Embracing Digital Transformation in Commodity Trade Execution (pt 1)
Updated: May 31
Trade digitisation & digitalisation have become hot topics at commodity conferences and within the commodity trading and shipping community, promising a revolution in how traders execute their activities, unlocking opportunities of efficiency and improving productivity & performance.
It is a broad and complex subject to take on in a relatively short blog post. The objective is to provide some feedback from the ‘coalface’ based on experience, reading and listening to others’ views on the subject.
As with all complex subjects you may agree or disagree with the thoughts and perspectives offered and I’ll always be interested to hear and learn from others experience.
In part one of this blog post I will dive into the concept of commodity trade execution digitalisation and explore the general challenges, and benefits, to trading companies in taking a decision to embrace digitalisation.
Note: 'trading companies' in this post refers to any organisation engaged in the buying and/or selling of physical commodities. Including end users, producers and exporters, trade houses
In part two, to be published later, I will consider the constraints that trading companies may need to overcome to successfully implement digital transformation within their organisation and outline key steps that can be taken to assess the readiness for change.
what is meant by digitisation and digitalisation, with example
Commodity trade execution refers to the comprehensive set of processes that occur after the contracting phase. It involves the execution, shipping, documentation, and settlement of contracts for physical commodities.
Coordinating numerous actors in the commodity supply chain, managing complex logistics, ensuring compliance, and facilitating the timely and secure delivery of goods are all part of the trade execution teams responsibilities.
A key question that leadership and management teams considering trade execution digitalisation must answer is "how ready is the organisation to make major changes?" to established practices and ‘how things are done around here’.
Organisation politics is always an influencing factor in such important decisions - to move from the status quo requires courage and a united vision - as well as practical considerations such as which capabilities are required to execute a transformation and how can the business acquire these.
Once past the internal alignment hurdle and the decision is taken to explore the opportunity and build a business case, the abundance of providers offering functionality to digitalise front, middle, and back-office processes can be daunting.
Business decision makers often wonder how to select the solution that can best fit their current known requirements and be 'future proof' at the same time. They may be tempted to delay a decision in anticipation, and promise, of the next big innovation and, in a fast changing world, have concerns on application redundancy before an investment has paid for itself.
Writing off the costs of legacy IT developments can also be a point of resistance (or emotion..)
When seeking out suitable application solutions it is not uncommon for providers to try and sell ‘the journey’ to the mutually desired end state.
This is not surprising in a relatively young marketplace with different technologies and solutions seeking to establish themselves as winners.
While working closely with a provider in shaping the development priorities and outcomes can be highly beneficial in the long run, it requires the necessary company resources and time to be invested. Small and medium-sized trading companies with limited resources should carefully consider if this course would be right for them. Most SME’s require ‘jam today, not jam tomorrow’ to make investment worthwhile and should be seeking out tools with the functionality to meet today’s needs while retaining the flexibility to build for the future.
What are the opportunities and benefits of digitalisation which trading companies should consider when building the business case for transformation?
Process Automation: Automate manual or paper-based processes, reducing the general admin burden of the organisation with a significant uplift of efficiency and productivity.
Workflow Integration: Integrate workflows across locations and functions, ensuring consistent execution of standard processes and compliance to business procedures and policies.
Network Leverage: Leverage network connectivity between, buyers, sellers, and service providers to improve supply chain insights and streamline process handovers between stakeholders.
Organisation Flexibility: Enhance organisational flexibility by enabling resources to be re-allocated, and the organisation to scale, with speed to meet changing market and seasonal demands.
Increased Competitiveness: Lower the unit cost of execution, increasing margins, and enabling the business to respond with agility to new trading opportunities.
Beyond the operational advantages, digitalisation brings numerous "soft" benefits.
By freeing employees from repetitive tasks and the general administrative burden of data management they can focus more time on business critical and value creating activities. This in turn improves employee engagement and retention. Who wouldn’t be happier spending more time on fulfilling tasks, developing new skills, or simply the opportunity to get out of the office regularly before 7pm!
Management teams are also presented with the timely and accurate data needed to make better and faster decisions. Increased operational visibility and the capability to ‘manage by exception’ can improve control over the business activities, mitigate trade execution risks, and increase the management teams (and shareholders) peace of mind.
Digitalisation can also provide opportunities, should the business seek them, to consider the organisation model and how work is executed. The improved operations visibility and centralised data source(s) allows employees to have access to the same data as 'real time' wherever they sit. Digitalisation is an enabler of the hybrid workplace and remote working models, bringing access to a broader pool of talent. It allows the organisation to build and leverage scale digitally across remote teams of employees, it also is an enabler of successful offshoring and outsourcing models.
What is the general status of trade execution digitalisation today?
The scope and scale of market participants is too diverse for anything other than generalisations. It is generally accepted that, for example, Energy traders may be ahead of Agri-commodity traders in the digitalisation of trade execution processes. There are probable reasons for this but it’s not the subject of this blog.
Organisations which have a level of vertical integration may find more opportunities to digitise their processes compared to "pure" trading intermediaries. Nonetheless, digitalisation poses challenges for companies of all sizes, requiring strategies to overcome them for effective implementation.
Interestingly, however, despite the recent advancements, Excel remains the go-to application for many trading, finance, and trade execution professionals to record, report and manage post-contract execution processes. It’s flexibility to fill functionality and reporting gaps in existing systems and applications is a key draw. While Excel offers flexibility and functionality, it also comes with its pitfalls for trading companies.
Unfortunately, many commodity traders still do not conduct a regular audit of the critical and non-business critical Excel files used throughout their organisations. As a result, they probably underestimate the extent of task duplication, time wasted on the reconciliation of data between various sources, the risk & costs arising from transference (fat finger) errors between Excel and other applications. Consequently, the potential benefits of digitalisation to an organisation may also be underestimated.
Excel is a great tool which meets a current need, however its flexibility and availability on every employees desktop/laptop can lead to it morphing into a ‘shadow’ system of the business CTRM, Accounting and Logistics applications, with duplicate sets of records and reports from non-aligned data sets. Instead of a single source ‘of truth’ there are multiple sources of ‘a truth’ across the organisation. As a business grows, the opportunity cost of continued reliance on Excel to fill the functionality & reporting gaps in existing applications rises.
To conclude, there are great opportunities for trading companies in embracing digitalisation if the initial resistance and internal alignment challenges can be overcome. Those considering a digital transformation in their trade execution activities should take a deep dive to explore and put a value on the opportunity.
While it can be daunting to define the business requirements and seek out the best fit solution amongst all the options in the market, it is also a great opportunity to have valuable discussions, deepen knowledge on this subject and raise organisation awareness of the possibilities that increasing digitalisation can bring.
Part two will follow shortly.
Crest Trade Services have experience in trade execution transformation and digitalisation. To start a conversation on how Crest can support you in your transformation contact us.
Tel: +41 22 710 21 60