New developments in the ECTRM software market

By Navita, Norway

An article on the implications of linear development paths and mutually exclusive design strategies in the ECTRM software market on the success probability of your ECTRM project.

In a time when differentiation is desperately desired, it is often argued that the energy and commodity trading and risk management (ECTRM) software industry is ‘different’ from other software industry segments. Navita asserts that this is not the case and uses this assertion as a premise – coupled with the assumption that technology and business forecasting can be meaningfully performed through reasoning by analogy – to predict the mutually exclusive decision points (bifurcations) and associated linear development paths that will characterise ECTRM software development for the foreseeable future. Understanding these bifurcation points and linear dependencies – and what strategic choices system vendors will make in relation to these bifurcation points[1] – enables buyers of ECTRM software to avoid project failures while extracting maximum value from their ECTRM software purchasing decisions.

Introduction
In another article,[2] the authors of this article wrote: “As of 2007, 9% of ECTRM projects fail, 27% result in misinstallations, and over half cost more than double their licensing fee. While similar numbers may be compiled for the general software industry, the fact is that many best practices from the general software industry have only been slowly adopted by most vendors of ECTRM systems.”

Having discussed the high failure rates in the industry with many customer organisations, prospective customers, consultancies and vendors from the ECTRM software industry, as well as from the general software industry, Navita has learned that failure rates are not solely the result of the absence of best practices. Failures are just as likely to be attributable to the trading community’s and the ECTRM software industry’s limited focus on understanding the technology and business trends that will profoundly shape the longer-term success or failure of any ECTRM project. Moreover, this lack of understanding seems to be more present in the ECTRM market than in other software market,[3] primarily because of the prominence functional expertise plays in the trading community and the weight today’s functional requirements are often given in the evaluation of various vendors’ solutions.

The aim of this article is to forecast – based on an explicit forecasting methodology – where the ECTRM software industry is heading and to provide practical guidance to a prospective purchaser of ECTRM software on key business and technology trends that they should consider.[4] 

The over-arching assumption in this article is that project delays (and unrealised trading profit), lack of flexibility and agility, cost overruns and, if significant enough, project cancellations and write-offs, can in most cases be linked to the failure to make the right (or any) decision regarding a few but critical issues, rather than getting the full requirement specification right.

Methodology
The following process forms the basis for Navita’s predictions:
1. Accept the notion that ECTRM software is just like any other piece of software and, in particular, subject to the same dynamics as any other piece of software.
2. Identify key trends in the general software industry, check whether applicable to the ECTRM software industry and, if yes, include in predictions for the ECTRM software industry. This was done via two mechanisms:
   a. a comparative study of the ECTRM software market, the enterprise resource planning (ERP) market and the customer relationship planning (CRM) market, used to drive a forecast of where the ECTRM software market is going; and
   b. compiling a list of general industry trends in the software industry, based on participation in a number of industry events.[5]
3. Identify key bifurcations in the offerings of various vendors, the requirements of various customers and the perspectives of key industry sources.
4. Identify the key issues with our forecasts that may weaken the accuracy or credibility of our forecasts.

The focus on bifurcations, which is not often done in technology forecasting,[7] was made for two reasons. First, forecasting across bifurcations is often very difficult: we know that a bifurcation is there, but we do not know the ‘dominant’ path after the bifurcation. Second, most bifurcations represent decision points and some may decide to pursue one path, others another path.

In summary, the above methodology inherently prescribes a certain structure to the development of the industry over time, namely that of a general linear development (step 2, above) with a number of bifurcations superimposed on the general linear development (step 3).

The linear developments – the ECTRM software market industry to develop just as the ERP and CRM markets
There are obvious similarities between ECTRM software, ERP software and CRM software, including addressing highly business-critical needs, being primarily focused on commercial/financial information, being used to enforce compliance with government regulations as well as with company policies, and finally providing simultaneous decision support, transaction support, reporting and audit trails. Table A provides a comparison between the ECTRM software industry, the ERP industry and the CRM industry along a number of dimensions.

Table A: Comparative analysis of ECTRM software market with that of ERP market and CRM market[6].

It is, in our opinion, to be predicted that the ECTRM market with its strong and striking similarities will develop in the same direction as the ERP and CRM markets, with the emergence of software majors, less in-house development, delivery projects provided by system integrators, shorter and lower-risk projects than today, cloud computing, heavier involvement of IT, more central governance and tighter integration with the rest of the application portfolio.

The recent decision of software industry analysts Gartner to create a separate industry group to follow the ECTRM software industry testifies to this development. Indeed, this is already high on many top-tier customers’ agendas in their dialogue with their chosen ECTRM system vendor. A customer representative told Navita in the context of a certain system acquisition: “[We] selected [your system] because of optimal functional coverage and short implementation time. We believe that rapid deployment and flexibility through configuration are key to the agility we strive for in our business, and that the days of the multi-year ETRM [energy trading and risk management] implementation projects with significant bespoke development are gone.”

Bifurcations – mutually exclusive choices for a potential buyer of an ETRM system
Based on an analysis of the offerings of various vendors (to the extent possible, as outsiders) requirements from various current, prospective and hypothetical customers, we have identified numerous bifurcations in the industry that already exist or are pending (see table B).

Table B: List of pending key bifurcations in the ECTRM software industry[8].

Clearly, choices should be linked to the fundamental issues in any trading organisation. Why do you trade and how do you make profit from trading? For example, the ‘right’ choice for managing complex contracts will be very different for an organisation in which transaction flow is a driver of trading profit, from one in which all trading profit is linked to a few, very complex contracts.

The bad news is that one cannot expect to have it all, and that these choices represent real trade-off situations. Figure 1 describes, in a sanitised version, the evaluation of two vendors for a specific system acquisition process9 relative to two fundamental evaluation criteria: functional coverage and deployment time. It illustrates the fundamental trade-off between functional coverage and delivery time for this particular acquisition process.

Figure 1: The evaluation of two short-listed vendors for a specific ECTRM system acquisition process.

One may ignore the above exclusive (and tough) choices, but at one’s peril. Indeed, failure to make these choices, or generally hoping to ‘have it all’, will inevitably result in infeasible technical concepts. As an example, Navita has on many occasions seen major companies insist on a 100% ‘have it all’ concept, thereby being forced to select solutions from specific vendors with the necessary functional flexibility, thereby being forced to accept multi-year deployment projects, which inevitably result in hugely expensive delivery projects and enormous unrealised trading profits while waiting for the system and the organisation to get up and running. Conversely, Navita has also seen a company insist on SOA-based architectures only to end up with a system that could not deal with the real-time requirements of a fast-paced trading environment in which massive information sifting is everything.

The enthusiasm for ‘having it all’ probably also explains one of the primary paradoxes that we see in the ECTRM community. As organisational size doubles, IT costs for trading companies seem to quadruple; that is, instead of cost effectiveness and sub-linearity in cost as a function of organisational size, we observe some kind of exponentiality.

So, why is this formation of bifurcation happening now and not earlier or later.  In our opinion, it is related to learning, continuous refinement of good designs, improved testing, and weeding out of poor designs.  We believe this has been at work in the ECTRM industry long enough to allow for meaningful prediction of the emerging dominating designs.

The counter arguments – some myths to dispel
ECTRM software is somehow different from other software
It may be argued that ECTRM software is somehow different from other software and, therefore, that any forecast or prediction based on reasoning by analogy with the general software industry is faulty. This is often based on an argument that trading is just much more complex, faster and riskier, and has more upside than other business activities. While certainly true, we believe this is an issue of degree and that there is no reason to believe that software for ECTRM should somehow be specified, acquired, delivered and supported in any other way than it is for other business processes.

There are ways to have it all
There is an argument that the solution footprint of any offering can just grow and grow until, far out on the long tail, marginal net present value of the cost of providing such an incremental footprint outweighs the marginal net present value of the value of such an incremental footprint to the part of the market that would be interested in such. Indeed, this is often seen in certain other parts of the software market including Microsoft Outlook (on the personal productivity side) and SAP (on the enterprise software side) as examples. However, Navita believes that this mechanism is less relevant in the ECTRM software industry (as for many other long-tail/vertical segments), due to the triple-squeeze between the few potential customers over which to spread maintenance costs, maintenance costs that grow non-linearly as a function of footprint size and quality issues with software used by few customers. In essence, while we can expect the solution footprint to grow also in the ECTRM software space, the ‘super footprint’ solution will most probably not exist.

SOA is the answer to everything
SOA may appear to be the response to all of the dilemmas implied by the bifurcations listed in table B. For example, a SOA will allow some piece of capability outside the firewall to be connected to some piece of in-house software deemed to provide competitive advantage. We believe that this is a misconception and that there are at least three reasons why a SOA will, at least not in the short or medium term, resolve some of the fundamental issues implied by the above bifurcation points: the bifurcations listed in table B are not about integration, but about fundamentally different technical/functional concepts; SOA implies some performance burden; SOA applied to its extreme actually in-sources interfaces and service levels that have been outsourced to vendors for many years.

Summary
Navita concludes that the ECTRM software industry will align with the rest of the software industry including the emergence of software majors, less in-house development, delivery projects managed by system integrators, shorter and lower-risk projects than today, cloud computing, heavier involvement of IT, more central governance and tighter integration with the rest of the application portfolio.

Navita also pinpoints a number of pending bifurcation points on the vendor-side of the industry; points at which it believes we will observe differentiating strategies being pursued by various vendors in this space, and necessitate mutually exclusive and difficult choices for any potential purchaser of an ECTRM system. These bifurcation points represent the few, tough choices that will determine a vendor’s success or failure in the market place, and determine an ECTRM project’s success or failure from project cost and trading profit perspectives

Failure of a potential purchaser of an ECTRM system to make these tough choices, or generally hoping to ‘have it all’, will inevitably result in unfeasible technical concepts, lack of flexibility and agility, cost overruns, project delays and, if significant enough, project cancellations and write-offs.

A call to action: If you are in the process of acquiring or developing an ECTRM system in-house, spending the same amount of time on getting the fundamental design concept right as on writing the functional requirements, will dramatically improve the probability of your success along any dimension.

Henrik Sætness, Executive Vice President (EVP) and Head of Products & Consulting, and Grim Gjønnes, Dr. Ing., EVP, are affiliated with Navita Systems AS – a provider of ECTRM software. For more information about the company, see: www.navita.com The opinions expressed in this white paper are those of the authors and they may or may not reflect those of Navita Systems AS.

Footnotes:
[1] With bifurcation points we generally understand the forking of generic designs at certain points in time or, in this case, of the designs of the various ECTRM offerings available in the market.
[2] World Finance: “The Necessary Future of the Procurement and Deployment of Energy and Commodity Trading and Risk Management (ECTRM) Solutions”
[3] One of the authors has an extensive background in the general software industry, including Microsoft, and this statement reflects an outsider’s view on the ECTRM software industry.
[4] Clearly, this is done from the perspective of the vendor side of the industry and representing one particular vendor, but significant attempts have been made to remove any reference to specific products or vendors.
Furthermore, given that the authors represent one particular vendor, it was deemed inappropriate to assess own offerings as well as competing offerings in such a paper. The reader is referred to other sources to ‘fill in the blanks’, typically industry consultancies like Utilipoint or Gartner.
[5] This list is, from a methodological perspective, the weakest part of this paper, but is also probably the least controversial part. It has therefore not been explicitly included in this paper.
[6] This analysis was done by the business development function of Navita. While specific characterisations could be debated, the table is believed to provide a materially correct comparative analysis.
[7] See, for example, http://en.wikipedia.org/wiki/Technology_forecasting for a general introduction to the field.
[8] This table was compiled based on a number of sources. It is not meant to be mutually exclusive or commonly exhaustive.
[9] The authors represent one of these vendors.