Introduction of euro a worry for business

When a technical oversight creates a problem for business, the frustration of managers is understandable. And the Year 2000 problem is proving to be an unavoidable scourge.

Now another problem looms, as the euro's introduction brings a series of headaches that threaten to hit the corporate IT wallet hard. Most businesses will struggle to install and test new software systems in time for its official adoption on January 1st, 1999.

When the plan to introduce the euro was originally drawn up, the technological implications were far from the architects' minds. But now converting in-house software systems in fact any application that handles currency needs to become a priority. Conversion time at between one and four years and most companies across Europe have left it too late, devoting the greater part of their IT budget to the Year 2000 problem.

The challenge to software developers varies across different sectors, but financial institutions are the ones with most to worry about. Most are introducing euro-denominated accounts, transactions, cheques, credit cards, bills and are planning the introduction of euro cash machines, when the notes and coins come into circulation in 2002.

To calculate exchange rates inside EMU requires more than the value of the two currencies involved. The key to EMU-compliance is the "triangulation" method which is required by the European Commission. Instead of the current practice of converting from one currency to another via a single exchange rate, converting a currency within EMU to another within EMU must be done via the euro. Triangulation involves two steps. First, the currency to be changed must be converted to its fixed euro value before it is converted into the currency of another country via that country's fixed euro value. The result is then rounded to six significant figures.

Small to medium-sized businesses could probably manage this manually, if their focus does not rely heavily on cross-boundary transactions. Once the euro notes and coins arrive in 2002, the complex calculations will no longer be necessary, as every country will effectively be operating the same system.

In the meantime, a growing number of firms are pursuing a more expensive phased transition, using a multiple base-currency reporting system that will carry out these calculations for them. This is where the threat lies, as each system will be designed differently without any standard. Fortunes could be made and lost as key decisions are made on how to convert systems to support the euro. The processes of rounding and triangulation are still not generally understood and may cause confusion.

A recent survey conducted by RS Consulting, on behalf of Cap Gemini, found Irish companies lagging behind firms in Germany, France and the Benelux countries in their preparations for EMU. Some 65 per cent of German firms and 53 per cent of French firms considered themselves to be prepared for EMU, compared with 50 per cent of Irish firms and 37 per cent of British firms.

According to Mr Noel Crowley, EMU programme manager at Cap Gemini, the trend indicates complacency and near-sightedness among many European companies. "EMU is a strategic, tactical and operational issue. Businesses should be trying to prioritise and get the most competitive advantage out of any investment in the euro, without incurring huge costs."

Already multinationals like Siemens and Phillips have said they will conduct business using the euro from January 1999 and expect their suppliers to follow suit. Obviously those who convert early will have an advantage in trading with these companies. This may be short-lived until other companies gradually come onstream

but it is likely to improve the business relationship with the larger company.

According to Mr Jim Murray, general manager, SAP Ireland: "We have found most of our customers have thought about the euro at this stage, and have strategies in place. But there tends to be a difference of opinion over whether to publish prices in euros immediately after January 1st, or adopt a `wait and see' approach to see what customers or suppliers are doing."

With IT budgets already stretched over the Year 2000 problem, many businesses have convinced themselves they will be able handle the euro changeover on a gradual basis, sufficient to meet any threat to their marketplaces from outside competitors. However, the Cap Gemini survey found that while only 24 per cent of companies anticipated an increase in foreign competition, 42 per cent declared their intention to begin competing abroad.

Mr Crowley believes this is where the euro will have greatest impact. "A lot of Irish companies don't see the threat yet, thinking Ireland is too small and won't be targeted by big European business. In fact they will encroach on Ireland without even thinking about it once a £350 million market is thrown open for grabs. An awful lot of companies are not waking up to the reality of the euro typically a person will be able to buy their car insurance in France, if it suits them to do so. This has huge implications."

However, there are also positive ramifications. Most Irish companies will be able to spread themselves across European borders to attract new customers, without having to deal with complex currency problems. The euro will boost online trade, because it provides transparent pricing across boundaries, lessening buyers' preference to trade solely in their own currencies. Any company with a specialist offering will be in with as good a chance as its larger counterparts to trade on a European basis through electronic commerce.

Then there is the threat from outside Europe, in particular the US and Japan. It is becoming as essential for companies in non-participating countries to demonstrate euro capability, as it is to prove Year 2000 compliance, if they want to retain their customers and trading partners. Where previously Europe may have been viewed by outsiders as a messy market featuring too many currencies, the single currency provides the perfect incentive to enter the market on a mass scale.

To date companies have had to make up their own rules on handling the euro, as governments remain unsure as to when their IT systems will be capable of handling the euro for general administration. A recent IBM study concluded that system changes for EMU will cost at least 20 per cent more than for the Year 2000 problem which is estimated to cost $1 trillion globally and will exacerbate the existing skills shortage as demand exceeds experts available to deal with the problem.

According to Mr Donal Forde, head of corporate and commercial treasury at AIB, businesses need to focus on broad-based planning. He says that some companies are focusing so much on the changes needed in technology that they are losing sight of advances in the area and in the long run could be left at a competitive disadvantage. Rising to the total business challenge posed to future commercial strategy is emerging as the key to crossing the Rubicon of Economic Monetary Union.