The Covid-19 pandemic and the collapse in crude oil prices have delivered powerful economic shocks to world markets. But these seismic events have only sharpened the critical challenges that were already confronting energy trading organisations: how to increase revenue, become more agile and cut operating costs.
Now – and increasingly as we emerge from this crisis – identifying the most effective ways to reduce costs, improve operations and move faster to capture new opportunities will decide their future. Markets are being restructured; supply chains need to be reimagined. Energy and commodities trading groups will therefore want to address customers and opportunities that have gained in strategic value as a result of these crises, and to leave markets that have been undermined by it.
The industry starts from a position well behind other major sectors, notably banking and retail, as well as the leading consumer technology firms, which have all undergone rapid digital business transformation over the past few years. The experience of these pioneers highlights some standardised approaches that can be quickly adopted, speeding up the process for those that follow. Other issues, such as the ability to hire the right talent and skills or to move quickly within existing governance norms, need home-grown solutions.
Commodity trading markets are unlikely to see a revolution in terms of business models. But the relatively slow progress of digital business transformation in this sector means that a major opportunity remains in play: removing low-value processes, which frees up the organisation’s money and talent to focus on areas with the greatest potential for value creation. This allows more of the organisation’s intellectual firepower to be used for activities where it can achieve a competitive edge.
Other activities need to become much more efficient and automated. Too much of the upside of digitalisation remains untapped. There is too little automation, too many data silos, too many in-house data centres and too many off-the-shelf IT packages with overlapping functionalities, and not enough consistency of process and technology across participants in the market.
The missed opportunity
So, while the business opportunities in the coming months may reside in topics such as asset and inventory optimisation and a truly agile supply chain, energy and commodity trading groups need to successfully overhaul their technology as a priority.
Although some steps must necessarily come first, others can run in parallel. However, to achieve the business objectives that lie behind this digital business transformation – increasing efficiency, building their organisational capability, and accelerating innovation to tap new revenue streams – organisations must make progress on all six of these steps:
1.Moving from in-house compute and data storage to the cloud will bring efficiency and performance gains, as well as cost savings. This is the critical first step in unlocking resources to reshape and refocus the organisation. Cloud is the foundation on which the entire transformation strategy is built. It is also a key ingredient in allowing IT organisations to be agile in the support of new value.
2.Once they have migrated their tech infrastructure to the cloud, trading organisations must take advantage of software-as-a-service (SaaS) or commoditised platform-as-a-service (Paas) propositions to drive efficiency and scale benefits for standardised, high-frequency processes such as transaction processing and reporting, invoicing, etc.
3.To move faster and do more, organisations need to adopt modern engineering practices, especially the agile approach and product management. Start with IT then become truly multi-disciplinary by collaborating with business teams and functions in this way. Doing this in combination with the removal of data silos will give the insights and speed that the business needs.
4.Once you have the right engineering approach – and the cost savings released by migrating to the cloud and to Saas and Paas – the organisation will be in a position to fund projects that support the unique competitive advantages in the target market(s). Modern data engineering combined with APIs will bring universal access to all the organisation’s data, and pivot IT towards analysis and intelligence and away from transaction management.
5.This is the time for trading organisations to focus on how users in their business consume data. Doing this means releasing the organisation from its current way of operating, in which IT departments are gatekeepers to the organisation’s data and the tools to analyse it. Instead, once all data is readily available, the key step is to enable business units to decide for themselves which reports they need, what analysis adds the most value and what workflows are most efficient and effective. The aim must be to enable data analysis and the generation of business intelligence to happen as close to the individual businesses as possible. IT needs to provide the tools, not the analysis.
6.You should start to consider the emerging technologies that are likely to provide the next wave of transformation. Could your organisation cut costs and better collaborate with counterparties by harnessing shared ledgers to manage transactions that are currently managed in-house? Could it manage the entire life cycle of its contracts in a standardised, external marketplace? Can it tap new revenue streams by finding ways to monetise its intelligence, algorithms, software and data, perhaps through new platforms or marketplaces?
Commodity and energy trading groups have a long way to go if they are to use digital business transformation to help them reorient their operations and emerge from the current market crisis well positioned for the future. There are big opportunities here for organisations that have already embarked on these steps, which are supported by a virtuous circle of efficiency gains in the early stages that help to fund investments that secure the next stages of the transformation process.
Even without the pressure of Covid-19, modern trading organisations should be following this route. The lessons we have learned from other industries is that those who digitalised most have been able to better respond to changing requirements, challengers and new business models.