Euro Essay, Research Paper
The Impact on Information Systems
Throughout the changeover to the Euro our information systems department will play a crucial role in the process. Therefore, it is necessary to involve them at an early stage in order to avoid potential problems. As a result, the transition will provide us with a unique opportunity to screen systems and ultimately harmonize them. But at the same time, the changeover may entail a significant cost. However, at present it is difficult to assess the costs and the length of the adaptation of our information systems. And as a result, this will temporarily induce a competitive disadvantage vis-?-vis non-European companies (www.europa.eu.int: ?Why a Single Currency??)
From the perspective of our information systems, the changeover to the Euro may be compared to that of learning a new language. Naturally, it impacts first and foremost the department that stores and transports information for all of the company stakeholders, including customers, suppliers, shareholders, lenders, tax authorities, and consumers. Consequently, it would be most beneficial for the information systems department to be closely associated with the preparation of all the other departments from the beginning of the process (?Why a Single Currency??).
The Euro will have practical implications within all departments of businesses and will modify the nature of relationships with stakeholders. Among these implications related to the information systems department, several opportunities will arise. These opportunities include reviewing information systems, improving efficiency, identifying external resources, and assessing electronic links with clients and suppliers (Tirbutt, 1998, p 11).
Information systems require upgrading on a regular basis due to either obsolescence or to new company needs. In order to be effective and operational both during and after the transition period to the Euro, information systems will have to be evaluated and if necessary, appropriately adapted. Bols-Wessanen currently operates with standard software packages that will require upgrades in order to cope with the Euro. Therefore, the changeover provides us with a dual opportunity to combine the need to upgrade existing systems while also adapting to the introduction of the Europe (www.europa.eu.int: ?Why a Single Currency??).
In reviewing information systems, it is necessary for the information systems department to take six important steps. First, they must screen all software to assess whether each system can operate in a multi-currency environment and be adapted to the use of the Euro. Second, it is essential to initiate discussions with package vendors to assess their ability to provide a euro compatible version at a reasonable cost. Third, they must review the customized software to evaluate its Euro-compatibility and potential replacement needs. Fourth, the changeover requires that the information department reviews and lists all existing Information Technology projects. Fifth, it is necessary to evaluate the impact the Euro will have on current and planned projects. And finally, they must modify certain project plans and possibly select another package (?Why a Single Currency??).
The changeover will also provide Bols-Wessanen with an opportunity to improve efficiency by modernizing the Information Technology architecture of the company. Rather than incurring many small costs in adapting systems individually, it may prove cost effective to review the current operating procedures, to simplify them, and then to implement a new system. This requires that the information systems department reviews the total information technology budget, lists the opportunities for business reorganization, and finally identifies opportunities to replace obsolescent packages (?Why a Single Currency??)
Identifying external resources is an important part of the transition process to the Euro. Bols-Wessanen will rely on external resources to scan, review, and upgrade our systems. Therefore, it is important to check with the usual providers as soon as possible in order to make sure that they are preparing standard solutions for systems upgrades and also that they will be available at a reasonable cost. Since the Euro coincides with the millennium issue and both projects will be extremely time consuming for both programmers and analysts; it is likely that there will be a shortage of specialized information technology experts in the months just prior to 1999. In order to cope with this shortage, the information systems department should estimate the external resources which will be required, check the availability of usual providers, and assess whether anticipating the changeover could be a less costly alternative (?Why a Single Currency??)
An increasing number of companies, including ourselves have chosen to communicate with their major customers and suppliers through electronic links such as Electronic Data Interchange for orders and invoices (Jennings, 1998, pp 36-38). Therefore, coordination with these partners becomes crucial in the process of a smooth migration to the euro. As a result, the information systems department here at Bols-Wessanen should review the agreements subject to electronic transactions, agree on the changeover timing and method, and implement the changeover simultaneously.
While information systems specialists will play an integral role in implementing the new information systems, it must be the system-users themselves, possibly the heads of the company, who determine the orientation of the changeover plan according to the company?s needs and objectives. Thus, the information systems department should first list all required adaptations, and finally progressively assure that they are implemented.
The Implications for the Financing Department
The introduction of the euro provides us with an opportunity to review our entire treasury operations including foreign exchange and interest rate risk management. This will eventually enable our sector to improve the efficiency of the treasury, and as a result, save money (www.europa.int: ?Why a Single Currency??). However, there is also an inherent risk associated with the euro. Since the Euro is a new currency with no performance track, it will have to prove to have the characteristics of a ?hard-core? currency and financial markets will have to recognize this as well. Consequently, one may expect real interest rates to go down throughout Europe through the reduction of risk premium (Jennings, 1998, pp 36-38).
The practical implications for our financing department will come in the form of simplification of treasury management, the elimination of hedging costs within the Euro zone, reduction in working capital needs, and easier access to low-cost financing (www.europa.eu.int: ?Why a Single Currency??)
Reducing the number of currencies used in Europe will lead to a simplification of treasury management for Bols-Wessanen. Savings in financial costs are expected through the reduction of the number of foreign-exchange transactions. The Euro introduction will also simplify cash operations, because there will be less currencies to deal with. It will no longer be necessary, for example, to review daily balances in multiple currencies. Therefore with respect to treasury management, the changeover to the Euro will reduce the workload, reduce the average balance, leading to reduced capital needs, and lastly, reduce transaction costs and eliminate currency spreads (?Why a Single Currency??).
The Euro will also allow us to eliminate hedging costs within the Euro zone. Hedging is the process of attempting to protect foreign currency holdings against an adverse movement of an exchange rate (Daniels et al, 1998, pG-7). It is accomplished when companies try to match their planned payments or receivables with term purchases of currencies. However, these hedging methods bear a cost that is integrated in the currency?s forward exchange rate (Jennings, 1998, pp 36-38).
Here at Bols-Wessanen we presently hedge all net cash flows with term purchases of currency. Consequently, these contracts bear a cost and also become pointless if the currencies have not fluctuated. This creates the need to justify regular losses incurred on hedging contracts (p 36-38).
Foreign exchange transactions also include a cost related to the currency risk as well as a lesser cost that is due to the actual transfer of money from one country to another. The first cost will be eliminated within the Euro zone; however, it is likely that the banks will continue to charge fees for international transactions even if they are conducted in euros, just as they do today. But, it is expected that these transfer costs will diminish as banks develop more efficient international payment systems (www.europa.eu.int: ?Why a Single Currency??)
As a result, the changeover to the Euro will allow Bols-Wessanen to change several ways of operating in terms of eliminating hedging costs. It will allow the company to negotiate prices in Euros, eliminate both conversion and hedging costs, and save valuable management time by eliminating the need to track both the costs and benefits resulting from each transaction. In a similar sense, the Euro will contribute to the reduction of discrepancies between value dates when they exist, and finally avoid having to explain regular losses on hedging accounts.
The Euro will provide for a reduction in working capital needs. One of the present functions of our financing department is to attempt to monitor balances in respective currencies to limit excess liquidity with small financial returns or to avoid the negative balances which can lead to high overdraft costs. This monitoring requires daily work and interaction with the bank. It calls for an inflated treasury float in order to guarantee that each shows a positive balance (Jennings, 1998, pp 36-38).
At present, our financial director negotiates an overdraft in the local currency on a yearly basis and attempts to transfer all amounts on the current account as quickly as possible in order to limit the financing costs. The Euro will improve the efficiency of cash management by allowing for an immediate set-off of debits and credits. In this respect, the changeover to the Euro will allow the financing department to take advantage of several opportunities. These opportunities will allow the department to immediately include all payments in the company?s main account thus allowing for an immediate closing and an elimination of account transfer delays, while also allowing the financing department to transfer amounts at a later date to suppliers, thereby reducing the settlement period. And finally, it will eliminate exchange fees on currency transactions (Tirbutt, 1998, p 11).
Through the introduction of the Euro, easier access to low-cost financing will also be achieved. The size of the Euro capital market will be comparable to that of the dollar market; therefore new financing opportunities and products are also to be expected. The costs of these products and services will play an important part in the success of not only the Euro, but also the company (Kamm, 1998, A1 and A10).
The liquidity risk due to the progressive growth of the products that will be available in the Euro market has many important implications during the transition period. Treasurers will consequently have to deal with the change in liquidity risks and funding possibilities available in our home currency, which with longer maturities and increased distribution facilities may pose a challenge (Tirbutt, 1998, p 11). Therefore, it is the financing department?s duty to prevent a radical change compared to the current conditions.
Financing working capital and investments is not currently a major challenge for Bols-Wessanen. However, the financing available following the changeover to the Euro will depend on banks? general policies and abilities to present very specific and innovative projects. The introduction of the Euro will lead to larger, more liquid, and probably more differentiated capital markets. The Euro will favor the development of new financing methods and thus, provide opportunities to develop a broader investment base in Europe. Therefore, it is probable that the changeover to the Euro will increase competition in the banking and financial sectors across Europe, and facilitate access to foreign banks (Peterson, 1998, pp 64 and 66). Similarly, the changeover will also expand the role of capital markets by offering broader access to professional private capital providers, and also reduce the number of bank accounts for Bols-Wessanen (Jennings, 1998, pp 36-38).
If the optimists are right about the Euro, it will bring unprecedented opportunities for investors and the banks that serve them. A deeper, more sophisticated market could finally give Europe?s financial institutions the global competitiveness they have sought. But only those prepared to capitalize on the many changes will thrive (Peterson, 1998, pp. 64 and 66).
The treasury and financing functions will be amongst the first to be affected by the changeover to the Euro. Most financial markets have already planned to initiate the changeover to the euro as early as 1999, at which point the treasury function of Bols-Wessanen will be required to deal with cash flows in Euros. Therefore, staffs in finance and treasury departments need to be urgently informed regarding the developments of the Economic and Monetary Union and how it will affect financial markets.