|
 |
|
FINISHING THE TRADE |
|
By Gary M. Vasey |
Since the deregulation of the natural gas and wholesale power industry, several fundamental shifts have occurred in the energy commodities business. Each acted as a dislocation event for the software industry, where changing market requirements interrupted the typical technology adoption curve.
It's in this unstable world that many energy trading, risk, and transaction management vendors and products (which handle contract management and other "back-office" functions, as opposed to open market exchanges) were born and, in many instances, died. Since many vendors were poorly capitalized, they could not build the new functionality that the shifted market required. Better capitalized vendors often made the transition, introducing new or enhanced products and sometimes taking the opportunity to buy out their competitors.
Before wholesale power deregulation, a thriving group of mostly small software vendors was busy establishing gas marketing software packages. Wholesale power required other systems to capture, schedule, and invoice. In response, some vendors built new software while others continued to focus on gas. A sudden realization of the need for risk management created yet another dislocating market requirement. Gas marketers had experienced little of the price volatility that came with electric power. Once again new vendors entered the market—start-ups as well as vendors from the financial markets that already had risk management systems.
A Package Market?
But for a vendor to design truly packaged software, there can't be too many business models. And that's a big problem.
Users' requirements vary dramatically based on assets, their operation, and their regulation. A package that is an 80-percent fit in one part of North America barely meets 50 percent in another part.
The result is that products become more complicated as vendors sell to an ever-larger installed base—and programmers produce nearly unsupportable spaghetti code that doesn't fully meet anybody's requirements. A poorly capitalized vendor magnifies the problem. Add a major industry shift, and you throw things even further awry.
The fact is that energy trading is not a shrink-wrap package market at all. It's actually a large number of small niche markets based on geography, assets, and regulatory regime. In fact, what the industry really needs are custom solutions delivered for the cost of a package!
Financial versus Physical
The industry has yet again shifted from a more speculative trading model to an asset-centric trading model: We are in mid-dislocation event. In an asset-centric world, software support to optimize assets and assess the volume risks associated with them have become important requirements. Some vendors with a financial markets pedigree can provide tools to manage price risk and perform value-at-risk and mark-to-market position reporting, but they have weaker tools to help their clients understand the volume risk. Customers can turn to vendors from a more physical energy side of the business, but they might not have the financial tools.
Similarly, the desire to understand counterparty relationships and get a better view of credit exposure has allowed new vendor entries.
Many packages are still weak in the area of truly flexible reporting that allows users not only to run a report, but also to drill down to the details. Instead, most come with a monumental library of canned reports (requiring users to spend consulting dollars to customize them) and rudimentary report writers that may require hiring database experts.
Best of Breed
In the early days, vendors aspired to a do-everything application. Most now aspire to offer "best of breed" components, or the best component for a particular function. This development is not surprising given the number of vendors focused on niche markets and the inability to meet everyone's requirements with a single solution.
The move to a best-of-breed model introduces additional complexities. It provides users with different components for different aspects of their business (such as deal capture, risk management, back office, and so on); or a transaction solution for each commodity, integrating the solutions with a risk management system. But integration can be complex and costly—plus, it's the dominion of the "system integrator." Of course, some vendors have built their applications in a modular fashion around their own middleware that still gives buyers the option to select a component from another vendor.
Also, several aspects of this business can be standardized—deal capture and risk management, for example. The more vanilla an area is, the easier it is for the vendors to bundle it and sell a true package. Other areas are more likely to stay a flavor of the regional operational and regulatory regime—scheduling, for example, where the needs of the transmission operator dictate much of the requirement.
Even with standardization and the emergence of shrink-wrap packages, the market will allow for many different vendors. That's because a range of solutions are available for different company sizes and budgets.
It's not about who has the best product today, whose products will integrate easiest with the key middleware, who has the best technology platform, or even who has the largest installed base. The future will more likely be like the past, where events in the industry change the fundamental rules of the game. It will be about which vendor is more flexible, innovative, and responsive to change and has the best attitude towards customers. Moreover, size and brand equity are no guarantee of future survival, either.
Whatever happens, the medium-term future is likely to be best of breed from multiple suppliers—making it more difficult for the user.
Gary Vasey is the founder of VasMark, a strategic marketing, consulting, and communications firm in that works with buyers and sellers of energy software. |
|
