Is an industry specific CTRM a critical success factor? - Agiboo

In the past decades I have been involved in many selection processes for a commodity trade and risk management (CTRM) software solution. The world of commodities can be divided into three main categories which are: energy, metals and agricultural / soft. The latter mostly comprising agricultural excluding grains and oil seeds.

In many cases during selection processes, companies reviewed or even selected software which had a good evaluation in other commodities than the commodity traded. They had the perception that any CTRM solution will cover 80% of the functional needs and thus they didn’t require an industry specific CTRM.

CTRM implementation has its challenges

Experience taught us that many CTRM implementations have not been successful. Despite success rates have gone up in recent years, there is definitely still a challenge to be successful in implementing specific CTRM. The latter is particularly true for companies that manage multi commodities out of the different categories. When for example you trade mineral oil and cocoa beans, it can be rather challenging to present a meaningful combined position. Sure, you can overcome such a challenge, but it requires time and investment.

For commodity trade and risk management implementations there are many critical success factors. For example, the quality of the business process definition and the budget for the software vendor to execute a proper implementation. Also, the flexibility of the vendor responding to customer change requests and the ability to integrate in the remaining IT landscape. In the end the willingness to accept standard software for standard processes is also an important contributor of success.

Commodity industry specific CTRM

Unfortunately companies often underestimate or sometimes even ignore the specific requirements of the industry or commodity complexities in the selection of a specific CTRM solution. A vendor can act flexible on change requests. However, when architecture is not sufficiently supporting the basic functionality for a specific commodity, then the implementation loses the momentum you need to be successful. Each commodity has its specific trading and risk characteristics. Companies need to address those characteristics in a specific CTRM. Then it will support the business satisfactory.  Some of these characteristics seem sometimes minor details, but these can have significant impact. Once you do not sufficiently address those characteristics, an implementation is bound to fail.

The devil is in the detail

For almost every commodity there are multiple examples of such commodity specific details. For example in coffee trading. There, the premium of an unfixed arabica contract is priced with cts/LB it becomes very difficult to execute it. When that is not possible in the system, you get stuck and start with changing requests to your vendor before you even populate the first contract.

This is just an example, there are many more. Think of buying in number of bags instead of metric tons. For Cocoa the need to facilitate arbitrage between London and New York markets, and these markets have also different currencies. One can trade cocoa products such as cocoa butter and powder on ratios. Also, sugar, on white or polarization premiums. Those details affect not only the deal capture, but also they will find their way into the calculation and presentation of risk positions and valuation.

Choosing the right basic architecture is critical

Missing a detail does not jeopardize an implementation, but missing multiple details does! For example when you apply a good CTRM solution specific for a certain vertical to a different vertical. E.g. an energy solution (sometimes referred as an ETRM system) for agricultural or the other way around. You can imagine the logistics of transporting oil through a pipeline is incomparable with loading bags of coffee beans into a truck. Pricing and hedging mechanisms and practices differ completely.

Overstepping commodity categories makes it often worse. The London Metal Exchange (LME) has for example very different rules than the Chicago Mercantile Exchange (CME). The list of industry specifics might look almost endless. But by selecting a CTRM solution it does matter if you have to bridge 100 items or only 5 ! The ability of your vendor to offer flexibility an the agility of the CTRM in configuring these details is key.

A personal recommendation: attention to detail

My personal recommendation for any selection is not to underestimate the importance of industry specific CTRM. But to verify the functions and features in detail which you require in your industry. You can prevent implementation delays or even failure by small details not supported in pricing or hedging mechanisms, when you select the most suitable specific CTRM solution. Our aim at Agiboo is to facilitate industries with specific commodity software solutions. At this moment agricultural and soft commodities. This also means that we have chosen not serve some commodity industries. We adhere a focused approach. We also estimate that the functionality cover of a CTRM should be 95% or above for success.

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