Managing Risk in Euro Currency Conversion
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Managing Risk
to 2002. The coincidence of this transition
with the Y2000 problem has been much
commented on recently (see Table 1).
in Euro Currency Common issues for both are estimating,
project management, defect management,
regression testing, dependence on external
Conversion contractors and package software, missing
source code, and operating system, applica-
tion, and hardware upgrades. In this article,
I will focus on what is distinctive about the
euro conversion. [Note: I have made use of
many ideas from a 60-page article by Pieter
by Patrick O’Beirne Dekker on “Preparing Information Systems for
the Euro.” The larger article is available on
R isks are present in virtually every soft-
ware project, and as a result, “risk
management” is typically discussed in very
the Information Society Project Office (ISPO)
site, at http://www.ispo.cec.be/y2keuro.]
generic terms. However, there are a few On 1 January 1999, the euro will be created
types of projects for which the risks seem from the present ECU (European Currency
particularly pervasive and severe; they Unit). Rates of conversion between the euro
deserve a specific discussion of risk-man- and the participating national currencies
agement issues and guidelines. Y2000 pro- will be irrevocably fixed, and the euro will
jects are perhaps the most widely recog- become the national currency in the partici-
nized example in the US, but in Europe, the pating countries. To say that, for example, a
euro currency projects may involve even euro is 0.776655 Irish pounds is just like
greater risks. saying that a foot is 30.48 centimeters — it is
simply a different scale of measurement of
As the countries of Europe enter the 21st
the same entity. As of 1 January 1999, enter-
century, they face a challenge of historic
prises can begin operating in euros if they
proportions. Conversion to a common
wish. On 1 January 2002, the new euro
currency, the euro, will not only involve
banknotes and coins will be put into circula-
economic issues — for example, the reduc-
tion in substitution for banknotes and coins
tion in exchange rate risks and the increase
in the old national currency units.
in price transparency — but also a number
of business and technical issues. This article During the transition period, two different
will explore a number of business and tech- currency units will be used within the
nical issues concerning the euro conversion member states; at the end, only the euro will
and suggest ways of managing the risk. be the legal expression. Financial information
systems will have to be prepared in order to
The transition to European economic and
deal with this unique transition scenario.
monetary union (EMU) is marked by the
changeover to the euro currency from 1999
22 REPRINT ©1998 Cutter Information Corp.Planning the changeover of information Table 1: Comparison of Y2000 and euro currency projects
systems to the euro is not just a matter of
Y2000 Euro changeover
dealing with the technical conversion. For
Maintenance project Strategic decisions
many enterprises, there will be strategic Every application that uses dates Every application that uses money
decisions that will fundamentally affect the Database expansion possible Database conversion of amounts
way an enterprise conducts its affairs. These Embedded systems Vending machines, cash registers
Supply chain management Trading partner synchronization
can change the functionality that is
Fixed deadline Transition period (but banks must be
expected from information systems. For this done on 1 January 1999)
reason, I contend that the introduction of Liability and litigation concerns Consumer legislation concerns
the euro is primarily a problem of managing No functionality change New functionality and user training
requirements. Future date testing New functionality testing
No fallback “No compulsion, no prohibition”
Every business process is affected by
the euro. You should perform a “thought have to be dual priced. The EC leaves it to
experiment,” or a simulation of what will national legislation, and there is as yet no
happen to your business during the transi- legislation on this issue in any country. It is a
tional period, to see how new requirements customer information issue, and it’s up to
might be generated for IT systems. This you to decide what to do. I would warn of
simulation must cover setting prices, order the risks of taking on too much change in
processing, delivering, invoicing, and payment systems, given that IT resources will be
systems, and it must also consider the atten- stretched already for Y2000 conversion. This article originally appeared in
dant transitional problems that may occur as Vol. 11, No. 6 of Cutter IT Journal.
Monetary union also means that the
trading partners go through their own E-day. exchange risks between participating Copyright ©1998 by Cutter
Information Corp.
member states will disappear. Therefore,
BUSINESS ISSUES businesses may now wish to compete in a All rights reserved. Unauthroized
reproduction, including
The strategic preparation must involve the wider market, requiring new language, legal,
photocopying, faxing, and image
entire company; this is much more than an and marketing competencies. New products scanning, is against the law.
accounting problem. Don’t leave it to the may require IT changes, but that is a normal
The monthly Cutter IT Journal ®
accountants or IT people to solve for them- part of systems development and should not newsletter is published by:
selves. Do you want IT people making busi- be a risk except in resource terms.
Cutter Information Corp., 37
ness decisions? Broadway, Suite 1, Arlington, MA
Enterprises are sometimes able to profit
02474 (+1 781 648 8702 or, within
The impact of euro conversion on retail from price discrimination in different North America, +1 800 964 8702;
systems is pervasive — consider price geographic markets. After the introduction Fax +1 781 648 1950 or, within North
displays, labels, pack pricing, bar codes, of the euro, these hidden price differences America, +1 800 888 1816).
psychologically sensitive price points, may become painfully visible. Addressing E-mail: klovering@cutter.com, Web
weighing scales, the unit pricing directive, this should only be a data maintenance task site: www.cutter.com/itgroup/.
the loss of margin on low-unit-price items, and so should not pose an IT risk.
consumer information, personnel training,
adapting cash registers, scanning systems, SUPPLY CHAIN
cash office management, security, the use In some industries, customers use informa-
of credit cards, and so on. Sales and tion systems for ordering, payments, or
purchasing price lists will have to be bookkeeping that are developed by their
reviewed. But people seem to be making an suppliers. The problem for the supplier/
automatic assumption that everything — developer and the customer/user of such
price lists, invoices, even statements — will
Get the Cutter Edge free: www.cutter.com/itgroup/ REPRINT 23software is in the coordination of their precision, as above. According to the Giga
changeover schedules. Group, “Almost every system falls over
when it has to do triangulation; the
Plan the synchronization with your trading
computer starts to choke.” Such anthropo-
partners carefully. Consider the effect of
morphism is amusing as, of course, the
time lags in order/delivery/invoicing/
triangulation logic is either there or not.
payments/statements processing. You may
have a dependence on external service Unavoidable Rounding Differences
providers of information systems (e.g., stock Converting amounts forward and backward
exchange feeds, bureau services) that will between the euro and participating
change to the euro on 1 January 1999. Once currency units will unavoidably cause
one major enterprise changes, it will have rounding differences. The addition (as in
an effect upstream and downstream in its invoices) of amounts that have been
value chain. This is particularly profound rounded results in an accumulation of the
when EDI is used. rounding differences. Repricing small unit
Where users need to
prices in euro figures rounded to the nearest
revise and correct the data TECHNICAL RISKS IN SOFTWARE cent can cause a loss of net margin. The
LOGIC AND DATA effects of these rounding differences vary
files manually, there is a
There are a large number of technical risks from being merely a nuisance to being able
risk of incorrect data entry involved in the euro conversion, some of to bring information processing to a halt
which I will summarize here. Lack of space because of the accumulation of discrepan-
or even fraud.
prevents me from providing detailed exam- cies that require reconciliation.
ples, but the reader should find the risk cate-
gories fairly obvious and understandable. Other Technical Risks
n Interfaces between systems,
Avoidable Rounding Differences specifically EDI, will require an
Article 235 of the regulations prohibits the agreed changeover of currency
use of cross-rates or inverse rates derived denomination.
n Systems may suffer “data pollution”;
from the inverse of the fixed conversion
that is, amounts expressed in euro
rates. This is because inverse ratios produce
may accidentally be combined with
nonterminating decimals; these figures
amounts expressed in the national
must be truncated or rounded somewhere,
currency unit.
and will therefore fail when converting
n Conversion of historical data
amounts with more than that number of
requires that all instances of the
significant digits. If your system really same data be converted in exactly
cannot handle the prescribed method of the same way. This poses a particu-
multiplication or division, the risk will have lar risk where the data is not normal-
to be managed by using a rate with more ized, as is commonly the case in
significant digits than the largest number MIS/DSS data warehouses.
you ever convert. n Countries such as Italy and Spain
have a national currency unit with-
“Triangulation” is prescribed as the method
out decimals, and their systems may
for converting participating currencies via the
need to be modified in order to
euro. If this involves too many logic changes,
work with euro cents.
you may have to manage the risk using
n Thresholds such as report ranges,
direct conversion factors with sufficient
validity checks, credit limits, and
24 REPRINT ©1998 Cutter Information Corp.reorder points must be converted to the data files manually, there is a risk of incor-
euro, and they may be embedded in rect data entry or even fraud. The conversion
code rather than in data. to the euro may also give rise to a substantial
n Displaying information in two cur- number of “suspense” or “clearing” items in
rency units at the same time can be financial systems. These items need to be
difficult, because the amount of analyzed and resolved in time to ensure that
space on displays and printed no irregularities have occurred. Testing
reports is limited. systems for new functionality will also require
the creation of new test cases.
RISKS IN STAFF RESOURCES I believe the magnitude
Here the obvious risk is that IT departments RISKS IN MODIFYING EXISTING of the task is overstated
may need additional staff to cope with both SOFTWARE
in the media.
the euro and Y2000 conversions. And as In practice, most financial systems are
Pieter Dekker observes in his paper, the currency-agnostic; that is, they just process
introduction of the euro will require training numbers within one base currency, and no
of existing employees for new functionality, currency is implied. The only time a
as well as a familiarization period for people currency symbol appears is on input
to grow accustomed to working with a new screens as a prompt or on output reports as
currency. To the extent that manual a column heading or data format. After all,
currency conversions are required, this will who asks if an accounting package is
also introduce the risk of clerical errors. “dollar-compliant” or “pound-compliant”?
Therefore, there are only one or two places
RISKS IN CONVERTING END-USER where the specific euro conversion rules
APPLICATIONS have to be applied: input and output. If
As we have also found in Y2000 projects, a these are well-modularized, the entire appli-
large area of risk involves end-user applica- cation’s conversion may be isolated to two
tions whose existence may not even be modules. It may only be necessary to
known to the IT department. Identifying modify the input routines and rely on report
only the spreadsheet cells or database fields generators to produce the required outputs.
to modify may be difficult, as most end-user
I believe the magnitude of the task is over-
applications are poorly structured and
stated in the media. The Gartner Group is
completely undocumented. Unfortunately, it
quoted as saying, “The cost of fixing each
is impossible to design a utility that can
line of code is estimated at $1.10, with bil-
automatically convert spreadsheet models
lions of lines of code having to be changed.”
to euro. To avoid double conversion, identify
I consider “billions” to be a gross overstate-
the currency unambiguously so you know
ment. After all, how many lines of code
what’s converted and what’s not.
handle currency conversions in a system?
One module — maybe shared among many
RISKS IN INTERNAL CONTROLS applications if the company has any
An important part of financial computing concept of reusability. Another example
applications is a set of internal controls that comes from the Giga Group, which states,
deal with unusual transactions, access privi- “The monetary union has said that all sys-
leges, and potentially fraudulent insertion, tems will have to be able to account for six
modification, or deletion of financial informa- significant decimal places, making most sys-
tion. Where users need to revise and correct tems, which now account for two, obsolete.”
Get the Cutter Edge free: www.cutter.com/itgroup/ REPRINT 25In fact, the six-significant-figure rule only A big bang approach at year-end may not be
applies to the conversion process, not the possible if previous financial periods must
entire accounting system, which will remain “open” or “active” for an extended
continue with two decimal places when period (i.e., more than a few weeks). It
referring to amounts of money for payment. carries the same risks as all big bang
projects: the need to be able to recover
CHANGEOVER TIMING STRATEGIES from an unsuccessful implementation.
When the European Union set out in 1992
Gradual Approach
on its voyage to EMU, the Y2000 “iceberg,”
Under this approach, the systems would
as Capers Jones puts it, was not visible in
change over to the euro on an “as-
anybody’s radar. The Y2000 conversion is a
necessary” or “when-ready” basis. A dis-
maintenance project with a fixed deadline
advantage of this method is that special
and no functionality change, it requires
interfaces between these systems need to
regression tests and future date testing, and
be built to convert data from one currency
it has no fallback. In contrast, the euro
unit to the other. Such interfaces have a
conversion is a new functionality project
very short useful life and may therefore be
with a three-year transition phase, it
relatively expensive. An additional risk is
requires requirements testing, and it can
that of data pollution, in which users inad-
rely on “No compulsion, no prohibition” as a
vertently combine financial data denomi-
fallback. This clause, described below (see
nated in different currency units.
sidebar, p. 27), is the lifeboat for those
companies that are not ready for the euro
CHANGEOVER TECHNICAL STRATEGIES
on 1 January 1999. They can, in theory, wait
until 1 January 2002. If there really is serious There are a number of technical strategies
economic disruption, as forecasted by for achieving the euro conversion. These
Dr. Ed Yardeni of Deutsche Morgan Grenfell, may apply separately to input and output
even that date may be put back by political functions.
decree.
Manual Solution
Regardless of the timing of the euro intro- This means using a single-currency system
duction, IT departments will need to decide and a calculator. This method may suit
on an overall strategy for introduction of when almost all transactions are in the
their new systems. The alternatives are national currency unit and only a few trans-
familiar from previous IT undertakings: the actions are in euro. A full conversion can
“big bang” approach and the gradual/ wait until the euro becomes the most
phased approach. important currency unit.
Big Bang Approach Manual conversion, however, is notoriously
In the “big bang” approach, the enterprise susceptible to clerical errors. When dealing
prepares for a changeover of all its informa- with real-time transaction processing (such
tion systems at the same time. This strategy as at cash registers), manual processing
avoids the problems of working with a may be too burdensome.
mixed system (part euro, part national
currency unit). Parallel Systems
Another solution is to use two versions of
the existing financial information system in
26 REPRINT ©1998 Cutter Information Corp.parallel. One of the systems could be used for euro, or an enterprise could run two
to process amounts in the national currency copies of the same software simultaneously.
unit, the other could be used for euro. For
One risk with this strategy is that users of
example, one cash register could be used
two identical information systems with
for the national currency unit and another
different currency units could easily mistake
THE TIMETABLE AND REGULATIONS
One currency, two denominations. The To convert euro to national currency: multiply by
timetable for the euro is a transition period from the rate.
1999 to 2002, during which there will be two
denominations of legal tender in each member To convert national currency to euro: divide by
state. Philip Hamell of the Euro Changeover Team the rate.
of the Irish Department of Finance likens the Inverse rates are not allowed because the
changeover to the euro to Aristotle’s theory of inverse of those rates gives a nonterminating
“substance” and “accidents” (better known in decimal, and precision will be lost at some point
Ireland as the basis of “transubstantiation”). On at which your numeric precision stops. Whether
1 January 1999, the pound in your pocket still that makes any practical difference depends on
has the accidents (look and feel) of a pound, but the size of numbers you have to handle. Only
its substance (nature) is changed and is now you can answer that, knowing the precision of
really the euro. your language and file structures and your
No compulsion, no prohibition. In the legal business data.
framework, the fundamental principle Triangulation. The famous “triangulation” rule is
applicable during the transitional period is called that to convert from one participating currency
“No compulsion, no prohibition.” It states that to another, you must convert via the euro and
acts to be performed under legal instruments round the euro amount to not less than three
stipulating the use of one of the units possible — decimal places. Other methods are allowed only
the national currency unit or the euro unit — if they produce the same result, and that is the
shall be performed in the stipulated unit unless let-out clause that software companies will be
otherwise agreed by the parties (Article 8(1) of using. Triangulation is not a matter of national or
the 109L(4) Regulation). This rule ensures that local government enforcement, but a matter of
economic agents will only have to use the unit dispute resolution/litigation. Unless there is a
to which they have agreed. However, economic dispute, the method of calculation is not
agents may feel obliged to deal with the euro relevant. And it is only relevant where an
before the end of the transitional period for alternative method, if used, reaches a different
competitive reasons (e.g., because customers result. There are certainly no plans to set up a
may require invoices in euro) or logistical “Triangulation Enforcement Agency” in Brussels.
reasons (e.g., to avoid a high-risk “big bang” However, at the national level, there may be
conversion to euro on 31 December 2001) consumer protection laws that impose certain
Legal framework. The legal framework as far as additional requirements on parties in a
we are concerned is the Article 235 regulation transaction.
(Council Regulation 1103/97 of 17 June 1997), Article 5 states that you must round to the
which specifies the following: nearest cent for amounts to be paid; therefore
Article 2: Freedom of contract. This means that rounding does not apply to other numbers,
people are free to agree to their own terms such as unit prices (e.g., a phone charge of
independent of this legislation. “Freedom” of .00416p/sec) .
course assumes there is no element of coercion The euro in print. There is no law that you must
from a stronger partner. use the euro glyph. It is likely to be used in The euro glyph.
promotional material as a logo, but businesses
Article 4: Conversion and precision. This will not adopt it until it is a normal part of all
specifies that a fixed six-significant-figure keyboards, printers, and screen character sets.
conversion rate of one euro expressed as each Microsoft has introduced the symbol in Office 97
national currency is to be used without rounding applications, but it is not accessible by the
or truncation. Only in Ireland (and the UK when Ctrl+Alt+E combination recommended by the
it joins) will this mean six decimal places. For EU. The ISO 4217 Maintenance Agency has
the Italian lira, for example, it might be 1,987.65. adopted the currency code “EUR” for the euro.
Get the Cutter Edge free: www.cutter.com/itgroup/ REPRINT 27the euro system for the national currency enterprises to keep their accounting records
system. Furthermore, each system may in their original form for at least 5 to 10
receive only part of the transactional data. years. Retroactive changes of historical data
Where transactions are not independent but should be avoided at all cost, because this
are related to other transactions, this can be could cause synchronization problems
a problem. between the two systems. It is impossible to
represent amounts before 1 January 1999 in
Segmented Changeover euro, as the currency did not exist. This would
In some situations, the currency unit used cause anomalies when comparing data that
will depend on the type of transaction. For was collected during the floating-rate era.
instance, all purchases from corporate
suppliers could be in euro, while all sales to Possible solutions for this problem, and their
individuals could be in the national currency risks, are:
unit. This approach would, however, require n Print hard copies. However, print-
the implementation of an interface between outs may be not detailed enough, or
the two systems that converts the amounts they may be organized in such a
from one currency to the other. Here the way (e.g., sorted by the wrong key,
risk also exists that users could get confused unsorted, fragmented) as to make it
about the currency that the system uses. impossible to access the data in an
efficient manner.
Historical Database Conversion n Maintain double systems. This
Even after the enterprise has switched over involves using two versions of the
to the euro, it needs to keep its historical existing financial information system
data available in the national currency unit at the same time.
in order to maintain the existing audit trail.
In most countries, national law requires RISKS IN PACKAGE REPLACEMENT
OR UPGRADE
EURO CONVERSION RESOURCES ONLINE Selecting the right software package, devel-
The Tenagra euro2002 discussion list is a mailing list set up specifically to explore oping custom-made modules, or even
IT strategies and techniques for the euro conversion. To join this listserv, send an configuring the parameters of standard soft-
e-mail message containing just the word “subscribe” in the body of the message ware requires a significant amount of lead
to: euro2002-discuss-request@euro2002.com. time. It is common to read of software
The following Web sites also provide useful resources: suppliers who say, “There is still no defini-
n http://www.iol.ie/sysmod/eurofaq.htm (the euro FAQ tive interpretation of EMU compliance for
from Systems Modelling Ltd.) accounting software” or “Our development
n http://www.ispo.cec.be/y2keuro/src/wdiseuro.htm
plan is ... subject to the directives from
(Pieter Dekker’s paper on IT systems) Brussels becoming available in time.” The
fact is, the rules have been known since
n http://europa.eu.int/euro/ (EU information Web site)
1996 and are embodied in Regulation 235 of
n http://amue.lf.net (Association for the Monetary Union of Europe) July 1997. There will never be a specifica-
n http://euro.fee.be (Federation of European Accountants) tion for euro compliance from Brussels; that
will be a matter for the marketplace to
n http://www.ispo.cec.be/y2keuro (call for sharing best practices)
decide. If your vendors give you that excuse,
n http://www.emuaware.forfas.ie (Forfás Awareness Campaign) tell them, “There’s nothing more coming
n http://www.ecu-activities.be/ (EURO-PAPERS site) from Brussels, folks — get on with it.” Then
tell them what you want the package to do.
28 REPRINT ©1998 Cutter Information Corp.“Euro Compliance” database conversion, which requires Patrick O’Beirne, B.Sc., M.A.,
particular care where databases are not speaks and consults on Y2000
The functional requirements of “euro-
issues for the desktop and euro
compliant” software depend both on normalized and contain redundant data for conversion of business systems.
the business of your enterprise and the performance reasons. Database conversion He writes a regular column for
changeover strategy you have adopted. may be impossible if numeric price or Irish Computer on Y2000 issues.
Therefore, no standard definition of “euro- money data is buried in text or descriptive Mr. O’Beirne can be reached at
compliant” exists. Hence, you should always fields. Beware of mindless automatic Systems Modelling Ltd., Suite 2,
Villa Alba, Tara Hill, Gorey,
verify for yourself whether so-called euro- conversions. Many people seem to be
County Wexford, Ireland. Tel.
compliant software actually meets your unaware that euro pricing is more than a +353 55 22294; Fax: +353 55
needs. And remember the following caveats: simple recalculation — the whole pricing 22297; E-mail: pobeirne@
structure may need to be rebased in euro. sysmod.ie.
n Enterprises usually have little influ-
That’s why business involvement is so
ence on the type of changeover solu-
important.
tion that package vendors will
choose in dealing with the euro. Those companies currently operating a
n Some software software vendors single-currency ledger may not appreciate
may not have the financial and having to use a multi-currency package to
human resources necessary to pro- make the transition to a single currency. See
duce euro-compliant versions of http://www.iol.ie/sysmod/eurex01.htm for a
their software. Do not unconditional- worked example of how a small company
ly rely on their good intentions. might go about this.
n The “euro-compliant” software
may turn out to be less reliable than
SUMMARY
the previous release of the same
software. The changeover to the euro has three
n The price of an upgrade can be specific features:
excessive if the original software
1. New products or services may introduce
was poorly designed, a substantial
new functionality. These new require-
amount of unnecessary functionality
ments must be managed just as in all
was added, or the software vendor
other new projects, particularly at this
takes advantage of the situation.
difficult time for obtaining IT resources.
Very few “multi-currency” packages
2. The transitional period involves
currently meet the Regulation 235 criteria,
handling two denominations of
as they were designed for the management
currency with a fixed conversion rate.
of floating rates, not a six-digit-precision
There is no need to spend any more
fixed-rate regime. The euro requires more than is absolutely necessary for a transi-
than most multi-currency packages provide. tional period. Coordinate with your
Multi-base-currency packages have been trading partners to reduce this effort.
proposed and may suit some, but one size
does not fit all. Some large package vendors 3. The conversion effort is plagued by
are offering a dual-base-currency system, exaggerated claims of difficulty. Don’t
which essentially treats the euro as the real be fazed by these pronouncements.
base currency and captures converted data Take full advantage of any shortcuts to
minimize the amount of changes to
in parallel in the national currency.
your system. After all, at the end, they
Ask about the euro migration suite your soft- will look much as they always did, just
ware vendors should provide. This includes with a different currency symbol.
Get the Cutter Edge free: www.cutter.com/itgroup/ REPRINT 29You can also read
