Energy and commodity trading firms are increasingly embracing cloud technologies as they seek to reduce costs and improve their technology infrastructures. Within the next 5 years,Commodity Technology Advisory (ComTech) predicts spending for Commodity Trading & Risk Management (CTRM) products in the cloud will outpace “traditional” on-premise installs, whose funding increases less than 4% annually versus 18% to 20% for its cloud-based counterpart.
In addition to the cloud’s numerous benefits, there are potential complexities to consider before moving critical E/CTRM capabilities from owned or leased software to cloud-based servers.
1. Understanding the TRM vendor’s approach to cloud offerings: If a vendor has simply performed a “lift-and-shift,” they may not fully utilize cloud capabilities. This strategy results in, essentially, a shared data center which falls flat compared to E/CTRM systems “born” in the cloud and designed to take full advantage of cloud capabilities.
2. Managing what will stay “on premise” vs. the cloud: During transition to the cloud, many IT applications and tools will stay “on premise” for some time. This transition period needs to be thoroughly analyzed and designed to avoid issues during implementation, cut-over and in-production use, especially as data volumes increase over time. Integration with other external parties is another important factor. Architecting your integration properly based on an API approach can enable faster, cheaper, and more efficient communication between systems.
3. Locking down data security: For cloud implementation, data security is a shared responsibility between cloud vendors and clients. Vendors provide security tools, but ownership of access privileges lies with the client. Be aware: different cloud services require various levels of client engagement and security configuration. Discussing a cloud vendor’s use of penetration testing can help customers make sure their solution and data are secure.
4. Managing cloud resources: Process improvements such as speed are major selling points for cloud solutions. The management of these resources, however, is sometimes overlooked. Organizations with a widespread global presence should plan the location of their cloud assets according to their geographical footprint and load demands. Without properly vetting cloud coverage, pockets of users might be unable to access the network’s capabilities.
5. Reliability of the network: Network reliability needs to be paramount in any ETRM solution, including cloud. We have seen clients struggle for upwards of 6 months to maintain a consistent and reliable connection between on-premise applications (e.g. engine parameters and reporting tools) and cloud applications. Issues from DNS server issues to firewall and network glitches surface and re-surface after the firmware and server upgrades on the client side. Having a dedicated team investigate these issues can help to ensure success.
6. Realizing the impact of “hassle free” upgrades: Firms should realize how automatic updates will impact integration, system stability and any required “system freezes” that can potentially occur at peak trading periods and impact client service. A solution with the ability to opt out could be an ideal alternative for some.
7. Versatility: Small and large firms have different needs and therefore should be wary of a “one size fits all” solution. In these instances, organizations may end up paying more for extra capabilities they don’t need, or by needing to create “side-car” code to augment the core capabilities as they scale. In either case, ensure that the burdens of improper sizing or lack of configurability do not undermine the initial value proposition of a cloud-based solution.
8. Maintaining regulatory compliance: As regulatory and stakeholder scrutiny becomes more intense and invasive, an E/CTRM system should provide adequate access and analysis by compliance and audit teams, both internally and externally. Some key requirements include provisioning work-flow management capabilities (deal, contract, credit approvals), and providing detailed audit and user activity report on demand (logs of screen views, data inserts, updates or deletes).
9. Allocating budgetary resources: Clients often don’t understand how the cost of these systems are accounted for in budgets and financial reporting. Licensing usually involves a move from a large, initial Capital Expenditure (CapEx) outlay to a smaller, recurring Operational Expense (OpEx), which can impact IT budget and roadmap planning. However, licenses offer some financial flexibility and less write-off than a solution on a set amortization schedule. Many TRM vendors offer a one-stop shop model for cloud/license payments. This may be a cost-effective strategy, especially if the vendor offers a discount to bundle cloud services and software license.
