Treasury Today Country Profiles in association with Citi

On a short leash: controlling local and regional treasuries

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For years, ‘centralisation’ has been the watchword. Many have voiced the benefits of managing global treasury operations from a single centre, with all possible functions brought into one location – but that is not always possible in the real world. This article looks at the roles of regional treasurers, and the benefits their geographical diversity brings.

Centralisation of international treasury operations certainly brings some benefits. Treasurers gain a more comprehensive view of their cash positions, exercise greater control over that money, and cut the costs of replicating operating structures in many different locations, to name just a few examples.

“Over the past year we re-implemented a central treasury system which enables us to deal and communicate more effectively with our business units,” says Bart Jansen, Director of Treasury and Risk Management, Coca Cola Hellenic.

“But that does not mean we can or would want to centralise every function. Operations in major markets like Russia, for example, or small but more complex countries like Serbia and Croatia, will certainly require in-country treasurers for the foreseeable future.”

For reasons like that, the use of regional hubs, rather than full, global centralisation, is growing.

Chart 1: Please identify the structure(s) below which best describe how your treasury department is currently structured and if you have any plans to to review or revise that structure within the next 12-18 months.
Chart 1: Please identify the structure(s) below which best describe how your treasury department is currently structured and if you have any plans to to review or revise that structure within the next 12-18 months.

Source: Treasury Today’s European Corporate Treasury Benchmarking Study 2010 in association with J.P. Morgan

Structural differences

Although treasurers receive an almost constant stream of advice on ‘best practice’ in treasury management and organisation, that does not mean the guidance is always appropriate or useful to every company.

This is for several reasons: companies grow in different ways; they operate in different fields; and regulations vary to such an extent that uniform application of theory will be impossible for a great many firms.

The first differentiating factor is growth. “In line with our business model, we are quite decentralised from a treasury point of view. This is partly driven by our growth coming through acquisitions, where some of the larger companies acquired already had finance and treasury teams in place,” explains Anthony Buchanan, Regional Treasurer Americas and Europe, SABMiller.

“The way in which those acquisitions took place can also affect the possibilities from a treasury perspective – most notably, we have a joint venture with another brewer in North America, so our central treasury cannot take full control of those operations. However, we should keep in mind that SABMiller’s operational footprint is mainly in emerging markets, which means that certain treasury activities have to be undertaken in-country.

“An obvious example would be buying and selling foreign currencies that are not freely available in international financial markets.”

Such variety created through acquisition can of course be overcome – SABMiller is planning on consolidating many of its European treasury functions into a regional hub, for example.

The second factor is the different operations of different companies. “Our business can be very cash based in certain countries,” continues Jansen, “and that gives treasurers in those countries a different set of tasks to those in countries with more electronic payments.”

SABMiller sees similar issues. Says Buchanan, “In Columbia, for example, we can have bank branches in breweries to take cash payments off the delivery drivers. That is a complexity you do not see in the UK.”

Regulatory considerations

Regulation is a third key area. Rules around cash pooling, currency movements and investment, among others, vary from country to country, impacting on the importance of a direct treasury presence in each country.

Croatia, Argentina and South Africa, for example, have different and restrictive rules on taking cash off-shore, which can pose problems to treasurers trying to take money back to the centre. That means more effort needs to be put into finding ways to remove that cash, often through dividend payments.

“While it is not operationally impossible, it is rare to see regional treasuries based in Russia, for example,” says Citi’s Managing Director Global Subsidiaries Group Europe, Fernando Iraola.

“There are currency controls and regulations that would not allow treasurers to link a local cash management pooling solution to an automated cross-border solution, for example, and connectivity with operations and functions in other countries could be a challenge if companies are not looking at full-scale centralisation out of Moscow.”

Countries in areas like Western Europe, meanwhile, have very similar regulatory systems to each other, often requiring fewer treasurers to manage cash pools and currency movements. Individual companies must judge whether the situation in any individual country is complicated enough to warrant the presence of a treasurer, but such differences clearly illustrate the diverse needs of international companies.

The role of local and regional treasurers

Although the roles vary from firm to firm, typically a local treasurer might be responsible for functions including local collections, bank payments, payroll and reporting. Regional heads might also be responsible for ensuring central treasury policy is adhered to by every local unit.

Central treasury tasks, in comparison, may include:

  • Managing debt.

  • Funding of business units.

  • Foreign exchange.

  • Commodities trading.

  • Reporting to the CFO.

There can be overlap here – local treasuries may perform spot FX transactions and some hedging, for example, but such activities will follow strict guidelines from the global treasury in terms of counterparties and transaction limits.

“Any sort of debt from across the globe is managed centrally,” says SABMiller’s Buchanan. “We do not want local units setting up their own funds and facilities with no control, and we do not want the situation where a bank or other investor has any right to go against a local business.

“We ensure the debt is centrally held or if that is not practical we will put structures in place that will achieve the same effect as centrally funded loans for the sake of the individual business’ security and to lower borrowing costs.”

Similarly, bank relationships tend to be managed centrally, or at least local treasurers adhere to a strict policy dictated by the centre. This allows the group treasury to hold responsibility for managing counterparty risk and use its international position to gain better service and lower prices than an individual business unit.

For example, if a crisis arises in one country and the units there only use a local bank, which the global firm does not use elsewhere, the treasury has no leverage over that bank. However, if operations in that country only represent one part of the firm’s international dealings with the bank, the corporate is in a much stronger position to ensure continued good service.

Coca Cola Hellenic’s Bart Jansen explains his central treasury’s position: “We are driving a change through our business units to reduce the number of bank relationships at a local level. In-country operations will keep relationships focused on collections, but the centre will take on payments. We want to work with banks which operate in as many of our countries as possible.”

Intercontinental Hotels already has a very centralised treasury structure, according to Dennis Cook, Regional Director, Statutory Reporting, Taxation and Treasury: “Our group treasury is responsible for all major decisions and functions including key bank relationship management, as well as funding, documentation and hedging.

“Our regional presence is limited in terms of resources – I am the sole treasurer in Asia-Pacific, and also cover complementary roles including taxation and external reporting.”

Managing local relationships

That is not to say local treasurers have no place in bank relationships. “Local treasurers are needed to manage transactional bank relationships, and understand the culture and local differences,” continues Cook.
 Bart Jansen agrees: “Local facilities – and so local treasurers – are particularly important in cash-based markets, whereas this matters less in countries with more electronic payments.”

Furthermore, when an acquisition is made, the existing finance and treasury teams may already have a strong relationship with a particular bank which the group does not use.

Maintaining that relationship may be more effective than starting afresh with a bank not previously used in the country. Alternatively, the global bank used elsewhere may not have a presence in the country, and that lack of choice may make local treasurers’ relationships with banks very valuable.

“We do not approve any bank accounts with non-relationship banks,” says a regional treasurer of a US-based Fortune 500 company, who wished to remain anonymous.

“We use big US banks for cash and other central treasury needs, and in Europe we use a wide range of banks, generally in the countries they are based in. Our revolving credit facility is split up between those banks, based on how much business we think we will provide. Although these are central treasury decisions, as regional treasurer I am the bank’s main contact with the company and have an input in the decisions.”

Location, location, location

There are no hard and fast rules for deciding where to locate treasurers. Decisions tend to be made based on the nature of a company’s operations in a particular region or a country’s regulations, tax system and infrastructure but can equally be historical or just convenient.

Intercontinental Hotels’ Dennis Cook explains: “Our business service centre was initially established in Sydney, so that is where I am based. We have larger operations in Singapore and Shanghai, and if we were starting with a clean sheet perhaps I may be located in one of those two cities. With communications technology and easy travel between locations, however, the distance does not matter so much.”

Citi’s Fernando Iraola cites local regulations as key: “Traditionally, regional treasury hubs for EMEA have been based in the UK, Netherlands and Switzerland, but increasingly we are seeing centres in Poland, Hungary, Czech Republic and Slovakia.

“All of these countries are EU members, with strong infrastructure and human capital, as well as treasury-friendly tax and capital flow rules. However, the Central and Eastern European countries also have lower taxes and business expenses, and have gained popularity for both treasury and shared service centres.”

“We have started to regionalise our treasury activities, which means in-country activities – notably cash and foreign exchange management – are being outsourced to a regional centre that will be a part of our Group Treasury set up.

In this way, our businesses will continue to benefit from having access to ‘local’ treasury management and the group as a whole will benefit from scale, focused management and greater oversight and control of treasury risks,” SABMiller’s Buchanan told Treasury Today.

“Activities like supply chain finance are often done locally, where treasurers know how the business works.”

“Regional management can be more hands on and follow local regulations more effectively than a central treasurer, despite all the improvements in communications. We don’t want to lose that benefit. With large projects in, say, Latin America I will visit regularly rather than trying to manage the progress from the UK.”

It is not just specific projects which require a hands-on treasury presence. Companies and countries with a lot of cash business can find a strong local presence to be helpful. A lot of staff may be required to reconcile that cash, for example, rather than being able to put it all through bank systems and use bank data for reconciliation.

On-the-ground expertise

“Differences in county-specific local transaction types can require on-the-ground expertise, which can probably be provided by local treasury staff located in-country,” says Deutsche Bank’s Head of Treasury Solutions, Dieter Stynen.

“Even in countries like France and Italy, specialised instruments such as confirming, RIBA, and monthly tax payments may need local staff as central treasurers may not be knowledgeable enough in local requirements.”

Local and regional treasurers can often understand the local business best, as well as the local regulations. “Activities like supply chain finance are often done locally, where treasurers know how the business works,” says Steven Victorin, Managing Director and the Regional Client Executive for J.P. Morgan Treasury Services in EMEA.

“Similarly, when moving into a new country the company will have a lot of requirements like new payroll, tax and funding issues. Those needs may be best served by a treasurer in country, with a clear view of the situation.”

Other factors also play their part. “Dubai is right in the middle of our eastern hemisphere operations in terms of time zone,” says a regional treasurer in the energy services sector, who could not speak publicly. “It is four hours away from western Europe, and four hours from our Asian operations. Also, it is a great place to attract staff who speak all of the languages of the countries in which we operate, and Business Support Centre represents a real cross section of those locations.”

Treasury dynamics

The growth in importance and stature of the treasurer within the organisation as a result of the financial crisis has been much discussed and well documented: treasurers are more visible than ever before and therefore have a greater opportunity to take on a strategic role. But what effect has this had on the regional treasurer?

Just as group treasurers have often found themselves put under more pressure to identify trapped cash, cut working capital needs and keep the CFO well informed, so have regional treasurers felt that pressure passed down the chain of command.

“The company as a whole sits on a big pile of international cash, so central treasurers are always on our backs, saying “go off to the divisions, let’s get that,” says our unnamed treasury source. “That’s boosted regional treasurers’ profile in the company, and we interact on a daily basis with the divisions with regard to excess cash.

“Another factor changing that dynamic is the occasional tax break we get for taking money back into the US. That gives us an opportunity to take our cash – which has already been centralised by regional hubs – back to the company headquarters. At other times, though, we have to design new ways to take it back to the US, or use it for acquisitions, or invest in money market funds.”

As well as an increased need for cash visibility, cost cutting during the crisis typically extended into regional and local treasuries – beyond the usual response of cutting marketing budgets or head count.

Whether that means moving to global banks with lower risk to treasuries and greater benefits of economies of scale, or changing policy on interest rate heading – SABMiller cut costs by moving to floating rates, for example – treasury can contribute at several levels to the business’ overall savings.

SABMiller has also seen an increased focus on its regional treasury operations, according to Buchanan: “When business is not going well, like during the crisis, you need to find ways to save money – and that goes beyond the usual response of cutting marketing budgets and head count. We saved a lot in interest rate hedging, moving to floating rates, for example.”

Deutsche Bank’s Dieter Stynen says corporate culture makes a big difference: “US-based companies tend to be very top down – the headquarters simply tells the subsidiaries what to do.

“Japanese and European companies might have the same objectives, but they generally want more buy-in from the subsidiaries. They take more time explaining the business case for centralisation, and also experience more resistance to changes, so that model can be slower – unless there is a very clear-cut case for centralising, as was the case during the financial crisis.”

That view of US corporate culture is not held by everyone, however: “We are seeing local and regional ‘influencers’ become increasingly important in the decision-making process,” J.P. Morgan’s Steven Victorin told Treasury Today.

“When US-based treasurers widen their horizons to other countries, they take the input of experienced regional centres very seriously. Indeed, in some companies the global treasurer will be involved in decision making but will not over-rule regional treasurers, respecting their knowledge and experience in their own regions.”

Where next?

Regional and local treasurers are clearly a valuable part of a company’s treasury team. However, that does not mean a degree of consolidation is not on the cards as regulations change and technologies develop.

“It is still more efficient to centralise operations,” says Coca Cola Hellenic’s Jansen, “and we are looking to centralise tasks like transactional processing and cash pooling, pulling in cash in as automated a fashion as possible.

“We will be keeping a local treasury presence in bigger markets like Russia and the more complex markets like Serbia, which require a more tailored solution because of difficulties in repatriating cash. The pace of change is slow in the most regulated markets like Ukraine, so we will need these local treasuries with the extra expense that entails.”

That is a position backed up by Dieter Stynen: “Banks give corporates better rates and better service when transactions are larger and more frequent, and the only way to achieve that is to centralise.

“A local treasury might make a few transactions a month, whereas a regional centre will deal with it on a day-to-day basis. It makes sense to use that leverage. Also, the more often a treasurer makes transactions the more efficient he or she will be, further lowering costs and saving time.

That efficiency extends beyond banking requirements. “Regional cash flow forecasts tend to be more accurate than those at a local level,” says technology provider Wall Street Systems’ Mark Lewis. “The aggregation may be based on business lines, entities or products, but the regional hub tends to have a better view of the group’s overall performance, and the factors which impact on cash flow.”

SABMiller is also looking to centralise, to an extent. The treasury’s European operations are being centralised currently, with a longer-term plan to form a regional hub in South America, possibly with a regional head based permanently in the region, rather than in the UK.

The trend is not necessarily towards global centralisation of all treasury operations, but a rationalisation of functions and processes. Regional treasurers’ roles seem more important now than ever.