europeans are going to wake up sometime in the next 12 months and realise that the euro thing is doomed," says Edward Yourdon, chairman of the Cutter Consortium, a Massachusetts advisory service that focuses on year 2000 issues.
"So they're doing their best to avoid spending any money on the euro project."Most experts, however, have no doubt that the EC will launch EMU and its euro currency as planned. They anticipate a unified market that facilitates corporate comparison shopping among suppliers in different member countries and allows products and supplies to cross borders without incurring the costs of currency conversion. Companies may save money by consolidating warehouses and manufacturing plants, and corporate treasurers expect the single currency to reduce the need to hedge -- offset risk by buying or selling currency futures or options -- when economic conditions are unstable. "The currency fluctuations were driving our people batty . . . We're all for the euro because it will simplify things greatly for us," says Supreet Manchanda, CIO at Logistix.
Because their home currency won't change, Australian and American businesses have more breathing room than their European counterparts. But IBM's Cruttenden cautions against sticking the euro on a back burner. "You have to start with the assumption that it's going to happen on time and it's going to be a big deal when it happens," he says.
TRW, it turns out, is nicely positioned to greet EMU. Back in 1996, the company initiated a five-year rollout of SAP R/3 packaged applications. Now, in light of the software's euro capabilities, management is giving consideration to an accelerated implementation, and Aamoth views the new order with considerable optimism. "Foreign exchange will get easier as you no longer have cross-currency exchange risk. Banking should become more competitive because the industry may consolidate. And prices you pay for certain banking products will go down. Those are all good things for us." Lynda Radosevich is a senior editor at US InfoWorldReader ROIFor multinational companies, the euro's implications are difficult to specify but too large to ignore. Few organisations have started to ready their business and information systems to work with Europe's new currency, but now is the time for executives to:- Determine the strategic importance of your business dealings with Europe - Assess your IT group's ability to deal with the new currency - Plan to take advantage of Europe's unified market By Definition Euro: Nickname for the common currency of the upcoming European Economic and Monetary Union. Starting in January 1999, EMU will comprise about a dozen countries of the European Union.
Are You Euro Ready?
To prepare for the euro's far-reaching implications, you should: - Determine your current level of European business. You need a euro policy if 20 per cent or more of your revenues come from Europe or if your European business is strategically important.
- Ascertain when your European customers will convert to the euro.
- Examine your financial systems. Can your systems accommodate another currency and triangulation? Are your systems easily upgraded? - Evaluate human resources systems, including benefits, pensions and compensation. Will contractual arrangements require you to pay some employees in local currencies and others in euros during the transition? - Inspect contracts. If contracts that stipulate payment in domestic currencies extend beyond 2002, do the contracts remain valid once domestic currencies expire? - Examine logistics, supply chain, warehousing and shipping applications. Will the unified market change supply flows, and can you adapt them to reflect changes? - Establish a conversion timetable for making your IT systems compliant with the new currency.
Source: Hurwitz Group
Find It Online
Coopers & Lybrand LLP (http://www.coopers.com/) Cutter Consortium (http://www.cutter.com/) Gartner Group (http://www.gartner.com/) Hurwitz Group (http://www.hurwitz.com/) IBM (http://www.ibm.com/) J P Morgan & Co (http://www.jpmorgan.com/) KPMG Consulting (http://www.kpmg.com/) Logistix (http://www.logistix.com/) Niche Systems (http://www.nsinc.com/) Oracle (http://www.oracle.com/) PeopleSoft Inc (http://www.peoplesoft.com/) SAP AG (http://www.sap.com/) Solomon Software (http://www.solomon.com/) SunSystems (http://www.sunsystems.com/) The official euro website (http://europa.eu.int/euro) TRW (http://www.trw.com/) A white paper on conversion to the euro and its impact on IT (http://www.itaa.org) The European Commission's stance on year 2000(http://www.ispo.cec.be/y2keuro) What will the euro symbol look like? (http://www.indigo.ie/egt/standards/iso10646/euro/euro.html) Financial Assistance Software vendors are supporting the arcane demands of the euro - SAP AGwww.sap.com.
SAP officials say R/3 Release 3.0 and higher support the European Union's conversion rules and multiple base currencies in all modules. Release 4.0 of R/3 includes tools that convert local currency accounts to euros as well as add-on functions that let customers generate price lists or submit reports in both euros and national currencies. Those conversion tools will also be available for R/3 Release 3.1. The company will offer euro-conversion support services this spring.
Oracle Applications Release 11 supports multiple base currencies in all Oracle applications modules. Release 11 incorporates euro conversion, tools for converting local currency accounts embedded in applications, and such dual-currency support as the ability to generate price lists in euro and local currencies simultaneously. The company already offers euro-conversion support services.
Since November 1996, when PeopleSoft shipped Release 6, the company says it has supported multiple base currencies in the assets and general ledger modules.
Release 6 also supports such dual-currency functions as price list and report generation in both euros and local currencies. Release 7.5, due to ship by July, will update accounts payable and accounts receivable modules to support multiple currencies.
-- L Radosevich
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