Treasury Today Country Profiles in association with Citi

Best practice: finding your gold standard

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Every treasury department is different thanks to a wide array of variables – geographic spread, industry, staffing levels, to pick just three. How do you find out the treasury best practices suitable for your department?

Achieving treasury best practice can add value to your organisation by saving money and optimising processes. One of the ways that treasury departments can quantify exactly what best practices they should be striving for in their company is with the help of a treasury consultancy. These firms work with their clients to assist them in understanding and implementing best practices across their organisation.

Usually when a consultant is helping to define best practice for an organisation, they will start by delineating a high-level vision of what your company wants to achieve across the entire treasury function. From there, it is possible to drill down into more granular levels and follow that through to all of the processes and practices that ultimately comprise the treasury’s scope of responsibility.

“We have a concept called Treasury 3.0,” Mike Gallanis, partner at Treasury Strategies explains. “Treasury 3.0 is a framework for best practices and for getting treasury to the point where it can serve as the financial nerve centre for the organisation.”

Treasury is positioned well within an organisation to deliver a superior service to that company. It is a hub where information passes through, where financial transactions are initiated, risk can be observed effectively, transactions can be processed and all of the relationships with financial service providers can be effectively managed through that hub. “By having a framework of Treasury 3.0 in that environment, where treasury has been elevated to being the financial nerve centre, the treasurer is able to do a lot of things that help the organisation,” says Gallanis.

Treasury is the analytical hub of the organisation, providing end-to-end business intelligence and strategic advice to all of the different departments in the company, as well as the company’s Board, creditors, customers, suppliers and shareholders. Treasury facilitates interaction with the ratings agencies and the regulators. By positioning treasury in this kind of role where it can be the conduit for monitoring, managing and facilitating transactions and strategy, treasury has achieved a best practice framework.

In this position, treasury can manage risk, have real-time visibility over areas such as global currency positions, interest rate exposures and liquidity positions across the globe. It is able to monitor funding flows with precision and accuracy across the whole organisation. This is the ultimate goal.

When you start to follow any one of these threads, you start looking at the different processes that make up best practice treasury. Take the banking structures and providers as an example. Best practice in this sense is having a provider that is able to match up to your needs globally, whether this is a geographic match or a service alignment, and whether this gives you the necessary tools and visibility to manage your business.

The right banking provider brings considerable benefits, such as pooling structures to enhance liquidity or the controls that banking services bring to bear, for example. These are just a couple of examples of what having the right structure around banking in your organisation, and having the right banking provider will accomplish. It is a key pillar of best practice.

Having the necessary organisational structure behind the treasury, and the correct staffing for your treasury department is another keystone of best practice. Obviously you do not want an organisation where you have too many or too few people. You need to have the right balance of resources in the places where you need them geographically to achieve the treasury’s mission.

You have to factor in things like segregation of duties and take into account special skill sets required for your treasury. For example, if you are a global treasury with a significant risk management charter that you need to satisfy, you need people that have skills around managing balance sheet exposures and operating earnings exposures, that have a proficiency around hedging and currency markets. It is also key to have the right bandwidth within the structure and to ask the question of whether your organisation is too flat or too vertical. You have to have the right mix.

Mike Gallanis provides an example of an oil and gas company headquartered in Canada that Treasury Strategies is working with: “We started by assessing their treasury function and identifying opportunities for improvement.

This led to the development of a comprehensive road map for the organisation that lays out all of the things that are instrumental to achieving best practice. One of the things challenging this organisation was that they had grown geographically to a point where they were no longer able to proficiently access the data, gain the visibility and manage liquidity and transactions effectively through their Canadian headquarters. They needed to expand beyond this central treasury and we are now working with them to set up a treasury centre in Luxembourg to provide this visibility on a global scale.”

Attaining best practice is all about following through all of the processes and components that make up treasury. There are specific things that consultants will look at when going through this review. For example, when looking at the aspects of a banking framework that are representative of best practice – having few providers compared to many providers is one element. Having a structure of bank accounts and flow management capabilities – for example through pooling – that provide almost seamless automated consolidation of funds in central points to enhance liquidity management, is another.

Processes such as these represent best practice in the sphere of banking. It is also vital to have a structure in place for the market rate of fees. You can have the best processes and the best structure in the world but if you are being charged three times the market rate for it then you are not accomplishing your goal.

Quantifying best practice for an individual company

To establish what best practice actually means for your treasury, many consultants recommend carrying out a benchmark survey. The benefit of working with a specialist treasury consultant is that they will tend to have seen hundreds of different company’s practices, which allows them to continuously catalogue and update their lists of best practices.

They will often have a template of different expertise areas, such as cash management, corporate finance and risk management, and see which are most applicable to your treasury. They will also look at your enablers, the treasury process and the treasury systems. Finally, they will take a look at how your treasury structure is organised. These steps provide the information to compare against what the consultant feels is the best practice for your peer group.

But how do you establish what your particular peer group is? You cannot simply compare companies within a sector, but rather you should be looking at the level of treasury complexity of your department. There are many aspects of treasury complexity, as Sander van Tol, Managing Partner at Zanders, Treasury & Finance Solutions explains: “One example of treasury complexity is revenue. The more the revenue of your company and hence the number of operating companies, the more complicated the treasury function is likely to be, and there is also likely to be more staff available to perform treasury tasks.”

Another aspect is the international footprint of the organisation. The more international the company, the higher the level of treasury complexity. This is especially the case if you are operating in the emerging markets.

An additional factor to bear in mind when looking for a peer group to benchmark best practice against is the vision of the company when it comes to how they want to use treasury. Is it seen as a value-adding department or a not-for-profit department? These two strategies are quite different from one another. If the department is set up to be a not-for-profit centre, it is primarily acting as a department that is managing the treasury operations. But if it is seen as a value-adding service centre, then you see much more integration into the complete financial supply chain.

“Based on the treasury complexity, we find peers of that company, and based on our experience we can define the benchmark of treasury best practice for the company,” says van Tol.

Many consultants, through their experience in the industry, will have defined a best practices matrix incorporating several hundred practices that they believe to be ‘best practice’. Through discussions with their clients, they work to understand what the current state and practices of that company are, and put these up against the matrix to find out if the company’s current practices are in or out of alignment. It is the degree of misalignment that determines the opportunity.

Take a company that has significant risk management exposures as an example. If it is discovered that they are inefficiently managing those exposures – they might not have the correct perception around currency risk in certain regions or perhaps their hedging process or policy is completely broken – these issues will be teased out by the best practices comparison. It is a methodical and granular exercise. In any areas where a company may be out of alignment, further analysis can detail what the potential cost of the opportunity is for the company to fix the gap.

“An example of this can be seen again in the Canadian oil and gas company,” says Treasury Strategies’ Gallanis. “They thought they had their risk management practice pretty buttoned up as they are a very decentralised global company. They recognised that treasury could not be tasked with executing all spot purchases or sales of currencies because they have needs all over the world. This would be too labour-intensive for the treasury in Canada. So the company set a minimum limit whereby if you buy and sell currencies up to the equivalent of CAD100,000 then you can do it locally without authority from treasury.

On the surface this sounds like a good practice and something that allocates workload effectively. However, what we found was that, while this individual practice of limiting the spot trading authority of CAD100,000 or less to the local entities in isolation was a good practice, when we looked at how many trades occur over the course of a year throughout the entire global network of the company, the total dollars associated with that trading activity was CAD4 billion.

If you factor in the incremental value of treasury being involved in those trading activities and perhaps apply netting opportunities to offset some of that external trading through the use of internal currency positions, or even using negotiated trading relationships where you are able to shave off some of the costs in the execution, the dollar value of that opportunity alone was in the hundreds of thousands of dollars annually.”

This example highlights the fact that you cannot afford to look at a process or practice in isolation. You need to look across the entire spectrum of activities as it is easy to miss something if you do not bring the right level of perspective to the problem. It is quite easy to identify where these gaps exist, and then by drilling down sufficiently into the detail you can quantify these gaps. You might find an area where you can make a $10,000 annual saving, but this obviously does not amount to much if you are comparing it to other opportunities that offer hundreds of thousands of dollars.

Beyond your personal network

Many treasurers have their own personal network of peers. Your network can provide you with good anecdotal advice, but they may not necessarily be part of your peer group when it comes to best practice. It is particularly difficult when there are different industry practices in play. For example, some companies try to benchmark their working capital practices. But a company that has high inventory levels has a completely different perspective on working capital than a company that is service-orientated and has almost no inventory needs. Instead they may have large accounts payable (A/P) or large accounts receivable (A/R) components in their working capital framework. Having the right set of companies to compare to is key.

In addition, the devil is in the detail. You will see that there are issues for specific corporates that are very important, but not for other comparable treasuries. For example, some treasury departments are responsible for credit risk management, not only credit risk management when investing in money market funds (MMFs) or a derivatives portfolio, but also the overall credit risk management for the operating companies. Compare this to another treasury where credit risk management is done by the operating companies themselves – how do you know what is best practice? These are two very different treasuries.

Or perhaps you have treasuries who are using one global bank to do all of their cash management, and then you have other companies who try to mitigate their operational risk by using a diverse number of banks. Depending on your company’s situation, there can be compelling reasons why you are using one bank or why you are using multiple banks. Examples such as these are major reasons why it can be difficult to establish exactly what is best practice in this area.

It is always very important to understand the position of an organisation’s treasury, and what the drivers are that have led the company to set up its treasury in this specific way. Companies can be completely different. If you have an excellent relationship with one bank and that bank is able to provide every service you require and you do not need a huge amount of bank lending, then it can work out fine. However, if you are in more of a private equity/leveraged buy-out situation, you will require many more banks. Once again, this information is important to understand in order to ensure that you find the correct parameters for your peer group.

There are however certain best practices, related to processes, which can be quite comparable for all companies. For example, in areas such as the confirmation of derivatives, the segregation of duties, or the implementation of a treasury management system (TMS), it is more like an extended process or workflow. This can depend on the amount of people involved in the workflow for you to say what is best practice.

Achievable for treasuries of all sizes?

If you work for a small company and your treasury department is made up of two or three people, can you still quantify the best practices that are applicable to you without the resources that a large multinational could allocate? In most cases, the answer, happily, is yes. If you think about a smaller company, it probably does not have the same extensive global footprint that a larger company does. Actually it may have fewer constraints to achieving best practices than a large company does.

If you are an extremely large multinational, you have large liquidity needs and cash flow forecasting becomes a difficult challenge as you are dealing with global entities on a geographically vast framework, with multiple product lines and segments. On the other hand, cash flow forecasting for a small company can be much simpler. Liquidity needs are also simpler in many cases while banking tends to be something that is not as challenging. Whether you are in a small or large treasury, the objective is the same: good visibility of your business and a real-time understanding and access to your liquidity position. A small organisation can easily achieve this goal.

And that is not all, according to Gallanis. “Having the treasury organisation structured properly tends not to be a problem for a smaller company because the treasury function tends to be lean to start with. So having the right balance and skills can be achieved rather easily.”

Similarly, risk management tends not to be as difficult or such a challenge for smaller organisations. Investing and borrowing also tends to be an easy task, when compared with the processes in certain corporate behemoths. “I think it is very feasible for smaller companies to achieve best practice just as their larger counterparts do – it is all relative,” says Gallanis.

The challenge that smaller companies do sometimes have is having sufficient staffing to provide backup and support for the treasury responsibilities. This is because of the fact that they are size-constrained – only two or three people may be allocated to the treasury function in a middle market company, for example, so if one person is ill or travelling, it becomes more of a gap for that organisation.

Small and medium sized treasuries do have to take into account the advice they receive compared to the potentially limited resources they may have. Is there cash available to be spent on the treasury function? Zanders’ van Tol provides one example: “If you have a treasury that is working on Microsoft Excel it is easy to say that is not best practice. But do they really have the budget to spend €100,000 on a new TMS? For SMEs, best practice is different so you look at various areas where you can optimise the treasury function, taking into account the limited resources.”

Getting started and keeping up-to-date

A best practices review of your treasury can be carried out quite quickly, even if it is the first time that a corporate has gone through a process such as this. What can take the time is the follow up and implementation of recommendations and opportunities. “Just to benchmark your treasury department against best practice should not take a lot of time. Usually in around five to ten days you can have a very good insight into the status of your treasury department,” explains van Tol. “If you then see from the report that your treasury department is quite far below the best practice benchmark standard, the implementation of the report’s recommendations can take much longer.”

Approaching a review of best practice for the first time may seem daunting, but the pay-off to your business is there. A good analogy to use is that it is like going to the dentist. If you are someone that has not taken good care of your teeth, the very first thing you want to do is go in and get the first check-up done. After this you can see which areas, if any, need the most work done.

A lot of companies that approach treasury consultants are in this position – they have not looked at their treasury, perhaps because they have grown very quickly through acquisition, for example, and they are more focussed on getting everything lined up to actually function. The very first step in this situation is to go through an assessment of the treasury to discover what the current state of it is and to match this up against best practice.

Once you have done this, you might find that you have generated a list of 50 areas that are material opportunities that need to be addressed. Some of these will be priorities that need to be addressed immediately, while others might be longer-term objectives that can be rolled out in two or three years’ time. Finding out the gaps that exist in your best practice framework and laying these out over a timeline can help you understand which processes you should be focusing on and when. This makes it much more manageable to address these tasks one by one over a timeline. After you get to a point where you have addressed all of the immediate issues and you are working towards the longer-term goals, it becomes more of a maintenance routine.

Once you are in this routine, the review process becomes much simpler. The more often a company goes through this process the better, of course, but doing a major review at least once every five years is sensible. The treasury world has seen so many developments that all companies, but especially those treasuries where there is not a lot of staff turnover, can get many fresh perspectives and new insights into best practices by doing such a benchmark study.

“I personally believe that it is an ongoing exercise,” says Gallanis. “It is the responsibility of the treasurer to do their best to maintain a framework of best practice. Their goal is to serve the company in the best way that they can at any given point in time.”