Photo of Jörg Bermüller, Tanja Verseck, J.P. Morgan, Jörg Konrath, BNP Paribas and Thomas Eberle, Deutsche Bank.
Four major payment currencies (EUR, USD, CHF and GBP) represent 70% of the total transaction volume at Merck. Multiple cash pool structures for each currency had been in existence since the company’s initial setup and/or inherited through acquisitions in 2006 and 2010. This unnecessary amount of currency pools led to inefficient usage of liquidity, with no clear bank-country-currency allocation and limited access to liquidity of non-participating entities. So not only were there massive internal efficiencies to be gained, but there was also significant potential to reduce overall banking fees and to further increase liquidity concentration at group level.
Jörg Bermüller
Head of Cash and Risk Management
Merck KGaA in Darmstadt is the oldest pharmaceutical and chemical company in the world. It conducts the operations in four divisions: Merck Serono, Consumer Health Care, Merck Millipore and Performance Materials. With 40,000 employees in 67 countries, Merck KGaA generated annual total revenues of €10.5 billion in 2011. Merck was the 2011 winner of Treasury Today’s Top Treasury Team Award.
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“Each of these cash pools created its own workload, including documentation for each structure, different delivery deadlines of account statements and unfavourable local bank commissions agreed by non-participating subsidiaries. Economies of scale were not used efficiently as transaction volumes were spread over several banking partners, with the cash pool structure determined by the decision of subsidiaries’ particular banking partner,” explains Jörg Bermüller, Head of Cash and Risk Management at Merck. “We were convinced that an efficient cash pool structure could be set up and that our processes could be improved to meet the company’s business requirements.”
The first action point was to get the right banks on board. After a highly detailed and competitive request for proposal (RFP) that focused on increasing process efficiency in account receivables, bank processing, IT services and treasury processes, Merck chose BNP Paribas, J.P. Morgan and Deutsche Bank – this was a group wide decision. “Within nine months, a project team of four treasury people (without external consultant support and in addition to their daily tasks) managed to restructure this assortment of currency cash pools,” says Bermüller. “A clear bank-country-currency allocation was established to bring the overall cost structure to a minimum. The number of cash pools was reduced by five and clear principles were established for each of the banking partners.”
When negotiations on terms and conditions of the cash concentration, eBanking and service agreements were complete, documents for account opening from all participating subsidiaries were collected, including the Power of Attorney (PoA). Merck then facilitated the training of 105 users through several webinar sessions (for those subsidiaries in different time zones) and internal IT support during the entire implementation phase for the required programming of bank connections. Account opening by corporate treasury was then centralised for all subsidiaries. This was made possible by the PoAs.
Despite the extremely low one-time implementation costs (€51,000), the benefits of the project have been impressive. Fewer banking partners means documentation requirements and the daily workload in banking communication and cash management are significantly reduced. Furthermore, economies of scale are used more effectively as only three financial institutions are used for payments. “Also, using business transaction codes (BTCs) in MT940 messages allows the automatic translation of the entire account statement into the ERP and in-house bank software. In combination with the reduced number of master accounts, this contributes towards faster cash management reconciliation,” says Bermüller.
Since the structural overhaul, more favourable interest rates (on average 25bps lower) have been achieved while value dates on lockbox clearing have been reduced from D+2 to D+1. Annual fees have been halved from €1m to €500,000 and Merck expects company savings to total €2m over the next five years.
