energy trading risk management - Oil & Gas Financial Journal
energy trading risk management - Oil & Gas Financial Journal
energy trading risk management - Oil & Gas Financial Journal
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Buy vs. build: On reinventing<br />
the ETRM wheel<br />
Larry Hickey, FRM, Sapient, London<br />
Take a close look at your paycheck. Note that you’re not<br />
actually paid by the company you work for. You’re probably<br />
paid by a payroll processing company, perhaps ADP<br />
which pays 1/6th of all working Americans. Your company has<br />
outsourced the payroll function.<br />
Payroll is critically important and involves highly sensitive<br />
data. But <strong>management</strong> recognized that your company has no<br />
comparative advantage in the provision of payroll services. So<br />
the function was outsourced to a payroll company which can<br />
provide the service securely, reliably, and cheaply.<br />
“Securely” and “reliably” because payroll companies have<br />
developed specialized expertise in this area. They have a<br />
comparative advantage in the provision of payroll services.<br />
“Cheaply” due to economies of scale. The incremental cost of<br />
servicing another company is far less than it would cost your<br />
company to do it itself. Adam Smith would be proud.<br />
If your company’s do-it-yourself ethos extends to issuing paychecks,<br />
you can probably stop reading at this point. And good<br />
luck with your ETRM build!<br />
The same considerations come into play when a company<br />
decides whether to buy a commercially available ETRM solution<br />
or attempt to build one from scratch.<br />
First and foremost, the company must make a sober determination<br />
if the ETRM system is a competitive differentiator. Is the<br />
way you handle your portfolio over its lifecycle so different from<br />
the competition that it is part of your firm’s competitive advantage?<br />
This is a high hurdle for a number of reasons.<br />
What we do here is completely different. Really? By virtue of<br />
all trades having counterparties, there is at least one other entity<br />
wrestling with the same issues. How are they solving them?<br />
Industry leading solutions provide full lifecycle support so the<br />
portfolio can be managed and optimized at the highest level<br />
www.ogfj.com ◆ November 2011 ◆ Energy Trading & Risk Management25