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final published version in Global Energy Business
a longer version in Energy IT

Straight-through processing

by Anne Ku (May 2001)

original draft of article published in May/June 2001 issue of Global Energy Business

Increasingly companies look towards integration, both internal and external, as the ultimate answer to business process efficiency and operational risk management. Although the technology is available now, companies are still weighing the costs and benefits.

Just counting the number of integration solution providers, one would think that everybody is doing it. However, a comment made at an industry conference to the tune of "teenage sex: everyone is talking about it, but few are doing it - and those that are doing it aren't doing so well" reflected the misconception that integration is here and now. Many people are still waiting to see.

Single user interface to multiple systems

Not long ago energy industry professionals got tired of having multiple systems with different user interfaces. They wanted to avoid repetitive data entry, cut down on errors, improve efficiencies, and keep up with change. Traders were saying, "We have already done everything we can in the front office in terms of better analytics and real-time market information. To make more money, we need to improve efficiencies elsewhere." By this, they meant the ideal of a common front-end for trading and a
common back-end for accounting, to allow information to be accessed and processed seamlessly.

The proliferation of online exchanges has further accentuated the need for a single interface. Recognizing this need, Vicki Barit, Director of Marketing, Altra Energy Technologies, Houston, Texas, said, "traders can only have so many screens." Their new technology builds on messaging systems, java scripting, and web services. Another approach, by Houston-based Tradewell Systems, is to publish information from different exchanges onto an Excel spreadsheet that traders use. This engine called Excellerator is based on an object-oriented integration infrastructure technology. Developed after more than sixty man years of research and design, their Java-based Enyware allows application to application (A2A) and business to business (B2B) integration on a common platform.

The Internet as the pacesetter

The Internet has fundamentally changed the role that information plays in an organization. Not only is it easier and faster to get information over the Internet, users are also expecting faster access within their companies.

Internally, the problem arises when the individual components, be they databases, application modules, or entire systems, change. Different vendors release their upgrades at different times. Each time, the interface with the rest of the system may need recoding. One answer to this dilemma of keeping up with change is to outsource or use application service providers (ASP).

Faster processes for higher volumes

"Human beings are here to stay as things get more complicated," said Matt Frye, Chief Marketing Officer, TradeCapture, Stamford, Connecticut. Until now, there have not been enough trades to justify the integration of internal systems towards the kind of seamless end-to-end processing known as straight-through processing (STP). However, as trading volumes increase, the cost and risk of manual interface exceeds integration costs. Indeed, transactions are occurring much more rapidly, and at higher volumes than was previously possible in the phone and fax world of yesterday.

The timing of technology availability and industry deregulation explains the difference between the US and Europe. Many leading companies in the US, having chosen the best of breed solutions, are now integrating them for STP. The decisions on client-server modules were made prior to the arrival of ASP's. Meanwhile, energy companies in Europe are now choosing the best of breed or an integrated solution, with the benefit of ASP's. Frye foresees ASP modules for all functions in energy trading and STP to become a pre-requisite. "Integration requires standards," he added. "TCP/IP and XML are becoming more common - as we migrate towards Internet-based platforms."

To cope or to compete

In the gas sector, integrated solutions really help alleviate mid and back office processes. Changes in measurements can create huge reconciliation efforts simply because mid and back office systems cannot talk to one another. Altra's integrated mid and back office solution is one attempt to help gas trading companies cope.

Integration helps to achieve that holistic view of all data. Towards this end, Andrew Bruce, CEO, Tradewell Systems, Houston, Texas, observed "Energy companies, just like companies in other industries, still struggle to get a corporate view of their data. Companies have islands of information in different systems, which is fine because each system has a specific function to perform. On the other hand, to make more money, reduce risk, and drive down expenses, companies must figure out how to get the 'corporate view' of information which is enabled by STP."

Chuck Hanebuth, Managing Director, Enform Technology, Houston, Texas, which provides customized IT solutions, said that many of their clients view integration as a competitive advantage. "This increased availability of data has been forcing our clients to improve the integration of their front, mid, and back office systems to each other as well as to the outside world. Consistent, accurate, and timely flows of data in an integrated fashion can literally mean millions of dollars to the bottomline. Integration is already a key focus for our clients, and we anticipate an even stronger interest in this critical puzzle piece in the future."

Integrate to communicate

"The concept of integration is not a new one," said Claudio Casarotti, Senior Consultant, Accenture Germany, Frankfurt. "It is as old as the need to communicate. In fact, integration means communication. To communicate (integrate) there must be a message sender and a recipient, and both need to speak the same language. To solve the communication problem a single line of communication must be established, the one with the repository or bus where the data is aggregate or exchanged. To eliminate the spaghetti network (see figure 1), a communication standard must be established within the industry and within the organizations."

Integrate vs Interface

For applications to "talk" to one another, such as being able to use the same types of files and data, the interface between them must be compatible. Such Application Programming Interfaces (API) was the basis for communication between different programs. The word integration implies a more holistic approach.

We asked industry experts to explain the differences between integration and interfacing. Jim Baker, Managing Director, OpenLink Energy, Houston, Texas, sees interfacing to be much simpler than integration. He said, "interfacing allows data to be transmitted between two systems that do not normally share the same database tables by use of a utility, adaptor, or added code. Integration requires modifying systems to work together in a 'seamless' fashion."

William Rabson, Executive Vice President, Power Trade, Houston, Texas, compared interfacing to software that is cobbled together. For example, Lotus Smart Suite doesn't work as well as those written to be an integrated system on a single platform such as Microsoft Office Suite. He found that customers are concerned whether the systems they are considering were originally written as an integrated system. Many systems are a collage of independent systems which are not able to communicate properly.

Chuck Hanebuth noticed a strong trend in the marketplace away from traditional "interface" programs towards a more middleware-centric architecture. This new architecture provides a variety of benefits to the traditional approaches including queue technology, guaranteed delivery, rule-based data transformation, and store and forward capabilities. It also provides a consistent and consolidated pooling point for organizational data, allowing for a 'contract' to be formed between publishers and subscribers of data.

Blake Young, President, DynegyDirect, Houston, Texas, observes that network and business systems integration is now achieved by using advanced architecture like Tibco. It's not old school interfacing, but a different way of looking at data.

Planning to integrate

Complete Solutions, a Houston-based company which specializes in integration projects, advocates a ten-step approach to integration. Its managing director Addam Alderete said that companies involved in integration exercises are building adaptors which would web-enable a legacy application rather than having to rewrite the functionality altogether. This makes it possible to migrate rather than take the big bang approach. The hard part is the planning, which can take anywhere from 12 to 18 months.

Integration - still a luxury now

Coming from the financial markets where STP is a reality in leading trading houses, former CEO, FENICS currency options software vendor, John Ashworth, now Chief Commercial Officer, GFINET, London, observed that it would not take long for energy trading companies to catch up.

When will we get there? Speaking at the Adam Smith Institute energy conference in Berlin in mid-February 2001, Tony Rijkers, Manager Energy & Utilities BeNeLux, Sema, Netherlands, predicted it will be two to three years before energy companies trading in continental Europe will reach the stage of STP. Right now, he said, all European power exchanges have different interfaces. "If you're trying to keep your head above water, integration is a luxury to think about now."

Furthermore, some cultures actually hinder such developments. For example, in Germany, there is a long-standing practice of requiring physical signatures on paper. Equally tedious is emailing power schedules as spreadsheet attachments to grid operators. Despite the flexibility, this method of data communication lacks standardization as well as brings up issues of security, authenticity, and manual error (from copying and pasting). "If Bill Gates knew that the entire industry is surviving on spreadsheets, he would surely charge more for Excel," said Rijkers.

As a regular commuter between Houston and London, David Hanson, Vice President Special Projects, Altra, sees timing of STP more a function of when. "The benefits are definitely there but not without a cost to make the switch in processes and systems. Such budget issues seem to drive the process even though I feel there are demonstrable benefits in better control and lower costs," he said. Those that change will push towards being the low cost enterprises and those people will "rule the world". On the real costs, he cautions, "besides the obvious purchase costs of new systems to be integrated, there can be considerable costs to modify or replace existing software and hardware in house."

On the integration infrastructure side, Andrew Bruce agrees that STP is not here yet. "Very few, if any, companies are doing straight through processing. I think many have bitten on the middleware silver bullet, and are now figuring out how complex and expensive it can be to build a one-off, in-house solution. Companies that we know of have spent tens of millions of dollars just to buy the licenses for tools needed to build the infrastructure required to achieve the goal of straight through processing. Several companies have bought middleware licenses and use them to publish prices around the company, which is an incredible overkill."

Bruce added, "One of the companies leading the charge in integration efforts told us that no company was going to pay for people to sit in a lab for the 2-3 years required to design and model the business layer to sit on middleware tools. As far as I'm aware, they are adding one application at a time, and have successfully connected two applications. The big problem is that you need an overall blueprint to build to, before you start. If you don't have a blueprint, then when you add the 3rd and 4th applications, the model in the middle breaks, and you have to start all over again. Having said all that, the technology is ready, the business climate is pushing the requirements, and the networking infrastructure can support the traffic and complexity. It is being attempted everywhere."

Peter Tebbenhoff, General Manager, Energy Industry, TIBCO Software, Palo Alto, California, also agreed with the view that the implementation of STP in the energy industry is two to three years out. He said, "Based on our market research to-date, we believe the technology exists, but the energy customers haven't agreed implementing STP is worthwhile. We've had discussions with a number of the leading trading organizations here in the US. They have concluded they can implement STP with our products, but they have not concluded themselves there is a significant Return on Investment (ROI) associated with STP."

Not just straight-through processing

Integration, in the view of Dr Gary Vasey, President, VasMark Group, Houston, Texas, can be applied to four areas. "IT integration means using middleware components or building your own integration." The kind of internal integration to allow data and transactions to flow seamlessly from the front to back office is what's meant by STP. In energy trading, specifically, there is the goal of integrating the physical and the financial to allow efficient hedging and the matching of different portfolios. Finally there's commodity integration for companies to determine their total energy position. He also added,"Some vendors have STP. But I don't think anyone has all of these types of integration and most probably don't have even two of these."

Visit these URL's:

Middleware refers to the component layer that sits between the client and the server, covering all distributed software needed to support interactions between clients and servers - the glue that lets a client obtain a service from a server. In multi-tiered environments, middleware encompass pipes (RPC, MOM, ORB)and platforms (TCP/IP, NETBIOS, TIBCO). The worldwide market for middleware was $2.7 billion in 1999 (International Data Corp, August 2000).
Tibco, Junot Systems, See Beyond, Vitria

Integrators provide consultancy and project management

Accenture, Complete Solutions

Integrated solution providers in energy space:

Altra, Trade Capture, Sema Group, Lodestar, Open Link Energy

Integrated infrastructure technology provider and consultancy:

TradeWell Systems

Research references:

IDC, Gartner Group

Figure 1 The application spaghetti
Source: Roy Schulte, Gartner Symposium ITEXPO 2000, insight for the connected world
Table 1 Steps to integration