Articles about CTRM vendors and their software products.
One of the purposes in creating CommodityPoint as a Division of UtiliPoint earlier this year was to signal our intention that we would cover the broader commodities space rather than just energy commodities. Essentially, CommodityPoint provides research and analysis services around global commodity markets and the underlying technologies that are used to support trading, transaction and risk management activities. Over the last several years, and reinforced by the results of our study into commodity markets published earlier this year1, we have discussed how commodity markets have changed in a variety of ways. Generally, those that trade commodities now trade a wider range of commodities and new relationships between commodities have emerged as older relationships to some extent have broken down.
One example of these changed relationships is around the impact of ethanol, which has effectively linked supply and demand of a variety of different commodities such as crude oil, gasoline, natural gas, grains, sugar, ethanol and so on creating arbitrage and other trading opportunities. Indeed, the impact of the emergence of ethanol as a gasoline substitute may even have had a broader impact than that as through much of 2007 and early 2008 the rising costs of animal feed as farmers switched crops in favor of corn and grains for ethanol production forced them to slaughter early depressing meat and livestock prices.
ETRM Becomes CTRM
As a result of these and other changes in commodity markets, traders—particularly financial traders—are more likely to trade a wide variety of commodities and, as they have done so, they have sought TRM solutions that could support a wider variety of commodities too. As we have stated before, ETRM is becoming CTRM software as a result. Some traditionally ETRM vendors have followed this trend, too, offering support for non-energy commodities such as metals and softs, albeit often for exchange traded instruments only. The problem for many ETRM vendors however is just as the physical transaction management of the different energy commodities is extremely complex, so too is the management of the physical side of metals and agricultural commodities. It is neither simple nor straightforward to offer physical transaction management coverage for these commodity groups. Of course, there is also a similar movement amongst vendors that have historically served metals and/or agricultural commodity traders as they try to tackle the complexities of adding energy commodity coverage. As a result, the emerging CTRM software arena will include some non-familiar names for many in the energy side of the industry including Brady and EKA.
EKA—From Agricultural Commodity Beginnings to Complete Commodity Coverage
EKA was founded by Manav Garg with venture funding after working as a trader at a large trading house. He noticed that there were deficiencies in the technologies used to support trading and risk management activities and set out to build a software solution that addressed those issues. The result was The EKA Trade and Risk Management solution, a CTRM solution initially focused on agricultural commodities that later expanded into the metals domain. The key differentiator for the EKA platform is its deep focus and support for the physical transaction management (logistics) around agricultural commodities and metals.
The EKA software is utilized today by a number of clients around the world including the Noble Group, Louis Dreyfus, CHS and AWB. As EKA has succeeded in deploying and continually developing its software it has seen its staff grow to more than 200 professionals and it has opened a North American office in addition to its Bangalore, India HQ. Recently, it announced the appointment of Rick Nelson as Head of Sales, Achuth Rao as Vice President - Product Management, and Mr. Gautam Bhattacharya as Vice President - Professional Services as it seeks to consolidate and grow. It is working towards developing a complete end-to-end solution for commodities but its traditional and ongoing strength is in agricultural commodities and metals.
EKA's Commodity Trading and Risk Management (CTRM) solution for agriculture and soft commodities provides a single platform for managing operations across softs, grains, feeds, edible oils, oilseeds, livestock, and other agri-based businesses. It was specifically designed to meet the needs of the different participants in the supply chain, including trading houses, elevators, distributors, processors, exporters, farmers and importers and covers the entire lifecycle of both physical and financial contracts, combining front, middle and back office functionality. The software also caters for food processors and ingredient suppliers, the meat, poultry and dairy industry and refineries and ethanol plants amongst other segments.
EKA's Commodity Trading and Risk Management (CTRM) solution for metals provides a single platform for managing operations across base metals & ferro-alloys steel and scraps. Again, it was designed to meet the needs of different participants of the metals supply chain, including mines, producers, fabricators, trading houses, distributors, as well as recyclers and covers the entire lifecycle of both physical and financial contracts, combining front, middle and back office functionality.
The New CTRM Product Landscape
CommodityPoint's recent TRM Vendor Perceptions Study2 showed that buyers of TRM Software now have familiarity with a broader range of vendors than two years ago. Some, particularly the financial trading firms that trade a wider variety of commodities, are already somewhat familiar with traditionally non-energy TRM vendors such as EKA. Indeed, EKA were amongst the vendors considered as market leaders in industry segments such as agriculture and metals. This is a trend that CommodityPoint believes will continue.
As companies trade a wider variety of commodities they will require broader-based TRM solutions and this will often require the use of different products for different commodity groups or at least for the physical transaction management for those commodity groups. As a result they will be exposed to a wider variety of vendors and products as it is not just ETRM vendors like Triple Point and OpenLink that will offer the needed functionality but also vendors who grew up serving different commodity groups such as EKA who now are adding energy commodity coverage. The CTRM software market will be more competitive as a result offering a broader choice for buyers and users of CTRM software.
Note: CommodityPoint's Online Software Directory at www.trmdirectory.com provides complete lists of CTRM software vendors with direct links to their websites.
1 Changes in Commodity Markets: Impacts on Traders and Software. CommodityPoint Report, 2009
2 2009 TRM Vendor Perception Study Report, CommodityPoint Report, 2009
The ETRM software arena is one that often attracts new entrants. The fact that it is a complex business with many regional and/or asset-type specific requirements, especially on the physical side, means that there is often room for new entrants. UK-based Contigo is one such new entrant hoping to capitalize on its founder’s energy and market knowledge and IT skills. The Directors of Contigo spent many years working at PowerGen, which later became E.On UK. and were heavily involved in putting together that company’s trading systems. As a result, they have a good deal of expertise in UK market requirements and saw an opportunity to be a ‘niche’ supplier in the UK and European ETRM software market.
They founded Contigo in 2006 developing custom applications primarily for UK-based energy companies and found that their industry and market knowledge was in demand. The company has grown based on this model and is profitable according to Simon Piercy; its Director of Commercial and Project Management. But, the company has also been hard at work developing off the shelf software that it now sees as ready for mainstream consumption and its enVoy product is already used by four UK-based gas companies including Centrica.
Contigo’s market focus is “to target smaller players in the market at a lower price point than many mainstream ETRM solutions on the market,” states Piercy. “A lot of smaller players in the market still use Excel spreadsheets due to the high entry cost of an off the shelf ETRM software package.” All of Contigo’s software products are browser-based and employ Service Oriented Architectures making them flexible, scalable and easy to use.
The company’s three initial products include;
• enVoy - for notifications including Exelon notifications, submissions of data to the National Grid, gas notifications to Xoserve. It can support notifications to various agencies and is flexible enough that it is easy to add other data flows as required. EnVoy Interruption specifically provides UK Gas Shippers the capability to manage the process around bids and process flows for interruption.
• enVision – a business intelligence platform focused on energy and utilities. It consolidates trading and operational data for reporting, online analytical processing and data mining activities.
• enTrader – an energy trading platform that supports multi-commodity deals for power, gas, biomass amongst others and provides modules for billing and payments, service contracts and connectivity to trading exchanges.
Contigo reckon that their approach, based on their understanding of energy trading gained by many years in the industry, offers them and their clients an advantage. Piercy states “Our approach is to support a multi-commodity environment and for each commodity we provide a defined delivery calendar that determines the settlement and billing dates. The calendar is built to support complex delivery schedules, such as 23:00-23:00x48 (UK Power), 06:00-0600 daily (UK gas), weekly (UK coal), or annually (Carbon). Corresponding delivery, payment and settlement calendars enable much quicker position, risk and credit management. Products are defined as groups of periods against the delivery calendars. Traders therefore record deals as they would trade in the market – i.e. Power Baseload Summer, or Gas Balance of Month.” They also believe that they are differentiated as a “UK company serving the UK and European market.”
In fact, part of Contigo’s value proposition is to deliver cost effective software quickly and insure an ROI for the client – something that many clients already perceive as a reality. The Head of Trading and Operations of Wingas UK said of Contigo recently “Contigo was able to implement the software over a two day period and provided excellent training, enabling the roll out of the new software to be easily integrated and hassle free.” While the Contracts Manager at British Gas said “Contigo’s contribution was vital to British Gas Business’s successful participation in the first UK Gas Interruption Auction. Contigo helped significantly reduce the impact of the change on our team, freeing our account managers to concentrate on provision of quality customer service to our large account customers.”
But Contigo face a highly competitive market in ETRM software and will compete with a long list of other vendors in the UK market including OpenLink, Triple Point, Allegro, SunGard, Navita, Hyperrig and many more bedsides. End users are often attracted to a fresh face and a new vendor but the honeymoon often does not last. That’s why it is critical that vendors such as Contigo focus on being best in class in a certain aspect of the industry’s requirements utilizing their expertise to establish a beach head in that particular target market. Many new ETRM vendors have come unstuck and got into trouble attempting to be opportunistic and in trying to meet every requirement in an attempt to gain business and market share losing their focus and traction in the process.
The fact that Contigo are UK-based and have deep understanding of UK energy markets is certainly a differentiator but UtiliPoint buyer surveys have always discovered that whether the vendor is local or not ranks very low in any question regarding buying criteria. What is more important is functionality, ease of use and the ability to integrate. By building their software on Service Oriented Architecture, it is likely to be scalable and have good connectivity and their expertise in UK energy markets should ensure that they deliver the functionality. Nonetheless Contigo have made a good start and already have clients, installations and a profitable business.
Blogging does work. Recently a comment was posted on the UtiliPoint Europe Blog (www.utilipointeuropeblog.com) regarding our lack of coverage of VIZ Risk Management. I replied to that comment suggesting that UtiliPoint would be more than interested in learning more about the company and several days later Mr. Frank Carlsen, CEO of VIZ Risk Management, contacted me via e-mail to arrange a briefing. For me, this is good evidence that blogs are a great way to communicate and discuss topics around the industry!
VIZ Risk Management
VIZ Risk Management was established in 1992, writing front office models for interest rate traders. But it wasn't until 1998 that the company entered the energy software arena. It did so as a result of an interest rate trading client who desired forward curves for the NordPool power market and it has subsequently gone from strength-to-strength. The company now boasts a large number of clients for its ELVIZ ETRM software across Scandinavia and Europe in the Netherlands, Germany, Switzerland, France and Spain. UtiliPoint first encountered VIZ Risk Management in its 2007 European ETRM Benchmarking study1. In that study, VIZ Risk Management was in the top ten ETRM vendors first to mind for European buyers and also mentioned by several respondents as their vote for market leader in the software category.
VIZ Risk Management's early strategy was to target unhappy clients of a competing product which had a large installed base around Scandinavia in the late 1990s. This strategy was successful according to Mr. Carlsen who told us, “VIZ Risk Management now has around 90 percent of that competitors clients (the competitor is no longer operating) and VIZ Risk Management was able to win some European clients, too, as Scandinavian traders familiar with the product moved to other trading firms on the continent.” But the demise of Enron signaled a pause to trader movement and a slow down in ETRM software sales generally as the industry stalled on the back of the merchant collapse.
In 2004, VIZ Risk Management got a capital infusion from some venture capital companies which it used to acquire two smaller companies in Oslo, inheriting several more clients in the process. It also used its cash injection to open an office in the Netherlands from which to target European markets. Today it boasts seven German clients and others in France and Spain with plans to continue to win new European business.
ELVIZ ETRM—An ETRM Product
Mr. Carlsen believes that his product's strength remains in valuation and risk management—with basis in Nordic power, but points to their presence in other parts of Europe to justify the products strong functional coverage elsewhere, too. As might be expected, VIZ Risk Management has added natural gas, emissions, coal, freight and FX functional coverage to ELVIZ ETRM, as well as some scheduling functionality for German markets. Their true strength, though, remains in risk management and modeling where the product offers VaR, PaR, and stress testing utilizing full Monte Carlo simulation.
Typically, VIZ Risk Management has been actively targeting middle tier energy trading firms with a message based around speed and ease of deployment and a product that is trader friendly. But it also has a somewhat unique licensing model in that it licenses its software on a monthly basis i.e., leasing. This proposition is certainly attractive for some trading firms.
Unfortunately, UtiliPoint has yet to see the product in action and is therefore not in a position to offer first-hand comments, except that surveys in Europe around ETRM continue to show that VIZ Risk Management is a strong European vendor in some identifiable market niches with a reputation for delivering effective trading and risk management solutions with the emphasis on financial energy trading. Typically the product will compete with the offerings from other vendors such as OpenLink, Navita, Murex and Allegro in the middle tier of the European energy trading arena.
1 Benchmarking of European ETRM Software Markets, UtiliPoint report, 2007 - http://www.utilipoint.com/rci/details.asp?ProductID=1142