The world is changing, and commodity markets are experiencing more volatility, risk and complexity as a result. Thanks to recent trends in digitalisation, such as Industry 4.0 and the Internet of Things (IoT), the way market participants respond to this uncertainty is changing as well. These trends have introduced many exciting digital solutions, from business process automation to enhanced connectivity in manufacturing technologies.
Market volatility and uncertainty can put companies at great risk, but it can also present opportunities to businesses with next-generation commodity management systems
But what does all of this mean for commodity businesses? As John Chambers, then-Executive Chairman at Cisco Systems, said in 2015: “At least 40 percent of all businesses will die in the next 10 years if they don’t figure out how to change their entire company to accommodate new technologies.”
World Finance interviewed Frank Brienzi, CEO of Allegro Development, to get his perspective on how this increase in market volatility, complexity and risk is affecting commodity markets, as well as learn about the latest innovations in commodity trading and risk management.
What major challenges are commodity businesses experiencing today?
I think what Chambers said was spot on. Market volatility, risk and complexity are challenging commodity businesses now more than ever, and if they don’t figure out how to accommodate new technologies in response to these challenges, they won’t survive. There is a great deal of uncertainty in the market – in fact, the only certainty seems to be uncertainty. Many causes are driving this current environment, including geopolitical events, such as Brexit, conflict in the Middle East and the threat of trade wars between the largest economic powers.
Number of Allegro customers
Number of continents Allegro is active in
Years of experience Allegro has in commodity management
The world is also experiencing more extreme weather events than before, placing greater pressure on energy supply and demand patterns. Liquefied natural gas (LNG) and renewables are affecting supply sources, while the US’ shift from being an importer to a leading global exporter has further complicated commodity management. With these challenges, industry participants must find ways to manage price volatility and changes in logistics, as well as balance supply and demand.
In addition, commodity companies must ensure they have systems in place to capture, manage and leverage the latest explosion in data. A perfect example is the power market moving from 30-minute to 15-minute settlements. Soon, the market will move to five-minute settlements, creating much more data to manage. Another trend to watch is the surge in sensors being placed on assets thanks to IoT. Such colossal amounts of data can be used to enhance supply chain management and asset optimisation, while improving trading decisions.
Market volatility and uncertainty – coupled with big data – can put companies at great risk, but it can also present tremendous opportunities to businesses with next-generation commodity management systems that incorporate advanced analytics.
How do businesses manage in this type of environment?
We’ve found that many commodity businesses are still using spreadsheets or other off-system solutions in conjunction with their current commodity management systems to monitor their portfolios, rather than using one platform to manage all of their operations.
By relying on spreadsheets, outdated commodity trading and risk management software (also known as CTRM software or ETRM software), and other off-system solutions, businesses are exposing themselves to greater risk. Without real-time portfolio visibility, robust risk management and tight controls, businesses put themselves at the mercy of the market, missing opportunities and adding considerable costs. We’ve heard many stories where commodity businesses have had big losses due to bad data or a trade capture error that made its way to the back office and was used in a settlement. Spending time and resources to unwind those transactions and identify where the data went awry is an almost impossible task when done in spreadsheets and other off-system solutions, dealing a hard blow to a business’ bottom line in the process.
The answer to all these challenges is Allegro’s CTRM software and advanced analytics solutions. Our system provides multi-commodity and multi-region portfolio management that gives customers real-time position visibility, greater controls, regulatory compliance and enhanced risk-management capabilities.
There’s been a tremendous consolidation in the ETRM software space, with ION now owning a number of major ETRM vendors. What does that mean for Allegro?
ION has been consolidating the CTRM/ETRM sector. Several years back, there were four major ETRM vendors: Allegro, Triple Point Technology, SolArc, and Openlink; ION now owns Triple Point Technology, SolArc and Openlink, and many of their customers are not faring well post-acquisition. As a result of these recent acquisitions, market participants are now faced with a choice between Allegro and ION. We clearly offer two very different models for customers. Our model is centred on customer satisfaction, product investment, world-class global implementation teams and an extensive partnership network – all of which are focused on enhancing long-term customer relationships.
This is not the first time we’ve witnessed a big ETRM market participant cannibalise the industry. Prior to the ‘big four’, Allegro competed with Zianet, Caminus, Altra, Nucleus and TransEnergy, which were well-known players in the market until they were all acquired by Caminus. Caminus, in turn, was acquired by SunGard, which was then bought by FIS. Although this move seemed to benefit SunGard’s investors, it did not work out for its customers.
With a noticeable jump in ETRM and CTRM vendor acquisition activity over the past five years, today’s CTRM software market can seem as volatile as the commodity industries it serves. Many industry professionals using commodity management platforms powered by recently acquired vendors have expressed concerns over a potential lack of investment in products – or, worse, being stranded on a legacy system that is no longer supported. Commodity businesses are looking for a stable solution provider that is invested for the long haul, offering scalability in performance and decision support. Allegro is that solution.
Allegro has attracted some of the largest and most advanced energy companies around. To what do you attribute this success?
Our success and stability in the market are unmatched. I’m very proud to say that we have more than 280 customers and 400 employees on six continents, with a large presence in many commodity markets, including crude oil, refined products, natural gas, natural gas liquids, LNG, power, edible oils, rubber, emissions and metals. We have provided world-class commodity management solutions to the market for more than 30 years; and by treating our customers as long-term partners, we have ensured less than five percent attrition.
Allegro’s commodity management solution is the best on the market. We continually invest in both organic and inorganic innovation to ensure we are the world’s leading CTRM software provider. A few examples of recent innovations include our cloud-enabled solution, , our new mobile application and our recent acquisition of Financial Engineering Associates (FEA), the world leader in quantitative analytics.
We keep hearing that businesses across commodity industries are moving to the cloud. Are you seeing a number of your clients move to cloud-based solutions?
The cloud has become a major asset for many commodity businesses looking to not only streamline their portfolio management, but also better equip themselves for the future. Most companies now require cloud capabilities when they submit a request for a proposal for a new technology.
We’ve invested heavily in our cloud-enabled solution, Allegro Horizon, to ensure that we can help our customers migrate to the cloud when they are ready. Our fully integrated, Microsoft Azure based and certified platform is the most up-to-date solution on the market.
Less than 10 percent of Allegro customers are fully integrated on the cloud, a number that should rise in the next few years. Meanwhile, we’re seeing many customers move to the cloud in phases, having started the process with disaster recovery and backup services. Eventually, we’ll see more clients move their full production capabilities into the cloud.
The Allegro team works in the cloud every day. Each time we start the implementation process with a new customer, we set up a cloud instance for their full commodity trading and risk management solution. This method not only enables us to get started on implementations immediately, with the ability to quickly migrate customers’ systems to on-site production, but also provides capabilities for efficient virtual-implementation support and services.
The rest of the market will continue to turn to cloud-enabled technology for fast and flexible solutions that meet current needs and align with future growth opportunities.
You mentioned Allegro’s recent acquisition of FEA. What drove that decision?
With the explosion of data and the increased complexity of portfolio management, advanced analytics are critical to the survival of our customers. Hence, we acquired the world’s best quantitative analytics business.
FEA is the gold standard in quantitative risk tools for traders and risk managers, providing valuing, modelling and hedging of physical assets and derivatives. Allegro’s acquisition of FEA brings a number of different analytics products to the table, including valuing complex physical assets and derivative instruments, asset optimisation and risk capabilities.
These solutions empower customers to make smarter decisions around how they dispatch assets and hedge portfolios, enabling them to maximise profitability. I like to describe it as a perfect acquisition, because FEA’s trade and portfolio analytics are a natural strategic fit with Allegro’s distribution channels and investment strategy, as well as its extensive commodity trading and risk-management software. The combined solution provides our customers with global commodity-trading quantitative analytics, which lead to better portfolio pricing, valuation, risk management, decision support and physical asset optimisation.
What does the future look like for Allegro?
I’m thrilled that we continue to lead the commodity management software market. We’re going to keep innovating, ensuring our solutions are at the forefront of future technology trends, and acquire businesses with offerings that enhance our customers’ experience. With the next big market trend set to be advanced decision support – in other words, analytics – FEA’s solution is a game-changer when combined with Allegro’s flexible and extensible software.
We expect more growth as we continue to expand within existing markets and geographies, as well as enter new markets. In fact, we’re about to formally announce our move into the metals market – an industry in great need of flexible commodity software solutions.
This is an exciting time for Allegro because we’re positioned to continue leading the commodity management software market. Meanwhile, our global team of experts will continue to help our customers streamline their businesses, grow and win for decades to come.