Photo of Irene Chan, McKinsey & Co and Sanchay Agrawal, Bank of America.
McKinsey & Company is a global management consulting firm founded in 1926 by University of Chicago Professor James Ö McKinsey. The company offers professional services to corporations, governments and other organisations. The company employs 30,000 people globally.
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In order to bring the best advice to clients, the firm draws on the expertise of its consultants located in different countries to deliver customised solutions to its clients regardless of their location. This cross-border model leads to complexities in internal payroll processes involving payroll delivery in multiple currencies depending on the employee’s home location and location of assignments.
In the Asia Pacific region, this payroll process was centralised through a Singaporean legal entity. Funds are transferred through intercompany transactions in USD from either the US parent company or an international subsidiary and reported for tax and accounting purposes. As salaries had to be paid in different currencies, it required the entity to maintain up to eight different currency accounts. These accounts were funded through multiple FX trades and around ten international wire transactions monthly.
Funding amounts were determined by payroll forecasting and any last-minute changes resulted in additional FX, wire costs and timing issues. The management of this process was both costly and complex. This “top-down” pushing of funds inevitably required inefficient cash concentration in the currency accounts, with the administration of intercompany transactions. The manual segregation of payments through these FX accounts, for country-wise tax and accounting reconciliation and reporting, was also burdensome.
To address these challenges, McKinsey’s treasury team created a unique solution incorporating the payrolls of China, Japan and Korea as a first step, which is easy to scale across the region. The structured solution is made up of the following elements:
Pre-agreed transactional FX margins with Bank of America (BofA), with the bank managing the FX conversion. This arrangement allows the company to automate cross-currency payments from a single physical USD account. This significantly reduces the cost and complexity of FX and forms the basis of a ‘bottom-up’ pulling of funds from the master accounts.
A reference account structure was added to the USD master account, which is owned by the Singaporean entity. This comprises unique reference account numbers for each country entity – China, Korea and Japan – to facilitate segregation of payments and reconciliation of funds for monitoring and reporting purposes.
Automated, rule-based, cross-border USD sweeps at the end of the day fund the master USD account based on the split of transactions. In doing so, no forecasting is required, zero balances are retained at the local level, and each entity’s payroll is matched by a sweep from the corresponding funding entities.
This solution is without doubt innovative in the combination of technologies employed and could be the first payroll process of it’s kind in the APAC region. In more than one instance, best-practice is achieved. Based on the existing master agreement, future expansion of the solution is simple and scalable, as minimum documentation is required to add new reference accounts.
This solution has created a fully automated, cross-border, entity-defined payroll process that minimises transaction costs and optimises cash concentration with a pull-based approach to funding.
Number of banking partners/bank accounts reduced.
Manual intervention reduced.
Future proof solution.
Exceptional implementation (budget/time).
“This solution has created best in class levels of automation for our payroll process, along with reporting and reconciliation. This automation has optimised liquidity, significantly reduced treasury workloads and the risk of last minute or failed wire transactions. It is an optimal operational account structure for us,” says Gaurav Bakiwala, Treasury Operations Manager.
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