Global Trade Regulatory Software: Vendor Obstacles and User Recommendations

The Merger Rationale

At first glance, the acquisition of Vastera (NASDAQ: VAST) by JPMorgan Chase, N.A. (NYSE: JPM) might appear odd. The former is a public, global trade solutions provider and the latter is one of the leading global providers of financial services. However, JPMorgan's encroachment into the global trade management (GTM) software market illustrates that finance is as valuable as the actual movement of goods in the flow of goods, information, and funds.

The ability to finance this multi-echelon inventory, can, for example have significant implications on cash flow, taxes, and other balance sheet items, which will ultimately draw the attention of chief financial officers (CFOs) and investors. Therefore banks, financial, and insurance institutions are in the process of evolving from their traditional role of providing basic financial trade services to enabling value-added global trade solutions that help enterprises tap into global markets. With a global presence, global client bases, and a deep knowledge of global trade practices, many of these institutions are uniquely positioned to serve the role of global trade enabler for client enterprises.

The challenge for financial institutions is to evolve from their traditional practices and mindset, and to take advantage of new technologies and JPMorgan Chase seems to be leading the way. Although JPMorgan Chase deserves commendation for its out-of-the-box thinking, other companies also offer this service, such as KPMG LLP Customs Info or UPS with its UPS Capital group and UPS Supply Chain Solutions group (which acquired Fritz several years ago and Menlo Forwarding over a year ago).

This is Part Three of a three-part note.

Part One detailed the merger.

Part Two discussed Vastera.

Vastera Challenges

What challenges lie ahead of Vastera? Vastera has had a number of difficulties. For example, despite growing revenues, it has had a string of losses over recent years that have continued. However, its $45.8 million (USD) loss for 2001 came down to $11.4 (USD) during 2002. Subsequent, losses in 2003 and 2004 were also quite moderate. This combined with $55 million in cash means Vastera has not been bleeding red ink lately. Nonetheless, investors are no longer willing to reward any firm for achieving its growth and expansion targets without stable profits. There has not been enough money for Vastera to expand as fast as its customers need and want it to. Additionally, Vastera intends to substantially expand current international operations and enter new markets. This will require significant management attention and financial resources to successfully translate software products, to develop additional compliance expertise relating to regulatory agencies, and to develop direct and indirect international sales and support channels.

Also, the costs of maintaining Managed Services has increased lately (when expressed as a percentage of Managed Services revenue) due to new investments in personnel and in the Managed Services platform, and because of geographic expansion. Like most investments in new infrastructure, the initial cost is high and only over the longer term, can the vendor expect to realize productivity improvements. This trend will continue as Vastera enters large, multi-year Managed Services agreements in new industry sectors and regions. The long-term success of the Managed Services is predicated on Vastera's ability to leverage technology and processes to lower the per transaction costs. Further, the success of the Global Trade Management solutions depends on the vendor's ability to obtain or access the complex foreign government regulations governing imports and exports . Also unfortunately, for relatively small companies like Vastera, giant global corporations prefer doing business with other giant global corporations—the GTM enterprise applications business requires scale to achieve profitability.

Further problematizing Vastera's position is that its product and services are still new. Moreover, the return on investment (ROI) of compliance can be a tough sell, because it might be hard to put a price on the fines one did not have to pay. While compliancy is crucial to an import/export company, Vastera's offerings are generally not core to the prospective business. Thus the decision to purchase Vastera's services is predicated on expected cost savings than on enhanced compliance. While many customers use Vastera to make better sourcing decisions by calculating the actual landed cost of a potential purchase (the cost of goods plus applicable taxes and tariffs) or by reducing product costs by using trade preference programs like North America Free Trade Agreement (NAFTA), Israeli Free Trade Agreement, Generalized System of Preferences (GSP), Southern Common Market (MERCOSUR), the benefits of compliance are difficult to estimate.

Also, due to the inherent complexities associated with global trade, corresponding software and services solutions are very complex. Many prospects, prior to the vendor's assessments, are unaware of the regulatory compliance issues they face. Yet, while members of the finance, purchasing, customs, and legal departments typically view GTM solutions as important, they do not see them as core. Moreover, because the benefits of compliance solutions are seen only over a long period of time, lengthy assessments and discussions must occur to prove the solution's worth to the client.

To be fair, the hard cash payback of improved compliance may come in two forms. The first is duty drawback and reduced inter-country duty costs, given that claiming it correctly is a complex business, and many manufacturers find it easier to leave the money on the table. The second is supply chains that work better. The right information is put in the right hands and at the right time because there is assurance that goods will show up on time, resulting in trimmed inventory buffers. In the short term, some money can be saved, while in the longer term, both activities could become self-financing. The trouble, however, lies in the lack of the potential customers' awareness and the constant need for market education.

Nonetheless, securing new clients has not been an easy feat for Vastera and the process often takes more than a year. Keeping customers can also be difficult. For example, auto parts maker Visteon recently terminated its contract. Because the vendor's revenues are concentrated among a few customers, its business success depends on maintaining good relationships with these customers. Yet these companies may outsource some of their operations, thereby reducing their transactions volume with Vastera.

Yet a silver lining has emerged in the clouds above Vastera: it now has the backing of a JPMorgan Chase, a company with $1.1 trillion (USD) in assets. This will likely be a symbiotic relationship. Vastera will be able to leverage the reputation and resources of JPMorgan to secure the giant corporations and balance the amount of time spent validating solutions and building customer relationships. Likewise, JPMorgan Chase can move beyond the standard financial aspects of global trade. In addition to letters of credit and trade financing, it can offer more comprehensive services and extend into more aspects of the physical supply chain. The integration of Vastera's management of the physical supply chain and JPMorgan Chase's management of the fiscal supply chain should be fairly seamless as the two parties have had an alliance since 2003. The two channels are parallel and combining them should simplify the process and reduce costs.

One should also note, however, that this acquisition is not going to compensate for what Vastera has always lacked—the technology to automate and manage global logistics tracking, goods movement, and visibility of the physical supply chain. It has focused more on the rules and regulations imposed by the many governmental bodies required in cross-border trade, such as product harmonization coding, customs clearance, duties, tariffs and taxes. JPMorgan Chase will thus have to continue its pursuit of solutions to round out a complete GTM product portfolio. It will then reach a "breeze" to navigate international trading channels to place orders, send and receive shipments and settle bills anywhere in the world.

Competitive Landscape

The market where all GTM vendors operates is characterized by early adopters. The market is competitive, rapidly evolving, and highly fragmented. One should only expect the intensity of competition to increase in the future. The competition might come from in-house development efforts, consulting companies, other software companies, logistic companies, customs brokers, forwarders, and third-party development efforts.

In addition to the changing role of banks, third-part logistics (3PL) providers are focused predominantly on managing shipment booking through the proof of delivery process and the management of logistics costs. As user companies continue to embrace the value of broader GTM solutions, logistics providers will be often looked upon to provide leadership and add more value to the entire order lifecycle including purchase order management, total landed cost modeling, insurance and claims, import/export compliance, security regulations, and seamless integration to invoice reconciliation and trade financing systems.

Like other involved parties in global trade, 3PL providers must still mitigate their risks of providing correct and timely documentation relative to transportation, customs, and settlement, such as letters of credit. They will also be liable for trade compliance issues such as denied parties and anti-boycott and will need a corporate wide solution to protect them from liability. Thus, given currently complementary nature of their offerings, TradeBeam would prefer to partner with banks, 3PL providers, or even some logistics management vendors like G-Log or Xporta. However these entities soon may decide to grab a bigger slice of the GTM pie via acquisitions l JPMorgan Chase of Vastera or through in-house developments and competency building.

The number of standalone GTM vendors is quickly dwindling, because of mergers of SSA Global and Arzoon (see SSA Global Forms a Strategic Unit with an Extended-ERP Savvy), TradeBeam and Open Harbor, Qiva, etc., and Kewill and TradePoint (which had previously acquired ClearCross) and one should expect the merging of GTM software technology and managed services to continue. These acquisitions may also indicate accelerated restructuring in the logistics services market is inevitable, given a plethora of point solution providers that specialize in narrow areas, from land cost calculation, visibility, collaboration, export compliance, trading document generation, hazardous material handling, to more complete transportation management capabilities.

There are, however, a number of remaining players in several niches—just enough to muddle the message nibble at the potential revenues of full-fledged GTM players. For example, we could talk about the remaining ITL players like NextLinx, Precision Software, Intermart, Nistevo, MercuryGate, Xporta, Tarrific.com, OCR Services, Importers Software Services, MSR Customs Corp., Questaweb, GT Nexus, and LOG-NET, global settlement players like Bolero.net, TradeCard and S1, and a number of vendors that arguably more specialize in SCEM, visibility and shipment tracking like Viwelocity, Descartes Systems, Management Dynamics (through recently acquired BridgePoint), Timogen, etc. But, none of these vendors handles all the requirements of automating global e-business, and some of these vendors have apparently already merged with or acquired other companies to provide more complete offerings.

Still, some companies that are comfortable with using freight forwarders to handle the details of cross-border movement and which may only want visibility of the critical events, like departed origin, estimated arrival date & time, arrived at customs, cleared customs, etc., may be served well by SCM vendors and stand-alone SCEM and visibility solutions. Namely, both supply chain planning (SCP) vendors like i2 Technologies, Manugistics or Logility and supply chain execution (SCE) vendors like Manhattan Associates, RedPrairie, HighJump and Provia offer visibility and trading partner collaboration components to provide transparent inventory, orders, and shipments across the entire trading network. These systems do not typically have the capability of sharing demand forecasts with suppliers, but, in addition to such products like i-Supply, there are players like OneNetwork, weSupply, RiverOne or Valdero.

Furthermore, to build a complete and fully-functional GTM system, any user enterprise will have to integrate it with transportation management systems (TMS), ERP, SRM, partner relationship management (PRM), and other adjacent enterprise applications. We might be then talking about a full-fledged logistics resources management (LRM) system that would provide total "command and control" over the entire spectrum of global logistics activities. This would include transportation procurement contracting, shipment planning and optimization, load tendering, trade compliance, customs reporting, shipment and inventory visibility, warehousing, reverse logistics. Additionally, these would be conducted over the Internet, so that all internal managers and trading partners can access information. But, at this stage, there is no such thing as a native LRM application that covers all these bases.

For example, in the landed cost field providers like Vastera, Kewill, TradeBeam and NextLinx are primarily subscription consultants and information brokers who provide up to date, nation-by-nation trade information on complex and changing "terms, rules and conditions" that dictate duties, trade agreements and transfer of ownership. However, Xporta brings something new to the table—a decision support engine that can combine total landed cost with the customer's sourcing inputs to deliver the total cost of ownership (TCO) rationale for multiple plant and supplier scenarios. The vendor has an optimization tool that can adjust a large number of variables and what-if scenarios for every situation, and it fully understands the user enterprise's best alternatives while considering TCO.

User Recommendations

These moves of major GTM players indicate the need of the software category that handles incomprehensible regulations, complex supply chains, inevitable disruptions, such as weather or geopolitical events, etc. As enterprises move production or continue to source from remote places worldwide to supposedly lower item costs, the supply chain will become more complex. The result is bloated, multi-echelon inventories or lower customers service levels.

Companies that need to manage intricate details of their goods movements across borders, such as trade financing, regulatory compliance, accompanying detailed documents, HTS coding, multi-modal carrier handling, brokers management, etc., might want to look for a full-fledged GTM system. Generally, to know true total landed costs, ensure compliance with customs regulations and denied parties restrictions, and properly record the relationship between buyer and seller, source of supply and product related restrictions, a full-fledged ITL/GTM system should be able to track all the activities and incremental costs as the shipment is processed from point of origin to final point of receipt.

However, while this technology (like most other IT tools, for that matter) can provide critical assistance, it will not replace import and export savvies, and will not eliminate the need for freight forwarders and customs brokers. Now that the US laws shift responsibility and risk related to customs compliance to the importer, human experience and expertise may even become more important than ever, to manage financial decisions or to negotiate cultural issues. It is not just a matter of diligently inputting data—everyone has to be preemptive in managing international trade.

Once the GTM/ITL software is fully implemented, a dedicated staff will typically have to meticulously update and manage content and programs. Even more importantly, trade experts will be needed to interpret reports and respond appropriately. With TradeSphere, however, automatic content updates are sent directly to the customer, so that end users will always have the latest changes and updates on hand. GTM software typically provides an indication whether there is going to be an issue. Users will have to follow up on those alerts by researching other sources, either electronically or in person. The software alone will never completely prevent logistics delays and disruptions either. Optimized processes, procedures, and training are needed, but even then many problems caused by the factors that are beyond anyone's control may arise.

In any case, manufacturers also need to make sure their outsourcing providers have the necessary global trade and logistics knowledge, skills and technology. they might want to audit their outsourcers to ensure the documentation is being done properly. In order to thoroughly monitor customer transactions, new account openings, and relationships and timing between account transactions, large corporations must ensure scalable solutions that are capable of handling high volumes of transactions.

Customs duties and tariffs, and associated rates of exchange and transportation costs should be available to accurately calculate total cost of goods. This, however, will require a data model and integration at the product and item level and between the ITL system and the ERP or order management, warehouse management, transportation, and other pertinent enterprise systems. While the integrated GTM features by ERP providers will have the logical advantage of unified data, the usually trade-off is that the software will provide only the procedural framework. As a result, the user must build in business rules and regulatory content.

The complexity and specialization of the GTM space makes it hard for any aspiring vendor to handle all the requirements of automating global e-business. All the aforementioned issues and requirements should be taken into account during an ITL/GTM system selection, either as a stand-alone or within a broader SCM framework. Therefore, owing to a still fragmented market, one should keep in mind that each GTM package will have its own unique combination of features and components and will require varying degrees of data input and updating by users.