The Commodities Trading & Risk Management (CTRM) industry is going through lot of churn today and many have written about the best-fit software solutions and their maturity for CTRM players. However, a handful of articles focus on successful implementations and satisfied customers. And rarely do we hear if these best-fit standard software solutions actually drive loyalty amongst an organization’s customers? So that leads us to the question - do enterprises lean towards these standard software solutions or do they build their own software today? There is certainly an evident trend of enterprises building their own software’ today. Here are some factors driving this:
Lower Margin Game
One of the important angle to maturity of software is the customer spend. And, with Commodities being a “low margin” business, overall spend on CTRM is quite low.
High Commodity Spread
If a product vendor has to fit into cross commodity business, the spread is vast and the effort is very high - as every commodity has its own uniqueness. Cross commodity variation for similar product features and unit of measure is complex. Transportation planning (multiple modes), execution and related paper work are very important but diversified and complex. In addition, quality becomes a big differentiator for commodities. Adulteration may have significant impact on the downgrade of a commodity, its usability as well as the overall contract and this in turn raises the demand for related software. Similarly, functionalities like traceability and sustainability are adding another dimension to the commodity trading needs which is not there for energy players (except bio-fuel).
High on Non-Standardization
Standardization level in commodity trading is low and spreads from data to high claim of unique processes by commodity controllers. If we compare it with the Energy vertical that has direct customer impact, it is high on “Regulation & Compliance” and therefore higher on standardization quotient. Due to non-standardization, implementation timeline is very high and user satisfaction level is low. Implementation also runs under high risk of failure if the scope, stakeholder management and change management is not managed well. Many large companies have high global spread (ABCDs of commodities world) and therefore, requirements vary and implementation becomes difficult.
High Level of Localization
Localization for many commodities and related processes are very high and differs significantly as we move across geography e.g. Brazil vs. US vs. Indonesia. This includes functionalities like Origination, Taxation, Settlement, etc., therefore making life difficult for CTRM product vendors.
There are relatively very few big companies with propensity to spend high dollar number for buying best in class product. Trading vs. Processing spread is different for different companies and commodity asset class and therefore the overall need varies. Many of these companies have grown through acquisition and that makes the variation high and implementation of standard product difficult. Since the overall spend is low, market size becomes small which in turn urges makes CTRM product vendors to invest small in the product. Since the spend is low, variation in functionality across asset class is high.
BUT, in case you are still looking at buying one from the market, wait for my subsequent post to discover the product landscape....
Rakesh Singh is the Practice Head for Commodities Trading & Risk Management. He has been in the industry for 18 years working across business functions, commodity asset class and services including exchanges, consultancy firm, product vendor and IT services firm. He has led projects related to business process harmonization, product selection, solutions development and managed services in trading & risk management domain.