Treasury Today Country Profiles in association with Citi

Intelligent design: the evolution of TMS

Newly transformed Papilionidae butterfly

The technology that is available to assist treasurers and help them carry out their role to the best of their ability has changed markedly over the past decade. Today, the treasury management system (TMS) provides tools to create efficiencies across the range of treasury disciplines, including cash and risk management. But where will technology go next and how can it provide even greater support to the treasurer?

One answer is to add ‘intelligence’ to the mix. The concept of the treasury intelligence management system (TiMS) aims to aid the decision-making of treasurers by making the most of the valuable information generated around a transaction, rather than simply focusing on the execution of the transaction.

An ongoing evolution

The TiMS concept was first mentioned in Treasury Today’s weekly Insights email last year. At the time, Enrico Camerinelli, Senior Analyst, Aite Group explained the six ways that he saw a TiMS differing from the TMS solutions available today. To recap, these were as follows:

  1. The inclusion of eBAM.

    Allowing the treasurer to manage and maintain bank accounts through their primary treasury system is in itself a benefit, but when you add in features that indicate whether certain activities – such as notional pooling – are permissible with that account in a particular country, the system should really start to add value. “It’s all about the metadata,” says Camerinelli.

  2. Liquidity support system.

    Rather like the systems used by fund managers or those working in the capital markets, this functionality would assist treasurers in making the right decision for their liquidity, by showing all the available options (and risks and returns).

  3. A regulatory ‘spellchecker’.

    “When I send a payment or invoice,” says Camerinelli, “this spellchecker should understand what the payment is about and let the treasurer know if there are any regulatory rules that need to be complied with. Also, if something is missing in the data, instead of always alerting you that there is a mistake, it will autocorrect where possible.”

  4. Bank relationship management.

    This functionality should allow the treasurer to understand the banking fees that they are paying, how much business the bank is doing with the company, if the bank is complying with the contract that has been agreed with the company and generally to assess the performance of the bank, rather like a scorecard. “On the back of this, treasurers should be well equipped to renegotiate terms where necessary.”

  5. Cash flow simulation.

    Rather than just basing cash flows on the payables and receivables in the accounting system already, manufacturing plans, purchasing plans and so on should be captured. According to Camerinelli, “If the company has the information available, treasurers should use it to their best advantage.”

  6. Key performance indicators.

    As the treasury function is gaining more relevance and importance (because it is providing pertinent information about the cash positions of the company), what are the best indicators to measure and assess the performance of the treasury in terms of how they are bringing value to the company? Rather than being a cost centre, treasury should look to use KPIs in the creation of a value centre.

Speaking to Camerinelli some six months later, the list of components that make up a TiMS has increased to eight. The two additional components are:

  1. Access to accounts payable (AP) and accounts receivable (AR).
  2. Risk management.

“Following conversations I’ve had with people in the industry about the TiMS concept, it became clear that risk management should be included as one of the TiMS elements,” explains Camerinelli. “Then I also thought to myself that I’ve been preaching the concept that treasury should be more aware of supply chain finance opportunities. This should also be part of what defines a TiMS, which is where the awareness of AP and AR comes in,” he says.

Risk management is important and one of the top priorities for corporate treasurers today. As defined in the TiMS concept, the real value is in the information. The intelligence that resides in a risk management module for TiMS is the ability to build correlations between different risk elements. For example, a treasurer might have one set of indicators or models which allow them to establish counterparty risk. Then they may also have indicators for liquidity risk, foreign exchange (FX) risk, market volatility, etc. There may be a correlation between counterparty risk and liquidity risk, for example.

For a corporate looking at counterparty risk, they may find that one of their banking partners has had a change of circumstances. Knowing this information, when the treasurer is performing their cash management or liquidity management processes, the TiMS should either alert them to this situation, or provide some boundaries by letting them know that they are trying to perform an action with a bank that the system knows falls into a risk category. Risk correlation is key.

“The access to AP and AR is already happening to some extent,” says Camerinelli. Here, the TiMS should be a platform for treasurers to determine whether they want to expand payment terms, collect receivables and expand their working capital ratio.

Camerinelli continues: “The treasurer needs to take decisions on managing cash and liquidity, and to do that they need to understand what is happening on the AP and AR side. The treasurer can use instruments that allow them to make a financial proposition to their clients that could be mutually beneficial, for example offering to provide a BACS payment in return for a discount on an invoice. Developments like this – from companies such as Kyriba – are really pushing treasury systems into the supply chain finance space.”

Given that the number of components in the TiMS concept has increased to eight, is there a chance that the concept could grow even wider? Camerinelli believes that there could be more, but explains his decision to stop at eight:

“I wanted to make sure that, with this TiMS concept, I was not just thinking aloud and building a theoretical model. It started with a conceptual model. I believe that if you are a treasurer, you need to have intelligent data. Where does this data come from? Before thinking about what type of system a treasurer could get intelligent data from, I looked at what was possible today from a technological perspective. I looked across a wide range of technologies, some that are not necessarily directly used by treasurers, or even sold to treasurers – I just wanted to make sure that the technology was there.”

“So all of the eight TiMS items do have some technological equivalent out there today. They are not yet all integral parts of an operating TiMS, but you could go out and buy each of those eight modules. When it comes to adding more components, if I don’t see an existing technology behind it, I would refrain from adding them to the TiMS concept. It has to be something that would add intelligence to treasury management that has existing technology to support it.”

Vendor demographics

While no solution vendors in the market currently provide a full portfolio of TiMS features, many are moving towards providing such offerings in the near future. However, the traditional TMS vendors may not be the first place to look for a TiMS.

Traditional TMS vendors are currently concentrating on consolidating their positions rather than committing to too much new product development. A major reason for this is the large amount of confirmed and speculative merger and acquisition (M&A) activity in the market. In this type of environment, large-scale product development has to take a back seat.

However, it is interesting to look at companies such as Calypso, Temenos and Murex. These are vendors, but are not traditional players in the corporate treasury world. Their expertise can be found in capital markets trading and banking software, but in reality it is vendors such as these that are designing new technology that aligns with the TiMS concept. For example, their systems allow the user to manage funds and provide fund managers with the necessary visibility. Fund managers are using systems such as these today, so why shouldn’t a treasurer be able to use something similar?

Today, the market has the traditional TMS vendors on one side, who sell directly to corporates, and are concentrated on consolidating their position. On the other side, the vendors who have more capabilities that go beyond the basic cash management and treasury transactions are often too distant from the corporate world or do not want to mix and confuse the market. There are some vendors who could benefit from this position, for example companies such as Kyriba and Bellin, who are quite flexible and seem ready to pick up on opportunities.

Estimated time of arrival

Any technology that can provide additional support and enhance decision-making would likely be welcomed by treasurers immediately. However, the reality of a fully-fledged TiMS available on the market seems a while off yet. “In terms of development of the offering, I think it will take at least five years for the TMS vendor to come up with an offering that has an extended suite of solutions,” says Camerinelli.

Nevertheless, the cloud may be a key factor in delivering a true TiMS. You could have a traditional TMS to manage the daily business of the treasurer, while accessing these other services as applications. This is why the point about ensuring that the eight components of TiMS are supported by existing technology is important. Since they are, and the providers of these eight components are already on the cloud, integration should allow the TMS vendor to offer a wider spectrum of solutions.

Practical steps

Being purely theoretical about the TiMS concept is not the best service for corporate treasurers or vendors alike though. “Look at something like electronic invoicing, for instance, why is it not happening as it should? The answer is that, given the current economic situation, it is seen as a low priority. Even though it provides benefits to the treasury clients, it doesn’t get the necessary attention.”

Despite this, certain of the TiMS components are gaining good traction. “Supply chain finance is starting to make headway and is starting to make more sense to treasury. The benefit that treasurers see in supply chain finance is not so much the traditional benefit of improving working capital, but rather it is more about it being a way to extract liquidity from your operations. Liquidity is so important today, that positioning supply chain finance in this way has attracted the attention of treasurers. It is no surprise to me therefore that TMS vendors are embracing the TiMS concept in terms of the access to AP and AR components. Just look at SunGard’s AvantGard,” says Camerinelli.

Another example of steps being taken that align with the TiMS concept can be found in IT2’s move to build more of a governance framework and decision-making framework into the TMS. Paul Higdon, CTO of IT2, explains:

“I think that, in order for the system to start helping with decision-making, it needs to ‘know’ treasury policy. You have your positions or inputs, but then you also need to know the policy that dictates what can be done under different situations. A combination of these two things results in the decision. So for a long time now we have been working on building more policy rules directly into the TMS, which allows the position and the policy to be presented together. From that, the programme can actually present the suggested action that needs to be taken based on the position and the permitted actions.”

An easy example of how this works can be seen in FX hedging. A treasurer will usually have a fairly structured view of how much of their FX exposure they want to hedge, based on currency type or the certainty of the exposure. They will have a hedge ratio band that they want to be in as a function of the type and maturity of their FX exposure. For the most part, the TMS is able to collect and analyse the exposures, compare that to the existing hedges and provide the hedge ratio. By comparing this to treasury policy, the TMS can then suggest whether the treasurer needs to hedge more or unwind hedges in order to bring the position back in line with that set out by policy.

“When you look at the whole, it [TiMS] does seem like a revolution, but we have been taking baby steps towards this new concept. This is very different to a TMS of ten years ago. Back then the TMS was just about collecting data and storing information. Now we can take that data, first turn it into information and then combine information with policy which can be turned into real treasury intelligence,” says Higdon.

Treasurers vital in the development of technology tools

The treasurer can help shape the TiMS of the near future in collaboration with vendors, according to Aite Group’s Camerinelli. “The TiMS space is not a buyer’s market. Treasurers cannot afford, in my opinion, to sit and wait for the best offer to come to them. They also have to do their part, to provide their contribution.”

As a result of the financial crisis, treasurers have grown in experience and also in attention at a corporate level. They provide the information about how much cash the company has, but they also provide the intelligence about the best way to allocate future cash to ensure liquidity, for example. However, this specific intelligence is not going to appear out of thin air. Treasurers should start to work in providing specifications of their needs to vendors, being very clear about what they require in order to provide more value to their organisations.

“My theory is that treasurers know that they must prove something, but they don’t know how to do it. This is why they need the help of vendors, who might be able to assist them in understanding what technology is available to them, and also being really open to all sorts of possible solutions. This is the core of the TiMS concept – don’t just look at what is available in a traditional TMS box, look outside it,” says Camerinelli.