Euro Currency Debuts, But Not Everyone Ready

Multinationals largely prepared, SMEs lag in euro conversion

Tempe, AZ  January 2, 2002  As the clock struck midnight across Europe on Tuesday, the Old World ushered in a new era as the euro replaced national currencies in 12 countries spanning the continent from Greece to Ireland.


But while Europeans are just now getting used to handling the new notes and coins, many companies in the United States and other countries outside the "Euro Zone" have been preparing for years for the currency change.


Pharmaceuticals research company Covance, for one, began planning for the switch in mid-2000. Preparing for the euro was not optional for the company, according to Scott Gilles, financial systems administrator at the contract research organization. The company has units operating in several of the Euroland countries, including Germany, France, Spain and Ireland. "For us to remain an ongoing concern in those countries, and in countries that are doing business with those countries, we had to adopt to the euro," said Gilles. 


Indeed, as of January 1, all invoices and purchase orders must be issued, payments must be made and salaries must be paid in the euros. The nations adopting the euro are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. European Union members Britain, Sweden and Denmark opted out of the Euro Zone, at least for the moment.


Covance, which operates in a total of 17 countries around the world, set up a cross-functional and cross-border euro team that drew upon the expertise of U.S.- and U.K.-based financial and information systems staff. 


By November 2000, the company had installed a euro-compliant version of its financial system, from Coda. Then they went through a Coda-sponsored course to certify their in-house conversion team in May 2001 prior to beginning their conversion effort. By November, Covance had converted its last unit to the euro.


The conversion process for the company's financial back office was not a matter of simply re-writing code, switching, say, francs for euros. "The rules did not allow for a simple conversion," said Gilles. The conversion rate for each "legacy" currency  such as the deutsche mark or the French franc  was set in stone back in 1999, while non-legacy currencies  British pounds or U.S. dollars  continuously floated against both the legacy currency and the euro.


Software helped ease the process. Coda provided tools that made the process "almost mechanical," Gilles said. His euro team would create a new accounting set of books for each of the euro companies and do the triangulation of the existing financial data for these new companies. The tools involved programming routines that did most of the work behind the scenes, so the accountants and IT folks didn't actually see what was going on. That part of the process was not particularly time-consuming, according to Gilles.


The time-consuming part came during the validation process, when the company had to make sure that all its 52 subdivisions, dealing in more than 30 currencies globally, would be able to seamlessly handle the switch to the euro. Gilles said that his team needed to win management buy-in at each of the company's units to ensure a smooth transition. "Gaining the commitment from the senior management of each of these companies was critical to the success of this conversion," he said.


With the backend financial system converted, the Covance euro team was able to adapt other internal systems or subsystems to handle the euro fairly easily. For procurement, inventory, payroll and project accounting systems, for example, the conversion primarily consisted of switching currency units in the software, a fairly straightforward process, according to Gilles. "That was not the same level of complexity as converting the financial system," he said. "You're basically replacing one currency with another."


Of course, even while global companies such as Covance have forged ahead with their conversion projects, the extent to which small and midsize enterprises (SMEs) have prepared themselves for the euro remains to be seen in the days and weeks ahead. "It's the small to medium ones that have been dragging their feet," said Chris Loftus, euro product manager for Coda Financials.


A British government survey confirms that SMEs are lagging behind larger companies in their preparations to do business in the euro. For example, while 42 percent of SMEs in Luxembourg were either already prepared to invoice in euros by January 1, only 14 percent of small and midsize firms in Portugal anticipated being euro-compliant by the end of 2001.


"They seem to be thinking that it's going to be OK," Loftus continued. "But by January, [if they have not converted their systems to the euro] the minute that a customer wants to do something with them, they'll have to do it manually."


These laggards could slow down business at their multinational trading partners if they are unable to provide invoices and purchase orders in euros, since documents issued in the legacy currencies are no longer legally binding. "If you sent someone an invoice in early December and the payment terms were 60 days, when that 60 days rolls around, the invoice will be invalid," Loftus said. "Obviously, as a matter of business principle, you'd pay it or have the company re-issue the invoice in euros," she added, but the additional steps in the process could bog business down until all trading partners convert their systems to handle the euro.


Gilles said Covance staff that receive an invoice in a legacy currency will pay the amount due in euros, most likely after having made a manual conversion to the new currency based on the pre-existing conversion rate. "The exchange rate has been pegged for the past two years, so it's not a complicated procedure," he said.


Interestingly, Gilles said that he has not seen the same level of interest in the euro issue as in another recent conversion effort. "I'm not seeing the same level of interest in partner preparation that there was with the Y2K issue, where everybody was circulating forms signing off saying you're compliant," he said. "I'm not aware of that happening with this [euro conversion]."


With all this effort being expended to usher in the new currency, what is the upside to the euro for multinationals doing business in Euroland? Coda's Loftus said the conversion should ameliorate currency risks in trading between different countries within the Euro Zone. Gilles added that while it is not an issue for Covance, companies seeking to raise funding on the European continent may gain from being able to tap into one broad euro pool rather than smaller markets for francs, marks, lire and so on.


In addition, some companies may find the conversion has made their financial consolidation incrementally easier, since they now must contend only with the euro, rather than 12 separate currencies. However, Gilles noted that Covance still deals in more than 30 currencies around the world, so the conversion will not simplify the company's bookkeeping to any great degree, although he praised the ability of the Coda Financials system to handle this aspect of Covance's accounting.


Looking ahead, Loftus said that ultimately some companies operating in the Euro Zone may want to "push" the euro back into their supply chain, urging (or forcing) their trading partners to deal increasingly in euros in order to reduce foreign exchange risks.


For further information on the euro conversion, see the British Government Web site: http://www.euro.gov.uk/

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