Treasury Today Country Profiles in association with Citi

A risky business

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Corporates operating in today’s uncertain markets know they cannot afford to be encumbered by dated, ineffectual risk technologies. Those treasurers looking for new tools to help them manage risk are often confronted with a confusing array of options. But as industry experts interviewed in this article maintain, when it comes to navigating the treasury technology landscape, it helps if you have a clear idea of your risk management needs beforehand.

Plunging commodity prices, relentless currency volatility and several abrupt policy changes by major central banks besides; after a year of such surprises, it is perhaps little wonder that so many treasurers have been increasing their focus on risk management technologies.

In Deloitte’s 2015 Global Corporate Treasury Survey, 50% of treasurers noted that their biggest challenge is to manage foreign exchange volatility, with 40% citing insufficient technology infrastructure as one of the key problems hampering them in this regard.

To manage risk, treasurers need reliable, complete and consistent data, available on a timely basis and, technology, they know, remains the key to delivering this. But finding the right solution is not easy: and not because of a lack of choice. Technology giants or nimble local specialists; installed software or cloud hosting – today’s technology landscape offers treasurers more options than ever before. With a little bit of foresight though, evaluating the various vendors and finding the right tools for the job need not be a costly and time-consuming ordeal.

Time for an upgrade

A number of factors might lead treasurers to the market to look for new solutions. Top of the list today, perhaps, are new market realities. The recent commodity price slump is but one example. Such was the speed of that decline in prices over the course of 2014, especially in the energy commodity markets where oil market benchmarks halved in less than six months, it triggered some corporates to review risk management arrangements at an organisational level.

A treasurer of a company that is producing finished goods derived from material inputs (like oil or oil derivatives), obviously has an exposure which may or may not – depending on a number of factors – require hedging. In most organisations that decision would, traditionally, have been made by procurement without treasuries involvement. But according to the representatives of two leading risk management solutions providers, a growing number of companies are now beginning to reconsider this arrangement.

“Procurement would be managing the physical contract buying along with the logistics of getting commodities from A to B, but when it came to risk management and hedging, this becomes a bit more challenging without a robust system designed to handle that,” Mark O’Toole, Vice President Commodities & Treasury Solutions at OpenLink explains. “This was being done on spreadsheets, for the most part, and it didn’t have full transparency and a global view into the position and the real risk around it. But what we’ve seen over the past year and a half, is CFOs now looking to break down the barriers between procurement and treasury. As zero based budgeting becomes more prominent, this is a chance for companies to system rationalise on a single platform while getting this visibility.”

O’Toole is not the only person in the treasury technology business identifying this as a growing trend. “Commodities was typically managed in procurement outside of treasury, but now a lot of global organisations have started incorporating commodity risk into treasury organisations,” says Sanjay Thoppil, Solution Consultant at Reval. “What that means for treasurers is that they have got to come up to speed very quickly.”

Regulatory changes may have also given a few treasurers cause to reassess their treasury technology needs in recent years. Take, for instance, post-crisis changes to the OTC derivatives business such as Dodd-Frank and the European Market Infrastructure Regulation (EMIR). Although it is two years on now since trade reporting under the latter begun, the new demands placed on treasurers by the regulation still appears to be a compelling reason for many treasurers to look at new solutions.

“EMIR and Dodd-Frank have been around for a couple of years, but reporting has really come into focus for a lot of corporates these past few months,” says Thoppil. “We are starting to see a lot more requests around for EMIR requirements, more clients asking us to provide output for reporting.”

Other compliance issues, notably the imminent Markets in Financial Instruments Directive (MiFID) II, have also been a boon for multi-dealer platforms as responsibility for execution is increasingly pushed away from the bank to the corporate customer who are then looking for electronic platforms with TCA tools that can help them manage risk. “That’s one of the biggest changes in the industry we are seeing,” concurs Neill Penney, Head of Foreign Exchange Workflow at Thomson Reuters, the business information and technology specialists that provide a suite of solutions for corporate treasurers. “Regulators are saying to the customer that it is their responsibility to make sure they get the right price and to ensure they are executing at the right time of day.”

Lastly, there is the evolution of treasury technology itself to consider. The typical ERP/TMS or FX portal has a very long cycle; implementing a new solution every year, even if affordable, would be neither practical nor feasible in many organisations. Even accounting for upgrades then, it is likely that solutions introduced ten or perhaps even five years ago are going to look very antiquated alongside some of the more recent advents in the treasury technology space.

“Five years ago the industry was beginning to get there with comprehensive treasury solutions and now I think the problems are well-understood with good solutions out there,” says Penney. “Now treasurers are walking into a very mature market that understands corporate treasury and can meet their evolving needs.” Penney cites the recent introduction of innovations such as algorithmic trading and order slicing into the corporate FX market as examples of how vendors are developing their offerings to meet their clients differing execution strategies. “Large order slicing is something stemming from the customer saying they that are going to take more responsibility for how the order is broken up and how quickly or slowly they push it into the market. If you are on the market for a new FX solution now and you want to future proof it then that is the sort of question you should be asking yourself: what happens if my policy needs algos or order slicing?”

Before you buy

What other tips do treasury solutions vendors have to share with potential customers as they navigate the technology landscape? There is a long list of things the corporate customer should keep in mind, they say, when purchasing new technology – ranging from functionalities included and the degree of centralisation on offer, to know knowing what ones priorities are, in particular, where the biggest risks are in the business that need to be managed.

First of all, treasurers need risk management technologies that are comprehensive with respect to the scope of functionalities on offer. Wolfgang Koester, CEO at FX exposure management solutions provider FiREapps says: “The biggest mistake I see at the moment is people looking for programmes and not platforms. A programme is something that allows you to do one particular thing but nothing else – and nothing else in today’s environment can end up being very costly, because one needs to have an environment where at a moment’s notice one can look at risk from a different perspective and/or a different type of risk not previously pre-defined.”

One should be careful, Koester adds, not to lose sight of the original objective – managing risk – because of the cost-savings a particular solution offers. “Unfortunately, this is something some people still do,” he says. “But when considering technology, the first thing the treasurer should be thinking about is where the biggest risks reside – not what a solution can do to make their lives easier.”

This sentiment is echoed by Thomson Reuters’ Penney, who explains that, as with any purchasing decision, it helps if the customer is clear on their priorities from the offset. “I would encourage treasurers to think end-to-end, and look at their company’s risk management needs holistically. Start with the whole picture and then write a list of the things you want to fix with respect to your current workflow,” he says.

The danger in heading to the market without one’s priorities clearly articulated is this could mean ending wasting a lot of time and money on solutions that fail to address the fundamental problem. “It is a band-aid approach, versus trying to fix the problem holistically,” Reval’s Thoppil asserts. “Do you want to just patch something up, or do you want to really revisit your risk management practices?”

Depending on how the company is organised, a truly comprehensive solution might mean considering solutions that help the treasurer manage risks across the business. “A big trend we are seeing at the moment is the breakdown of commodities and FX into treasury and the introduction of systems that allow corporates proactively manage that,” says O’Toole. It is all about centralisation: both technologically and departmentally. “Certain things – cash management, or in-country banking – might remain regional for some firms, but it should all roll into one centralised view, of cash, of commodities and of financial hedges.”

Finally, it is no good finding a solution that ticks all the boxes if the money to purchase it is not forthcoming. “You need CEO, CFO buy-in,” says Reval’s Thoppil. “Without it, treasurers are often just fishing and hoping they can get budget for a product on which management may not mandate.” But given the way treasury is traditionally perceived as a cost-centre, securing those necessary approvals is often easier said than done. To help, Reval – like most leading vendors – offer an array of documentation and analytical examples explaining clearly what the particular solution in question does and how it will benefit the company. These can be used to help treasurers frame the conversation when they begin to explain to senior executives why it is the company needs a new solution.

Listen to your peers

Having taken the decision to purchase a new treasury solution, established what ones priorities as a customer and secured the necessary buy-in at the C-level, how should the treasurer go about navigating the multitude of different vendors and solutions?

The consensus amongst industry experts is that the best way for treasurers to evaluate the claims of the various technology vendors is to listen to the experiences of their industry peers. There are a variety of ways for them to do this: read objective research in industry magazines like Treasury Today Asia, source vendor case studies and attend user-conferences and other industry events, to name but a few.

“I would advise treasurers to try and socialise their purchasing decisions,” says Thoppil. This process is not too dissimilar, he points out, to what many of us already do as consumers. “Any time I make a purchase of a large item I am usually talking to friends and family,” he adds, “and I know that some people use social media in similar way.”

FiREapps’ Koester concurs on this point, but adds that when it comes to the client references supplied by vendors treasurers should be cautious not to give too much credence to case studies that are not relevant to what their own treasury environment is and what treasury is attempting to achieve. What fits one firm’s unique requirements may not, after all, be appropriate for another company in a different sector or with different legacy technologies. “References need to be applicable to them,” he adds. “If a treasurer wants to address a certain issue with a solution and they have a SAP supplied ERP system, a reference from a corporate who uses Oracle is going to be next to useless to them.”

This is a crucial point. There are no one-size-fits-all solutions when it comes to risk management. Treasurers who fail to keep this in mind when shopping for risk management technology may well find themselves lumbered with an unsuitable, piecemeal solution – and that is a risk no corporate treasurer should be willing to accept.

Easing the process

When issuing an RFP, there are a number of factors that sometimes get overlooked, but which can help make the process easier both for the issuer and the service providers.

  • It is important to create a realistic time-frame for responses and for the selection process. One or two weeks are simply not enough time for providers to gather information and make a submission. Allowing respondents a month or six weeks to prepare it enables them to tailor their proposal to the unique aspects of the project.

  • In addition, any changes made to the RFP for one service provider − for example an extension or question changes − should be made for all respondents.

  • When drafting an RFP it is a good idea to separate it into logical sections. This will help respondents to organise their responses as well as helping the issuer to avoid irrelevant and duplicate questions.

  • Be consistent throughout the document in wording and in expectations. Try to keep formatting constant as well. This will make it easier for providers to respond and result in better quality responses.

  • Many companies get frustrated when they receive a 300-page response from service providers. It can be helpful to put a limit on the length of responses − either on the entire RFP or by section. In addition, using short, precise questions can help respondents to be more succinct in their responses.

  • It is better not to bid for too many services at once, as the decision-making process can grow to be excessively complex.

  • It is important to work closely with other functional areas affected by the service or solution − such as accounting, IT and purchasing.

  • Visiting final candidates provides the opportunity to meet the technical staff, sort out any existing concerns, and complete due diligence.