Leading enterprise resource planning (ERP) vendors, SAP and Oracle, are rapidly moving up the supply chain with a view to expanding further into trade finance services, which could have profound consequences for the sector. Justin Pugsley reports.
The ambitions of two IT giants – Oracle and SAP – could reshape much of the trade finance landscape. For a start it could bring about a consolidation among the specialist IT vendors. This could take the form of acquisitions or close corporation or just outright competition.
Whereas, Germany-based SAP tends to build up its product range organically, US rival Oracle is not afraid to make acquisitions to quickly gain control of the technologies it needs. For example, to gain a strong foothold in the retail software sector it pursued an aggressive acquisitive strategy.
In the meantime, it already services 17 of the world’s top 20 banks. Indeed, the group sees financial services as one of its core businesses. That now includes moving into niches such as trade finance services, says Nicola Toombs, director of banking with Oracle UK.
Last year, Oracle bought Citigroup’s 41% shareholding in IT financial services specialist i-flex solutions. Oracle made over 20 acquisitions last year, not all related to finance, including absorbing rival, PeopleSoft.
For SAP, entry into the global trade space only occurred about four years ago with its Global Trade Services (GTS) solution. Already, the firm is one of the leading suppliers of trade-related software.
GTS was created at the request of the firm’s clients and in particular to satisfy the needs of the chief financial officer (CFO) and the chief compliance officer (CCO). CFOs are increasingly responsible for risk management. Also, there are the ongoing pressures of doing cashflow management more efficiently across a globalised corporation.
Trade finance shake-up
The giant ERP vendors could also help shake up trade finance itself. SAP for instance, without revealing any details or timetables, is apparently working on a multi-banking platform. It is working with SWIFT and Bolero and some its customers to produce its platform.
It will represent a further development of GTS and would sit on top of a user’s ERP system. Oracle has similar solution in the market already and also works closely with SWIFT on product development.
With the support of such large IT vendors the move towards efficient multi-banking could be considerably speeded up. “We’re currently speaking with both banks and corporates about our solution,” says Toombs.
Essentially, ERP is an attempt to integrate all the organisation’s data and processes into a single unified system.
Integration is achieved with the use of multiple software and hardware components. At the heart of most ERP systems is a single unified database, which is accessed by the various software components. ERP systems are generally closely inter-linked with supply chain management solutions to enable the rapid flow of data between trading partners.
“There is a lot of complexity in the supply chain which means that the CFO and his team really need to have the IT tools in place so that they can ring out all the inefficiencies that come from these complexities,” says Neetin Datar, director of SAP trade and compliance applications.
SAP has been building in functionalities to help manage logistical risk, which can have an impact on the treasury, “The enterprise has do the right thing so that they are not in the evening news for the wrong reasons,” says Datar. “At the same time you need the right documentation in place at the right time so that the supply chain doesn’t become inefficient.”
Out of synch
In the meantime, companies have been striving to automate supply chains since the mid 1990s. “Physical and finance supply chains have not grown up together, they’re not joined at the hip,” says Toombs.
Traditionally, banks have been providing their customers with an in-house built platform. But that is being challenged by the growing sophistication and expense of developing e-banking platforms and the speed with which they need to be deployed. Toombs doubts whether banks have the expertise or the time to ultimately provide the integrated platforms sophisticated large corporates demand within the time scales they want them.
What those customers are increasingly looking for is interoperability between banking solutions and their own ERP solutions.
Indeed, this is the main pitch of the ERP vendors: they understand their field better than anyone else and are better placed at figuring out how to make all the different components work together.
Generally speaking the headquarters within a corporation has a treasury hub, which handles or monitors the flow of payments across the organisation. The information it needs has to be retrieved from many different legacy ERP systems from various providers and different versions of those systems.
“If you don’t have all these different systems working together to really pull together all the relevant information you’re pretty much jeopardising your supply chain,” explains Datar.
For instance not having the correct documentation to clear customs does impact the treasury. “Because as soon as something gets delayed then your inventory level is not optimised and your cash is stuck in inventory,” says Datar. “Also, if you’re an exporter you don’t get paid on time.”
This is becoming critically important. Since the tragic events of 9/11, a plethora of new anti-terrorism and anti-money laundering regulations have sprung up. This hasn’t just happened in the US, but also in the EU.
It’s easy for companies doing international trade to get snagged up in all the red tape. This then translates into bottlenecks in the supply chain, which these days are increasingly global in nature.
The literal tower of Babel of different ERP systems is further compounded by the fact that these groups buy and sell companies on a regular basis.
“Our solution allows the treasury area payments hub to deal with payments that come in from legacy systems,” says Toombs. “Our clever piece is that you can build your business rules into the gateway.”
This is also important for Sarbanes-Oxley compliance, so the CFO can demonstrate to auditors that there are internal controls around all the different ERP systems it manages.
The challenge says Toombs is for the banks to be able to provide that level of service to sophisticated multinational corporations. Oracle is offering banks the opportunity to white label its solution and offer them to their clients. If the future holds that multibanking will one day be the norm, and many believe that, then there’s an opportunity to bite the bullet and make the first move. Strategically, this could prove popular with customers and may offer the pioneering bank the chance to manage all the other banks on the client’s behalf on its platform.
Oracle has been discussing the possibility of white labelling its solution with a number of banks for just over a year.
“The alternative,” says Toombs “is that corporates buy the solution directly from us and that would effectively dis-intermediate the banks. They would become bank neutral.”
In the UK alone, Oracle is in advanced discussions with just under 20 very large corporations about taking on its solution.
“We see the trend where the physical supply chain will come together with the financial supply chain,” says Datar.
Indeed, ERP vendors appear well placed to bring that merger about as they already have many of the necessary technologies in place.
“It is a matter of putting all these components together so trade finance people can leverage it to the maximum,” he explains. “Every company is trying to be more efficient in managing its capital and these IT instruments are very helpful for that.”
The next couple of years should prove to be exciting as ERP vendors such as Oracle and SAP add a new dynamic to the trade finance services space.
No doubt new alliances will spring up between technology companies vying to offer the best solutions. Also, there is likely to be some takeovers. Some of those takeovers may even involve banks buying specialist IT companies or even logistics providers.
So far, JPMorgan Chase’s purchase of business process provider, Vastera, has not triggered such a trend. However, time is running out for banks to figure out how they will fit into the supply chain. The risk is that others will make that decision for them.
Meanwhile, the presence of the ERP vendors is likely to advance the march towards multi-banking and force banks to come up with new trade finance business models more quickly.
Services under the hammer: The spread of e-auctions
A procurement trend that is rapidly establishing itself within the supply chain is the e-auction or reverse auction and is seen by manufacturers as a key cost cutting tool. Indeed, it is a process that is now even beginning to spread into financial services in some quite surprising ways. It may not be that long before certain trade finance services are procured in this way as well.
The process was greeted with an enormous amount of hype before the end of the millennium only to suffer a period of disillusion as it failed to live up to expectations. However, in the last few years e-auctions have once again boomed.
This is hardly surprising. Intense global competition and rising raw material costs are forcing manufacturers to reduce costs anyway they can. Also, reverse auctions can greatly shorten the length of time spent on the procurement process.
They are particularly applicable for procuring commodity type items where there is competition among suppliers. Analysts reckon they are also an excellent way to discover the “true” price of an item.
Even the UK government is adopting the process to help slash the cost of public sector procurement. So far cost savings in the order of around 25% have been achieved with the limited use of auctions.
In a nutshell, qualified suppliers are invited to tender for contracts through e-auctions. During the auction, which is run on a website for maybe one or two hours, suppliers bid the lowest price to sell their goods or services. The one bidding the lowest price wins the contract.
According to Chirag Shah, chief executive officer of e-sourcing specialists, TradingPartners, manufacturing can achieve savings of 10-40%, compared to using traditional procurement processes.
Typically, these auctions have been applied to purchasing indirect goods and services such as stationery, building maintenance or even recruitment agency services. But now they are being used to purchase direct goods and services related to the core business where bigger cost savings can be achieved.
For example, they are being used to source materials from low cost countries such as China, with companies such as TradingPartners helping to locate and qualify suppliers.
In the meantime, manufacturing companies have their own industry trade portals to source materials collectively to reduce unit costs. In the aerospace industry the leading portal is called Exostar. In the five years to 2005 around US$8bn was done through reverse auctions and this figure is growing rapidly.
However, some large companies in the US are looking to apply e-auctions to procuring financial services. There are reports that some are tendering insurance and even pension management services through reverse auctions.
The UK’s Regional Centres for Excellence, designed to improve local government efficiency, has identified insurance as a commodity item suitable for reverse auctions. Even in the area of lending some are turning to e-auctions to reduce borrowing costs. Arguably money itself is a commodity or at the very least it has very similar characteristics.
In personal finance, a phenomenon that has grabbed headlines in the US is the launch of prosper.com and in the UK, zopa.com. Both are sites offering the opportunity for lenders, usually private, to bid for borrowers’s business.
Indeed, it may not be too big a leap of the imagination to envisage that many trade finance-related services will be procured through reverse auctions one day. Many of the services are commoditised, such as trade-related document processing. Going down the route of e-auctions could result in savings for outsourcing banks or corporations. If done collaboratively, where applicable, the savings could be even greater for purchasers.
Is it possible that even lending rates could in some cases end up being decided this way particularly for large blue chip corporations with strong credit ratings. The internet has a habit of unleashing change in surprising ways.