Testing time for Europe; IT finance

Computers are deeply involved in Europe's hopes for a successful start to the new millennium, as the clock ticks on both the euro and Y2K.

The success of Europe's greatest economic project, the European Monetary Union (EMU), will depend in part on computers, for the financial IT systems which lie at the heart of the commercial enterprise will be profoundly affected by the introduction of the single currency. Therefore, in a period of heightened concern about the millennium bug, it seems fair to ask this question: How much of a threat is the millennium bug/ EMU combo as an IT double whammy to bring the European economy down?

Euro compliance is different in nature from Year 2000 (Y2K) compliance. In fact, about the only thing they have in common is that they both concern computers. Y2K effects all microprocessors, whether they are running the toaster in the canteen or the mainframe in the back office - though in each case trivially. The euro will necessitate changes only in certain systems, but it will complicate matters here to a high degree.

"Business functions including sales, accounting, treasury, distribution, purchasing, logistics and human resources will all be affected in various ways by these changes," predicts Pete Robertshaw, EMU roll-out manager for SAP UK. "The challenge to the IT industry and in-house developed software is to provide systems to cope with these demands which can be implemented and tested well before the start of dual currency on 1 January 1999."

It may therefore be incorrect to talk of a "euro bomb", detonation time E-day - 1 January 1999. But for the ill-prepared, the experience of the single currency may be likened to a slow-burn incendiary device, which threatens destruction quietly at first but which in the long term, if unchecked, could be potentially as devastating as the millennium bug.

Siemens is a multinational European company that has recently spoken out about its euro plans, and it forms an interesting case because it is one of the first manufacturing companies to take a lead. The reason is plain. "Siemens expects annual savings in the range of up to DM35m as a result of hedging costs associated with interest and currency dealings, and of transaction costs in cross-border payments," says Bernd Euler, Siemens's director of finance. Such high savings will make for a quick payback time on the IT and related investments required to become euro- compliant.

However, technology will not be so accommodating in certain other respects. "Using information technology such as the Internet, customers will be able to see what the prices of a product are around Europe, so trade will no longer be constrained by geographical boundaries," Euler explains. Thus businesses will also have to cope with the price transparency the single currency brings. It is not simply a win/ win situation. But back to the issue of whether firms can cope.

For Siemens to exploit the euro advantages requires more than simply an internal switch to the single currency: according to the logic, its suppliers, of which there are some 12,000 in the UK alone, must be compliant too. "If companies in the EMU are offered two identical deals from suppliers, one quoted in sterling or dollars and the other quoted in euros, the euro supplier will have a competitive advantage because it offers an extra benefit to the customer," explains Euler. Indeed, many commentators are beginning to suggest that in the same way that the banking sector as a whole is well on the way to being euro-ready in order that individual firms can seize competitive advantage, and others at least not lose out, a chain reaction of necessity to switch to the single currency could spread through the manufacturing community, forcing all members of it to fall in line even ahead of the timetables set by politicians.

Siemens's policy for now is "no compulsion, no prohibition". "We will not force our suppliers to use the euro and will remain flexible on payment, as long as pricing is competitive," says Euler. Whether or not suppliers will have to take on the expense of an early EMU IT project is therefore something of a prisoner's dilemma: if no one is doing it there is no risk, but it takes only one to succumb, for the rest to be forced to fend for themselves.

Which leads the argument on a stage further. If this ripple effect does gain momentum, just how capable are smaller players of handling the IT changes that will be demanded? And to complicate things further, the problem is not just one of the costs to be borne, but also the issue of whether there are the IT skills available in the first place. "It is very hard to determine whether or not there are literally enough resources to go round," says Nick Crosby, an EMU specialist at Price Waterhouse. "The market is undoubtedly tight, but since there has been no systematic research, there is no precise measure of the risk.

"Performing such research would seem to be something governments or the European Commission might do. It is what business needs, so that it can plan for the expected IT shortfall." It would seem, therefore, that the success of EMU as a whole rests in part upon small- to medium-sized enterprises' ability to support compliance projects.

If that were not worrying enough, all this is set against the bad reputation of IT projects, which almost invariably fail to hit deadlines and lead to escalating costs. Prophets of doom have already been heard preaching that it is not a question of whether this EMU will fly - more a question of whether it will get off the ground at all.