Trading on the edge

In their drive to take Houston-based Enron Corp. from a sleepy, regional gas pipeline company to a billion-dollar energy provider, Enron executives knew they needed the best in technology from the best technologists.

So the execs relentlessly pursued IT fixes that would help the company reach the goal of being a global energy market maker. And they consistently sought new solutions to push its earnings, former workers and investigators now say.

"Enron had ambitions to be the next Exxon. [The company's] focus was always on deal-making and negotiations. But everyone in the business knows you've got to complete the transaction," says Gary Gannon, a former director of research marketing administration at Enron Gas Transmission and now CTO of SourceXL, an e-commerce marketplace in Houston.

These ambitions eventually led to the company's downfall -- with a historic US$16 billion bankruptcy, a slew of federal and state investigations, and shareholder wealth gone while the company's top executives withdrew millions from the stock sales.

And in this lies a lesson for CTOs. Good technology can't overcome unsound financial practices; CTOs need to look closely at all business operations.

Technology follows business

The company's most prized initiative, EnronOnline, launched in October 1999, was earmarked as the energy market's leading e-commerce exchange as Enron tried to dominate markets by buying and selling electricity and bandwidth commodities.

The CTOs of companies brought in to bolster its technology position, including Mark Torrance of Knowmadic and Anthony Huang of RextonMedia, say Enron execs relentlessly looked for solutions that could keep up the frantic pace of the push for ever more earnings. "At Enron, it was about how to generate profits using technology," Huang remembers.

But the profits weren't there. Enron's boast that it could actually make an energy market was not possible, experts now say. But the belief that Enron could buy and sell any amount of energy in real time while avoiding risk flew in the face of economic common sense and ultimately helped create its downfall, investigators say.

"It was about leveraging more of their network and wireless applications to generate more deals, which equaled more money," Huang says. "Who knew about the accounting scams?"

"The bottom line is there are some mysteries for EnronOnline that we are still trying to puzzle through," says Robert McCullough, an energy consultant and investigator who has been an expert witness in the complex ongoing Enron investigations, including those by the U.S. Senate, the U.S. House of Representatives, the U.S. Department of Justice, and the California Attorney General's office. "My sense is the claims of [success for] EnronOnline might have been exaggerated."

Few outside Enron's CFO's office knew. For an IT executive to uncover massive financial fraud it would have taken serious investigation or extreme luck. But CTOs in general still need to be more active players with the CFO and other CxOs, say some.

"CTOs should work to be 'in the loop' with a 'business' seat at the management table, not just focusing on technical responsibility," says Torrance. "Knowing enough about the business and financial side of how your company operates to recognize issues like those at Enron should be a normal part of the CTO's responsibility. A big part of this education involves staying on top of trends in both technology and business."

When technology is no savior

Using EnronOnline, Enron traders acted as middlemen, extending traditional concepts of marketplace operations by entering contracts with both buyers and sellers, setting the prices and taking responsibility for risk.

By July 2000, Enron was boasting that EnronOnline had conducted transactions worth more than $90 billion in that year alone. Enron said it would spend hundreds of millions of dollars on technology infrastructure to "leverage its wholesale market expertise to publish real-time prices for power, natural gas, coal, weather products, liquids, petrochemicals, pulp and paper, emission credits, and other commodities," according to a company statement.

Enron had begun building an in-house trading platform in the mid-1990s and developed its own Internet-based trading software. As EnronOnline, the marketplace deployed Tibco's portal platform, used in-house developers, and sought out new technology wherever possible.

One company with such technology was Santa Clara, Calif.-based Knowmadic, which offered rapid integration software development tools to standardize and integrate applications and to provide access to real-time market data. Enron energy traders using Knowmadic's software suite could tap into relevant information sources such as any state's independent power system operators, the Federal Energy Regulatory Commission, or weather information from across the country. "Enron used a variety of tools for getting data and it used Knowmadic to standardize on it," says Mark Torrance, Knomadic's CTO.

Knowmadic was delivered in January 2001, as Enron's commodity trading was reaching a fevered pitch. "I visited Enron in August 2000, right before the delivery of Knowmadic," Torrance says. "The people there were intense -- definitely a lot of people with a lot of arrogance. They thought they could do no wrong."

Enron also brought in RextonMedia, in Houston, to develop wireless applications to create a mobile workforce and give traders real-time trading capability, says RextonMedia CEO and CTO Huang. Huang says Enron had more than 20 business units, each with a separate budget for IT development and each pushing to maximize profits.

"They were good at buying technology to build out their infrastructure," Huang says. "They also had the best IT people working for them. I give the IT people A-plus because they spent the money. It was about how to generate money using technology."

And therein lies the rub. Enterprise CTOs need to continue to be vigilant to ensure the technology they deploy is used appropriately and cost-effectively throughout the enterprise, says Torrance. "CTOs should select technology that balances the needs for centralized control, procurement, and economies of scale in implementation against the needs to empower individual business units and business people with flexibility and rapid response to get their jobs done."

Flying too high

But the essential idea of controlling such a vast market as energy is fundamentally flawed, says Enron investigator McCullough.

"The question is, 'How do you balance open transactions with very tight risk management?' " asks McCullough. "If you say you want to buy $500 million worth of energy, Enron said they would back it but at the same time keeping risk to a low level. Something's got to give."

Enron's CTO, Philippe Bibi, left Enron in 2001 to join Boston-based Putnam Investments, and declined through a representative to comment for this article. UBS Warburg, which now uses EnronOnline technology, did not respond to a request for an interview.

Certainly, EnronOnline and its trading sites set the pace for commodity marketplaces in terms of technology. "I appreciate them and applaud them for their technology. For a short time, Enron was the only game in town. For two or three years, Enron was the poster child for energy companies," says John Gonsalves, who followed the Enron story as vice president of enterprise solution practices at Boston-based Adventis, a strategy and management consulting company. "Enron's demise was not related to its technology. It was related to accounting and financial practices, the off-the-book numbers and things of that nature."

Torrance agrees and adds a cautionary note. "The CTO's view shouldn't end [with technology concerns]. They should also take the initiative to ensure that financial and sales management systems incorporate appropriate audit trails, checks, and balances to ensure that the enterprise can operate, and measure that it is operating in a fiscally responsible manner."

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More about Department of JusticeEnronFederal Energy Regulatory CommissionPutnam InvestmentsTibcoUBS Warburg

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