The Euro is coming: will U.S. business be ready?

Europe's adoption of a single currency could cost U.S.-based multinational corporations hundreds of millions of dollars in transitional expenses - and the meter is running. What are you doing to prepare for the big day?

Companies around the globe have been so busy scrambling for the past several years to address the Year 2000 IT issue. that many - particularly U.S. companies - have yet to even begin addressing another serious challenge: the consolidation of various European monetary systems into a single currency, the euro.

As most major political obstacles to European monetary union dissolve. the certainty of the transition to a single European currency, beginning Jan 1. 1999, has increased. The changeover to the euro will have a global impact, not just in the matters of trade and politics, but also on how businesses are run worldwide. Companies that adjust their business processes to address the euro may find it necessary to adjust their IT infrastructure. A 1997 study released by The Gartner Group, of Stamford. CT, reported that the "adoption of a single European currency will cost European application development organizations more than $100 billion for software changes, excluding PC applications and package updates."

The Wall Street Journal has reported that estimated transitional costs could exceed $100 million for large multinational enterprises. But it would be a gross mistake to assume that only large-scale businesses will be affected. Many experts suggest that essentially any business whose total European trade exceeds 15 percent had best put together a euro plan soon.

The Problem: Bigger Than a Shoebox 

Consider the scale of this commerce consolidation. The European Union's economy accounts for 20.9 percent of world trade and the U.S. economy for 19.6 percent. Eliminating conversions from one nation's currency to the next in Europe will strengthen the European economy, to the point that the euro could rival the dollar's international dominance as a currency standard. Because at least 60 percent of the trade of EU nations is already with other member states, the ease of trade a single currency offers will enable the EU to rival interstate commerce in the United States. Nations likely to participate in the first wave of euro integration are Germany, France, Austria, Finland, Ireland, Belgium, the Netherlands, and Luxembourg, though participants will not be fully committed until early 1998. It's also highly likely that Spain and Portugal will qualify. Other countries on the cusp include the United Kingdom and Italy.

As European businesses have begun work to address the euro issue, companies in the U.S., with the exception of the banking industry, have shown a reluctance to begin their efforts. This phenomenon may be due partly to concern that the conversion could be derailed in some countries by political developments. Unfortunately, as U.S. businesses - particularly small and midsize enterprises - appear to be dragging their heels, more alert rivals are already working to secure an advantage.

The euro will begin replacing national currencies on Jan. 1, 1999, and will become the only legal payment currency in participating countries by July 1, 2002. All European subsidiaries will be required to change their ledgers to the euro, eliminating old currencies and adjusting all reporting and controlling accordingly. Organizations will be required to convert open orders and projects from the old currency to the euro. Historical data such as sales statistics must also be converted for adequate comparisons to present and future data.

What does the euro mean for U.S. businesses? For any U.S. company already doing business with subsidiaries, customers, partners, suppliers, outsourcing firms, development, and manufacturing operations in Europe, the euro is at least as important a change as Year 2000 conversion. Virtually every industry will be affected, particularly companies involved in industries such as shipping, high tech, automotive manufacturing, and communications. Companies in these industries stand to benefit most from the euro if they make their conversion early, gaining an edge over competitors that elect to wait and see.

For companies like Fremont, CA-based Logistix, the change to euros will have little effect. Specializing in contract manufacturing, distribution, and support services to software companies, Logistix, with more than 2,000 employees and a rapidly growing revenue base approaching $350 million, decided to automate their operations to prepare for the change. According to Logistix senior manager Doug Sumaraga, a primary consideration for the company was having the ability to configure foreign currency, because it ships to markets across the globe. Logistix went live with the R/3 suite across its 62 plants and nine sites for domestic operations in early 1996.

Like many other businesses facing the euro implementation, the business process changes required were far from trivial. Because we believe this will be a growing demand in the marketplace, we at SAP have focused at least some of our efforts on easing euro conversion for customers with SAP Euro, a comprehensive euro solution component scheduled to be available by early 1998. Building on multi-currency capabilities in the current releases of SAP systems, the new software conversion tools will further aid customers converting data to the new currency, automatically documenting and reconciling differences caused by rounding off figures following the conversion.

Unforeseen problems are certain to surface once the euro actually enters the marketplace. One obstacle that has yet to be addressed by many businesses is the issue of changes related to pricing and packaging. For example, an attractive price of 1.99 deutsche marks for a product becomes difficult to market when converted to .786 euro, necessitating changes in a product's pricing structure, packaging, or volume per package.

Even seemingly inessential issues will be challenging. The symbol adopted for the euro, for instance, resembling the Greek letter epsilon, currently doesn't exist on keyboards and printer character sets. Additionally, companies that have made a practice of pricing the same product differently in the existing European currencies will have that aspect of their practice to resolve. Each company will have to determine how to maintain its business ecosystem to deal with the euro, through negotiations on when and how to adjust to new currency in its relationships with banks, tax authorities, employees, suppliers, and customers.

Piecing the Puzzle Together

One of the greater challenges of accommodating the euro is that it will not be adopted all at once, but rather in phases that need to be carefully calibrated. The fixing of conversion rates on Jan. 1, 1999, will mark the beginning of a transition period of three and a half years affecting companies, financial institutions, and government agencies.

Complicating the transition period further, the private and public sectors will move to the euro according to their own separate timetables. A subsidiary will have the option of paying its vendors and employees in euros, but local governments and social insurance agencies may still require taxes and fees to be paid and reported in local denominations. Large multinationals are expected to be at the front of the curve while retaining the ability to deal in existing national denominations. Such a strategy will enable them to maintain uninterrupted relations with smaller companies. which are expected to adopt the euro at a later date.

The fallout of companies adopting the euro at different times necessitates the need for businesses to track their books across multiple currencies. Complicating matters further, the Maastricht Treaty mandates that all currency conversions will be noted in six significant figures. Most businesses will need to adopt new measures beyond the current practice of noting only five decimal figures.

During this dual-currency phase, many subsidiaries will have to perform transactions and reports in more than one currency: the local currency of the subsidiary, U.S. dollars, and euros. It will be absolutely critical for companies - and particularly multinationals - to distinguish between the local currency and the transaction currency to enable them to bill appropriate customers in euros. Because not all businesses within a particular member nation will have made the transition, the ability to bill in the nation's former currency as well will speed transactions. Businesses without such systems in place may find themselves unable to process their suppliers' bills. Meanwhile, an enterprise with a multiple currency system in place would enjoy many other advantages. Payroll statements would reflect multiple currencies as employees learn the new currency, and the ability to print price lists for services and products in the new euro as well as the former national currencies would help reduce customer confusion.

In the global infrastructure of a multinational company as well as its European subsidiaries, technical and organizational changes will go beyond simply accepting individual business transactions in euros and converting national currency amounts to euros. Companies will have to undergo the difficult step of reviewing and adapting business processes, including procurement contracts, administration, processing, logistics, sales, financial controlling, accounting, and treasury and finance.

Software systems will have to handle these changes, while simultaneously dealing with the reporting requirements and intricacies of phased change.

One complexity that's bound to induce more than a few headaches involves the handling of rounded figures when convening documents on an item-by-item basis. Translation differences are likely to arise when converting to euros, with the total not equating to the rounded total.

Because the transition will vary from business to business over the three-and-a-half-year period, not all aspects will be controllable by an individual company. There are no standards for accomplishing this currency multitasking, making each company's strategies individual and there-by increasing the likelihood of confusion.

Avoiding the Headaches

A number of measures are available to U.S. businesses still without a plan. For starters, enterprises should begin assessing the impact of the euro on their existing IT architectures and projecting costs and opportunities of various adoption scenarios as soon as possible. IT development's cost dilution of other projects should also be examined, along with the potential for short-term reduced profitability for European subsidiaries. Managers should carefully consider the euro's effects on long-term contracts as well as existing contracts and business partners. Freight agreements will probably require renegotiations. Price lists should be updated to reflect the coming changes and billing procedures are likely to need revision. Current interest rate transactions for accounting processes are likely to need revamping, as will loans and interest agreements. In addition, a business's IT system will need evaluation; it's likely that both the Year 2000 and euro issues can be tackled simultaneously with an enterprise business solution.

The importance of a business management plan to address the euro issue will increase in the coming years. Despite the number of unknowns involved, companies that accept this new currency and devise a sound plan to implement it into their systems will likely emerge on the other side of the millennium as the strong players, enjoying an advantage over those who adopted a wait-and-see position.

As U.S. companies begin to take note of its myriad effects, discussion of the euro issue is bound to grow in intensity. The political decision regarding which countries will participate in the union is expected to be made as soon as early 1998. Meanwhile, consultants are getting ready to assist businesses and consortiums are springing up everywhere to foster ideas and communication. U.S. business leaders can benefit from this model and prepare to cope with the very different European business dynamic they will face in 2002, one that promises to facilitate trade and commerce for those who are prepared.

Paul Wahl is CEO of Wayne, PA-based SAP America Inc., a $2.6 billion enterprise software solutions provider, and a member of the executive board of SAP AG.