European Monetary Union seems certain to arrive as scheduled on Jan. 1, 1999. In the first phase of that transition, as many as 12 European nations will begin denominating their national currency in euros and cede authority over national monetary policy to a central European bank. The final switch to euro coins and notes will come three years later, in 2002.

The giant step to a unified currency will mark a massive change in European culture and commerce and will affect a wide range of business decisions in the region, including those involving site selection and supply-chain management.

For companies active in Europe, the immediate impact of the euro will vary according to the products, trade terms and markets involved. However, any enterprise with an interest in European markets should keep a close watch on EMU. In addition to changing the way companies operate, a single-currency regime promises to open up new business opportunities in the region.

"Can you deal in the euro to the advantage of your business? That's the question," said Nick Jones, research director for the Gartner Group in London.

One of the most important questions associated with the coming change is the effect that a single currency will have on product sourcing and pricing. The consensus is that companies will find it more difficult to maintain large price differentials between EMU member countries because exchange rates will be standardized and pricing, expressed in euros, will become more transparent.

However, setting new prices will not be simply a matter of converting existing national-currency prices to euros, said Sarwar Kashmeri, president of Niche Systems Inc., a New York City-based software consultancy. Since there still will be variations between national markets, such as cultural differences, developing a euro price list will be strategic exercise that must be effective from a marketing as well as a financial standpoint, he said.

A potential problem in some countries is that prices could be forced down, said Jones. With a transparent monetary regime, prices tend to gravitate toward the lowest-priced market. In that situation, he said, "you may have to rationalize your prices because you won't be able to raise them."

While the burden of operating under a dual currency system during EMU phase-in will be difficult for all companies, suppliers of multiple, large customers may find the changeover particularly onerous. They will have to take their cue from their customers, and big companies like Siemens and Daimler-Benz already have announced that they will quickly make the transition.

Daimler recently said it will convert all its systems on the first day of EMU, Jan 1, 1999. From that day onwards, suppliers will have to quote their prices in euros. Siemens will take an equally aggressive stance, though its shift will not begin until the start of its fiscal year on Oct. 1, 1999. Siemens said it will inform its clients and suppliers that only euros will be acceptable after that date.

This can have a cascading effect. According to an article in The Financial Times, it means "that suppliers outside the EMU-zone, for example in the U.K. might find the only way to hedge against the currency risk would be to switch to euros themselves, and pass the currency risk to their own suppliers. As this process continues, the euro is forced deeper and deeper into the supply chain, even in non-participating countries."

At the same time, the monetary transparency that comes with a unified currency will make it easier for companies to compare the costs and benefits of specific suppliers, regardless of their location.

Colin Stringer, head of Euro Transformation Services in the London office of management consultants Cap Gemini, believes that leveling the monetary playing field also will influence site-selection strategies because currency differences will be less of an issue. "It may be possible to produce closer to distribution points and sales points," he said. In addition, removing currency inequalities between countries could make it easier to sell internationally by mail-order or via call centers. Perhaps even more significant, a single-currency regime smoothes the way for cross-country purchasing over the internet.

Shifts in labor costs as result of EMU could have an important bearing on site-selection as well, according to Joe McClelland, director in the Atlanta office of KPMG Peat Marwick. Since countries no longer will be able to manipulate exchange rates to alter the value of imports and exports, there will be a greater emphasis on other competitive factors, such as labor costs and productivity, he said.

McClelland thinks that the distribution of industry in a single-currency Europe may resemble that of the U.S. some four decades ago. "In the '50s a lot of factories in the U.S. came to the South because labor was relatively cheap," he said. McClelland said the same shift could take place in Europe as businesses drift toward such low-cost countries as Spain.

He also predicted that a euro-based business environment could lure more retail companies into the region as credit becomes more available to consumers throughout the continent. "There's a tremendous marketing opportunity here, especially for U.S. retailers."

The advent of the euro also has implications for the way in which international businesses are structured. Dealing in the same currency across countries will make it easier for companies to standardize their operations. "It's going to be easier to put in a standard set of processes and solutions across Europe," said Stringer.

This not only applies to corporate structures but also to external services such as cash management. Stringer pointed out that pan-European cash management will be more accessible in a single-currency market because the need for expertise in local currencies largely will disappear. Indeed, big U.S. banks already are positioning them-selves to offer such international services to companies.

Moreover, banks could benefit from the reduced currency risks that EMU promises, said Jones. A single currency removes much of the need to hedge against exchange-rate fluctuations in the region. "One of the interesting questions is, will these companies need a treasury department?" he said. "They may want to outsource the treasury to a bank on a pan-European basis."

To take advantage of these opportunities, however, requires an integrated approach that involves all relevant corporate disciplines. As a first step, Kashmeri recommends assembling a corporate task force where all departments are represented and explaining to the group the EMU process. "The departments are then asked to report back to find out which ones may be superfluous to the program," because they are not directly affected, he said.

Jones agreed that the first step should be an awareness exercise. This means, he said, relating the importance of the issues to both operations and information-technology departments. "Secondly," said Jones, "you have to do an IT impact analysis."

"We tend to start off with something small, like a mobilization workshop," said Stringer. A major hurdle Gemini has experienced in its work with large financial institutions, he said, is convincing senior management that in addition to their European systems, their systems in the U.S. need to be changed as well.

"They had positions in the States in Deutsche marks, francs, etc., and they suddenly realized that it's not the countries that are changing but the currencies," Stringer noted. He cautioned corporations in other sectors against falling into the same trap.

However, many businesses already are pumping millions of dollars into overhauling the IT systems that will enable them to transact deals in euros. A Gartner Group study estimates that corporate IT conversions costs in Europe will exceed $100bn. "That's just the cost of changing the programs," Jones said.

Cost estimates are not as precise in North America where the EMU issue has attracted less attention, but analysis say that $20bn to $25bn is a reasonable estimate for U.S. and Canadian companies to convert to euro-based trading.

EMU will affect IT systems that govern accounting, sales and purchase-order processing, inventory control, pricing, and payroll processing, said Dennis Keeling, chief executive of the Business and Software Developers Association (BASDA) in Beaconsfield, U.K.

The European Commission cautions that companies involved in European markets will have to modify all computer programs, files, databases and reports containing references to financial information.

BASDA, which represents more than 200 of the world's leading application software developers, started a monetary union working group last year to pull together the IT requirements. Among its 25-plus members are such market leaders as SAP, Oracle, J.D. Edwards and PeopleSoft.

As an example of the practical changes that companies must face, Niche Systems' Kashmeri points to the complexities of doing business during the euro's three-year transition period.

The first group of European Union countries to join the EMU system is scheduled to be announced in May 1998. Acceptance of a single currency begins with the advent of the euro on Jan. 1, 1999, and full adoption is supposed to be complete by Jan. 1, 2002. After Jan. 1, 1999, there will be no direct cross-currency exchange rates between EMU member countries or between their currencies and non-EMU member currencies such as the U.S. dollar. The only official exchange rates published will be euro rates.

"Currency conversions will have to be carried out by using triangulation," said Kashmeri. For example, converting Deutsche marks to U.S. dollars will involve converting the marks to euros, then the euros to U.S. dollars. This relatively simple calculations has implications for numerous computer and bookkeeping systems, Kashmeri said.

Software vendors are seizing on the considerable business opportunities the euro presents by developing EMU-compliant products. The software will start to emerge next year, said Keeling, in many cases later than the Year 2000 upgrade affecting most systems.

"Some developers are offering it as an upgrade to existing systems like SAP," said Keeling. Others, such as PeopleSoft and Oracle, will make compliance available through new systems. He advises companies to contact their application-software suppliers to determine when the upgrades will be available and what type of conversion process will be required.

SAP claims that its R/2 and R/3 and R/3 systems already are well prepared for the transition phase since they can accommodate the currency conversions that will be part of transactions during this period. SAP plans to provide conversions tools that automatically convert the local currency to the euro.

Swedish software vendor Industri-Matematik International (IMI) has announced that its System ESS software supporters the euro. IMI specializes in supply-chain management processes "from order to cash, "said vice president of worldwide marketing, Henry Bruce. The ESS package can store up to four currencies, Bruce said, a capability IMI built into the product some time ago.

To help clients understand the issues, Cap Gemini has created a board game called "Euroka!" In the game, executives learn how they can win and lose in the monetary union stakes by throwing dice and choosing strategies.

The lessons learned from EMU also are part of a broader trend toward greater convergence between supply-chain and treasury functions. Tim Van Mieghem, a partner with Chicago-based consulting firm ProAction LLC, said that supply-chain managers need to be aware of exchange rate risks as never before because of the complexity of global distribution patterns.

As products and components are sourced, manufactured and distributed in many countries, keeping track of the currencies involved has become more complicated. Consequently, supply-chain managers who are not schooled in currency risk management methods can pay a high premium in today's global marketplace, warned Van Mieghem.

IMI's Bruce agrees that currency issues are becoming a more important part of supply-chain management, and he believes that over the next few years these treasury-related functions will emerge as "the next variable that has an impact on the company's bottom-line performance." Shorter product cycle-times make business more sensitive to currency changes, he said.

Also, he added, aligning the movement of cash with the movement of product will become easier as logistics and distribution managers become more sophisticated at the regional level.

Even so, a lack of communication between purchasing, distribution and treasury is endemic in U.S. industry, said Van Mieghem. In today's global economy it is imperative that companies trading internationally tackle this disconnect, he added. "And there's only one way that I know how to achieve this - by getting high - level executives involved."