Making XML Work in Business
by Alan Kotok |

Do the Math

Tony Coates of Reuters described how the financial services industry benefits from FpML. The industry had already developed standard contracts for many of its products, what it calls vanilla contracts. With FpML, parties to trades can automate the parts of the contracts with which they had agreement, thus reserving human intervention for negotiating areas of disagreement. According to Coates, using FpML will help reduce the current three to five-day preparation time for derivatives down to one day by 2005, the target for the industry. And in an industry where timing plays such a critical role, this increase in turnaround time will payoff immediately for all participants.

One of the companies implementing FpML is SwapsWire, a network of 23 investment banks for the electronic trading and confirmation of financial derivatives. Guy Gurden of SwapsWire said the first product support by the company is interest rate swaps (thus its name), although it plans to support other kinds of derivatives in the future. Swaps are an agreement to exchange future cash flows. For example, one party makes payments based on fixed rates, while another party makes payments based on floating rates. These agreements can run for as long as 30 years, although three to five years is the normal period.

After the agreements are drawn up, they need to be confirmed. Today for confirmation, the trading partners exchange documents by fax. Either they can take one document and fax it back and forth, or each party draws up a document that gets exchanged and discussed. Even the simplest document can run several pages, so the process is time consuming and error prone.

Gurden laid out a few metrics to show the potential impact of FpML. Today, the average weekly derivative volume of a typical financial institution is 380 trades. Each support staff person can handle about 9 trades per week, which means the average institution needs some 42 staff people to process the trades. Each support staff person has an average loaded salary of $87,000. FpML can increase the throughput for each of the staff people and reduce the negotiation load on each of the analysts. As they say on Wall Street (and elsewhere), do the math.

But SwapsWire will likely have its greatest impact on the improvement of the business processes used in swaps. Today, confirmation takes place after the parties agree to contractual terms. The traders match the provisions of each document, and once they are all in agreement, then the contract is confirmed. By bringing the traders on the SwapsWire network, the parties can agree to the terms of the contract during the trading process, thus cutting out much of the time needed for confirmation.

Reporting Results

Another session in the track featured the Extensible Business Reporting Language (XBRL). Zach Coffin of KPMG described how XBRL could well become the catalyst for an entirely new way of reporting business performance. XBRL started as an accounting vocabulary, but now encompasses most of the ways a company reports its performance or activities to investors, government agencies, or the public.

As an example of the need for XBRL, Coffin described the potential benefit for one of KPMGs banking clients. That bank, according to Coffin, is one of the best in the world at processing loan applications, but it still takes nearly two days on average to turn around each application. An analysis of the banks processes showed its staff spent 90 percent of this time on data discovery and paper-shuffling mechanics, and only 10 percent on real decision making. Better management of the information from credit customers, much of it tied to business performance, could reduce time spent on loan applications and increase the throughput of loans significantly.

Coffin said XBRL designed its vocabulary using the traditional supply chain as a model, with each piece of information like a bar-coded and uniquely identified inventory item. Using this model, XBRL aims to better manage the flow of information through the business reporting supply chain, from internal business operations, to management reporting, to external public reporting, and finally to investment and lending analysis. Examples of current uses for XBRL include accounting, financial reports, loans, mutual funds, and economic indicators. The XBRL organization is working on regulatory filings, tax filings, contractor ratings, and performance-related press releases.

Extending the EDI Experience

Joe Smolic, an independent consultant, described how the book publishing industry plans to use XML to extend its previous work with electronic data interchange (EDI) beyond the few large companies to the much larger universe of smaller companies who cannot afford the high cost of EDI.

Smolic said book publishers found that to buy the paper and services needed to manufacture books, hard copy purchase orders cost from $65 to $85 each, while electronic purchase orders using EDI cost $1 to $4 each. He added that electronic transactions will reduce errors in the complex transactions with manufacturers and paper suppliers, as well as reduce the time spent on paperwork.

Less tangible, but still meaningful benefits include better management of the production process from more accurate and timely information on the status of production jobs, paper usage, ship notices, and invoices tied to the individual print jobs. Smolic added that the use of XML can also encourage new business opportunities, such as opening up new channels to the end-consumer, including direct sales from the publisher, on-demand book printing (no more out-of-print books), personalized book production, and selling books incrementally, chapter by chapter.

While these benefits to businesses, including small ones, can be significant, for the most part many of the systems discussed at XML 2001 are still being planned or projected. Several conference sessions and tutorials addressed Electronic Business XML (ebXML) and web services as infrastructures that can deliver these benefits to smaller businesses. One of ebXMLs main goals is to make e-business possible for smaller businesses, and both Coates and Smolic mentioned ebXML as a framework for their respective industry vocabularies.

The challenge for XML is to make e-business real for smaller businesses. Not only can smaller companies and organizations benefit, but XML vendors can start showing the value that they have promised since the beginning.

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