Treasury Today Country Profiles in association with Citi

Early adoption doesn’t always pay

Base jumper jumping off a cliff

When it comes to making that initial leap into the great unknown, the risks can seem to greatly outweigh the rewards. Nevertheless, there are always people prepared to bite the bullet and move ahead of the curve. Is it the innovators or the late movers that really have the advantage though?

Everett Rogers introduced his theory of the diffusion of innovations in 1962. Since then, his theory has provided guidance to business executives across the globe when introducing new solutions – particularly technologies – to various industry sectors.

But the highly focused early adopters of the corporate world contend with a high level of risk. The worry is that technology may not be perfected, solutions may not be compatible with existing systems, and legislation may not be completely finalised. It’s understandable therefore why the number of early adopters is far outweighed by late movers and laggards (see graph below). Nevertheless, there are always forward thinking companies that are prepared to take the early adoption gamble. They may win, they may lose, or they may simply be content in the knowledge that they got there first.

And this is very much a reflection of today’s consumer attitude: for example, the first iPhone, launched in 2007, arrived with a $600 price tag. Those who were willing to wait a little longer were rewarded two months later when Apple lowered the price to $400 and again in June 2009 when the price fell to $200 for a phone with twice the storage.

Nonetheless, early adopters camped out in front of Apple stores and other retailers in 2007 to get their hands on the first version. Fast forward to 2012 and customers are causing riots in the streets prior to the launch of the iPhone 5.

In both the consumer and business space, early adopters are beneficial for vendors/regulatory bodies etc as they serve as guinea pigs for new initiatives, often providing valuable feedback for future amendments and releases, in addition to creating valuable publicity and driving take-up. But what advantages can early adoption have for the corporate treasurer? And is it worth the risk?

Two sides of the coin

There are two areas in a corporate treasury that are dominated by adoption talk: regulatory compliance and technological advances (one-upmanship). Both represent a requirement to be at the heart of a competitive and dynamic landscape; a need to stay ahead of the masses with modern advancements while being mindful of the regulatory deadlines, such as the SEPA end-date, rapidly approaching.

Being one of the first to implement a new technological solution or adopt a regulation even before the final text has been issued can have many advantages. Yet, there are two sides to the argument, says Patrick Coleman, Regional General Manager, IT2 Treasury Solutions. “Early adoption can pay off spectacularly. Take a look, for example, at some of the early adopters of real-time counterparty risk management back at the start of the crisis. The rewards were spectacular, and paid off in existential terms for treasurers who were prepared to adapt to the changed financial environment.”

Such a move no doubt took a certain amount of courage and forward-thinking from those businesses, though. And this is something that is relatively unheard of when times are good, since no-one wants to rock the boat, or there is simply no immediate need to fix what isn’t (yet) broken. Paradoxically, the conservative nature that would usually tend to dissuade corporates from being an early adopter actually worked in favour of these particular companies.

However, Coleman is quick to note that there can be a negative side to early adoption – in particular where technology is concerned. “On the other hand, you need to be sure of the solution approach and product commitment of your providers. How sure are you that the new development being marketed for early adoption is going to be successful and viable as a product, and that it fits in with the bigger technological picture of your provider? How sure are you that a provider can or will sustain its development commitment?”

Roger’s adoption curve
Chart 1: Roger’s adoption curve

When it comes to decision-making, the case for being in the first tranche when it comes to technology adoption is tricky to assess. The vendor will of course glamorise the product and there is no real user to benchmark best practice/processes or a success rate against. You essentially go it alone, without the luxury of counsel from your industry counterparts. If the solution turns out to be the next industry innovation, your company is ahead of the curve. If, however, the new product turns out to be a failure or is in need of considerable fine-tuning, your company suffers a loss of time and resources – not to mention the setback of not adopting a different (potentially viable) product, as well as the overall cost implications.

Keeping up with the Joneses

So, there is a gamble of sorts with the early adoption of technology. Yet, companies must play this game at times if they wish to keep up with their market peers. John Tus, Vice President and Treasurer, Honeywell says that his department looks at new technology as a facilitator of better decision-making and productivity.

“We’re constantly looking at the economic returns on our investments in technology. We need to understand the current state of the art of technology impacting treasury and where it is headed. Within Honeywell, we develop technology roadmaps to complement our treasury processes.”

“We have a small group within our treasury organisation responsible for the development and maintenance of our treasury systems while they study the evolution of technology related to treasury workstations, foreign exchange, and trading platforms. We then continuously brainstorm how we’re going to get to the new standard,” he says.

Nevertheless, with early adoption of new technology comes more work and more risk. Ahead-of-the-curve implementations are often bumpy, marred by more hiccups and problems than products that have made their way into general release. More time and energy must be expended setting expectations for end users and management; you can’t simply show them a case study of a successful project.

Tus agrees that being an early adopter of technology can have its risks. “I think that most people would probably say that there is a certain amount of risk on the surface. There isn’t always that immediate payback. When you think of adopting new technology, if there are bugs in the system, it may detract from the ability to execute and so the payback for that risk is significantly reduced,” he says.

Yet a well researched (as far as possible) business case highlighting the clear opportunities of what the new technology can give the company can sometimes be sufficient to sway the Board. It can take the company from the laggard bracket directly into the exciting playing field of early adopters – usually if the ‘cash carrot’ is dangled in an attractive way.

Says Tus: “Whether it be moving the treasury workstation to the cloud environment or whether it be looking at functionality, we constantly look at these opportunities in the context of the economics. If we feel that there is an economic benefit to us by either reducing our risks, increasing our productivity (doing more with less people) or we can get better transaction execution through the implementation of technology or regulation, we would look to be an early adopter. We evaluate the technology based on what it gives us.”

With any new system there are costs of licensing, implementation, and maintenance. Unless there is a clearly defined business case supported with identified benefits, we are not going to adopt and implement new technology. Until we have the business case, we continue to stay with our existing technology until it is no longer supported,” he continues.

Then again, even when the business case is quite clear and immediate adoption of the product appears to be a foregone conclusion, demand might actually outpace the available supply. The prolonged adoption of eBAM by corporates – giving oversight of all accounts, enabling visibility of counterparty risk and liquidity – is a prominent case in point, according to Coleman. “Fundamentally, the adoption of eBAM minimises risk. And, crucially, the benefits of unlocking trapped or invisible cash, of unmasking counterparty risk, and of central identification of bank account signatories make early adoption a no brainer, in an unpredictable financial environment.”

“Therefore, the growing consensus is that although the banks have not yet all rolled out support for eBAM, the benefits of central bank account management, or ‘BAM,’ are professionally unarguable. For organisations with a large number of bank accounts the business case is compelling.”

Knowing when to make the move

So how can a company assess when the best time is to be an early adopter of technology or when it would be more prudent to wait? The following checklist provides some useful pointers for a corporate considering a promising but untested technology product.

  • Ensure that the vendor/solutions provider has a good reputation in the market.

    If possible, liaise with other companies that have implemented other products/solutions from the same counterparty.

  • Establish a good relationship for ongoing support.

    Get to know the developers of the technology. They will be as invested in your success as you and will be prepared to go the extra mile to make it work within your company walls.

  • Proceed with implementation after a positive but realistic business case.

    Outlining the benefits to achieve Board approval is a necessary task but ensure that the expectations of management and the end users fall within reason. They need to be aware of the challenges they may face with regard to implementation.

  • The new solution must be easy to use.

    Initial implementation of any new initiative is always difficult but if it is not simple for the end user to operate, ultimate success is unlikely. Engage the core business on how to implement the technology and plan for additional user training.

In addition, while the current environment has become competitively high tech, it is also rife with opportunists; each new ‘market development’ is not always a requirement – nor is there any guarantee that a particular product/vendor will survive in the industry long term, so have your wits about you.

Be prepared but be flexible

Early adoption in the regulatory sphere also requires a great deal of nous and, frankly, guts. Take SEPA for example. With the introduction of SEPA, the standardised payments framework for the euro, Eurozone corporates and banks are required to phase out domestic credit transfers and direct debits by 1st February 2014; with the deadline extended to 31st October 2016 for businesses based outside the single currency area. But as reported in the May 2012 issue of Treasury Today, time is running out for corporates as they scramble to catch up with banks in order to become SEPA-compliant before the mandatory end-date.

Early adoption of SEPA would have perhaps been the most sensible thing for corporates therefore as the payments regulation will impact corporate IT systems, hit payments and administration processes and revamp mandate management rules. This leaves companies with an awful lot to achieve, and not very much time to play with. Bank, vendor and consultancy resources are also likely to become squeezed as everyone races for the finish line, causing significant bottlenecks.

Can the same be said of other impending regulation though or is SEPA a stand-alone case?

“In the regulatory environment, a lot is/has changed,” says Tus. “In the US, Sarbanes-Oxley has provided changes around various aspects of accounting and internal controls. Then there has been Dodd-Frank and Basel III. On the corporate side, we tend to analyse the forthcoming legislation or regulations; we pick it up and we look at it from 360 degrees and we assess what impact this has on us both directly and indirectly. How will the banks treat us differently? Will they give us credit? What will the cost of credit be? We prepare for that impact as we think about the future, for instance if we go to the market with a new credit facility.”

The regulatory regime of the last few years, and for the foreseeable future, is a very different type of change environment than that of old. With previous projects over the years, banks have been very experienced – and comfortable – in delivering large, complex change programmes where the requirements were solidified quite early in the process – not constantly inconsistent.

In the case of Basel III, the banks are finding it frustrating that, while there are definitive timescales, much of the detail still needs to be outlined accurately. Those institutions who have already implemented programmes constantly need to keep track of what is going on. The banks are also finding it very difficult to manage the flurry of knock-on effects and impacts that changing just one requirement has. And while the banks struggle, the corporates must continue to monitor these changes in order to manage the potential impact on their business.

“Part of the problem is that some pieces of legislation weren’t initially complete and continue to evolve as various governmental agencies work to define the specific rules requiring implementation,” says Tus. “Corporates and financial institutions alike must keep a keen eye on the evolving regulatory framework to ensure timely implementation and compliance.”

There are of course global market developments that give cause for some reflection in respect to regulation implementation. While RBNZ this month (September 2012) confirmed that it intends to implement the core elements of new capital adequacy requirements for banks, in a further step towards full Basel III adoption, the China Banking Regulatory Commission announced this summer (June 2012) that it had dropped its plans for early implementation. China had intended to begin implementation at the start of 2012, a year ahead of the Basel Committee’s timeline but Chinese regulators are now erring on the side of caution due to the ongoing Eurozone crisis and fears that early implementation may further slow the domestic economy.

So, even the best laid plans can be thrown off course. And while corporates are advised to prepare well in advance for impending regulation and its impact across the board, they must also remain flexible enough to cope with inevitable tweaks and amendments before the final deadlines.

Lighthouse or laggard: you decide

The case for early adoption will never be simply black or white. As a corporate, you must assess each new initiative on its individual merits and its application to your business. What works for the masses may not necessarily comply with your company agenda or requirements, and vice versa.