Treasury Today Country Profiles in association with Citi

Treasury models – an overview

Multinational organisations are under pressure to minimise costs, improve visibility and achieve tighter control over their financial responsibilities. This drive for greater efficiency has prompted many chief financial officers and corporate treasurers to look closely at activities across the group with a view to developing a more effective framework for treasury operations. In this article, we discuss model types and the role of group treasury within each option, and take a look at some of the main issues that should be considered when implementing structural and process changes.

The importance of an efficient treasury model

Treasury has a pivotal role in the financial welfare of a business and contributes significantly to the success of an organisation. A clearly defined and efficient treasury model is important, therefore, for several reasons including:

  1. A well-organised model ensures treasury decisions are implemented promptly. These decisions directly impact company liquidity. Liquidity reflects the sustainability and stability of the business, and therefore the financial and credit standing of the corporation within the marketplace.

  2. Companies increasingly operate in a highly competitive, international environment. A strong treasury framework helps to maintain competitive viability and ensures financial and business opportunities are maximised.

  3. A sound treasury model facilitates proper control and the protection of company assets. In so doing, it helps to demonstrate the use of best practice and the presence of adequate internal controls and procedures in compliance with regulations such as the US Sarbanes-Oxley Act.

Broadly speaking, treasury frameworks may be styled along one of the following five example model types.

Model types

1. Decentralised

In the decentralised treasury model, policy-making, decisions and treasury activities remain with each subsidiary (operating company or business unit). A small team of treasury staff may be maintained at group level to act in an advisory capacity. In smaller organisations their roles may be combined with other responsibilities such as financial accounting. Local staff may also find themselves combining treasury with other duties.

  • Locally based treasury staff may achieve a closer understanding of the financial market and day-to-day operational issues, resulting in greater precision and speed when determining the financial needs of the subsidiary’s business.

  • Stronger working relationships are established and maintained with local banking partners.

  • Treasury decisions, processes and other activities are duplicated across the organisation.

  • Lost opportunity to leverage economies of scale advantages (eg bulk transactions, better bank rates).

  • Balances cannot be offset across the organisation unless suitable liquidity management products are in place such as cash concentration and cash pooling, and the use of such products may be restricted in some countries or markets.

2. Partially centralised

Companies may choose to set up a partially centralised model in order to improve efficiencies in some areas of the treasury function. In these situations, group treasury will usually define treasury policy and may give advice to, or even instruct, individual subsidiaries. However, the subsidiaries retain responsibility for executing the deals themselves via their local banking partners. Back-office operations may be undertaken at local level, or they may be centralised, delivering more control while enabling subsidiaries to maintain a degree of autonomy within the front-office function.

  • Some uniformity in treasury policies and procedures across the group.

  • Key decisions are made at group level based on a global view of cash flow and objectives.

  • Treasury expertise is also retained locally, encouraging interest and support for group objectives while enabling strong relationships with local banks to be maintained.

  • The economies of scale advantages offered by consolidating front-office transactions are still not achieved – and there may be restricted use of liquidity management products (as outlined for the decentralised model above).

  • Group treasury is accountable for front-office operations at the local level without having proper oversight and control over its actions.

3. Centralised

In the centralised treasury model, policy-making, decisions and most, if not all, activities are undertaken by a global treasury or regional centres on behalf of subsidiaries across a specific region or across the group. These may offer a 24 hour service to ensure round –the-clock coverage for all subsidiaries.

  • Economies of scale advantages are achieved as treasury has complete control over all investment, financing and hedging operations.

  • The number of bank partners and bank accounts are streamlined across regions, simplifying cash flows and enabling an improved focus on the regional or global bank relationships that remain.

  • Policies, procedures and processes are standardised across treasury operations.

  • Group treasury has greater control across the organisation, with improved cash flow transparency and easier and quicker access to accurate data.

  • Group treasury can operate as a profit centre.

  • Lack of local treasury and banking expertise from professionals who could possibly respond more quickly to changes in the market and specific subsidiary cash flow requirements.

  • Loss of responsibility may lead to disinterest or even non-co-operation at local level.

4. In-house bank

An in-house bank acts as the main provider of bank services to all group subsidiaries. This may be established on a global scale or on a regional basis.

Instead of using local, external bank partners, each subsidiary channels its cash flows through bank accounts held at the in-house bank. The bank then nets out the resultant debit and credit balances across the group. The in-house bank may also use a netting process for foreign exchange as well as for the payable and receivable amounts owed between the subsidiaries. In addition, the in-house bank may organise inter-subsidiary lending.

When all the internal transactions have taken place, any remaining investment, financing and hedging needs are fulfilled by external banks, chosen by the in-house bank from its preferred group of relationships.

Centralised treasuries may operate an in-house bank within their overall model. However, an in-house bank can also be used to enhance operations whilst keeping a decentralised structure.

  • Economies of scale advantages are achieved.

  • The number of bank partners and bank accounts is streamlined.

  • More competitive rates are offered to subsidiary borrowers and lenders, compared to those that may be obtained locally.

  • Group treasury has greater control, improved transparency and access to more accurate data.

  • Group treasury can operate the in-house bank as a profit centre.

  • Group treasury must be confident each subsidiary will submit all its transactions via the in-house bank.

  • Loss of interaction between local subsidiaries and local banks may reduce local competence regarding treasury and banking issues.

5. Outsourced

Full treasury services or specific treasury functions, for example, cash management or foreign exchange trading, can be outsourced to third parties such as banks and treasury management companies. This normally requires some degree of centralisation before the chosen functions can be properly outsourced.

  • The expertise of these companies can be leveraged, reducing the size of internal treasuries and the need to recruit and train treasury staff.

  • Outsourcers can more readily invest in the sophisticated treasury technology required to keep pace with latest developments – corporate treasuries no longer need to compete with other departments for a share of the technology investment budget.

  • It takes time for outsource providers to understand a corporate’s specific requirements and objectives.

  • Potential conflict of interest with the outsourcer’s own business needs and objectives, ie there may be restrictions on how certain functions can be conducted and processes operated.

Note that it is possible to maintain an in-house treasury but outsource the systems infrastructure to Application Service Providers (ASPs).

Other model components

Payment (and collection) factories

A payment factory undertakes the accounts payable – and often the accounts receivable – functions on behalf of the subsidiaries, thereby streamlining and centralising the control and reconciliation of payment and receipt processing activities, and keeping cross-border transaction processing to a minimum. This also means that bank information relating to these activities is centralised, enabling treasury to obtain it from a single data feed rather than depending on individual subsidiary reporting. The payment factory is often operated with an in-house bank or it may be contained within a shared service centre.

Shared service centres

Shared service centres (SSCs) operate as separate entities offering a full range of services to a group’s subsidiaries, typically within a particular region. The use of SSCs is often categorised as in-house ‘outsourcing’. The services covered are usually those that may be universal in nature across the group, such as procurement processes, distribution management and financial accounting (such as accounts payable and accounts receivable). A treasury centre may be operated in conjunction with an SSC.

Treasury model issues

Any decision to embark on a fundamental or major change to structures and processes requires proper research, co-ordination and control. Although by no means exhaustive, the following offers a brief list of issues that should be taken into consideration when selecting and developing a suitable treasury model.

  • Executive support.

    Gain full support from executive management and board level to ensure the required ‘weight’ and resources are available to achieve treasury objectives.

  • Corporate culture.

    Consider existing operational and business structures as well as corporate policies, strategies and any forthcoming merger and acquisition plans that are likely to dictate the extent of the project and the ultimate model chosen.

  • Legal, regulatory and tax issues.

    Investigate the ramifications of changing business structures and establishing centres in preferred regional locations.

  • Costs and cost savings.

    Each model has its own financial implications in terms of the initial expenditure required to set it up and the ongoing costs as well as any potential saving – weigh these against the benefits and drawbacks each model may offer.

  • Cost centre or profit centre.

    Decide how (and whether) group treasury wishes to operate from a profit generating perspective, how (and if) profits should be shared with subsidiaries, and any charges to be made to subsidiaries for services provided.

  • Internal partners.

    Manage the expectations and concerns of employees affected by the changes. Employee support, trust and understanding is required at group and subsidiary levels to help achieve a successful transition, therefore good communication channels are important.

  • External relationships.

    Manage the bank and vendor relationships impacted by the changes; negotiate advantageous terms and conditions with relationships retained and handle sensitively those who have lost business.

  • Technology.

    Assess the current systems in use and the steps required to progress to the desired system infrastructure, taking into account the disparity of legacy systems and the ability to migrate or integrate these.

  • Operational aspects.

    Establish the procedures and processes to be adopted, the knowledge and experience of staff to be recruited and the employee training required.

  • Transition procedures.

    Consider how the changes will be implemented without impacting adversely on daily treasury activities.

  • Project management.

    Scope the scale and breadth of the project and define the Individual roles and responsibilities within the project, including the appointment of a project leader.

In summary

Today’s corporate treasurers perform a broad remit of duties ranging from cash management and risk management to strategic guidance and corporate governance. All these activities must be managed effectively. Whilst there may be similarities between organisations and the activities undertaken by their treasury departments, the model within which these are conducted will depend on each business’s own particular circumstances, needs and objectives. In practice, many organisations may end up with a hybrid arrangement, perhaps due to merger and acquisition activity, lack of standardised systems and technology, restrictive local regulations in certain countries – or because it suits the nature of their particular business.