To outsource or not to outsource is a question which many corporates will have faced over the years. For a number of reasons, the answer for the majority has been ‘not’. However in recent times treasury outsourcing has made something of a return and is offering an option to corporates looking to reduce costs and increase efficiency. In this article, Treasury Today Asia looks at what treasury outsourcing actually is, its uses, and the debate surrounding the practice.
Outsourcing, the process of transferring a portion of a business’s operations out to a third-party provider, is something which generates an eclectic mix of opinions. For some, outsourcing an area of business responsibilities can be seen as a way to reduce costs, improve efficiency and free time to perform value-add duties. For others, it can be perceived as a threat which can cause a loss of control, loss of power and a loss of jobs. Despite this, outsourcing is something which many businesses participate in, primarily outsourcing high-volume functions such as human resources and IT, and have done for many years.
Treasury is another area where outsourcing was touted to be a revolutionary concept, redefining the role of the function when first introduced in the late 1980s. However, for a number of reasons the adoption of treasury outsourcing was neither widespread nor long-lived (in the main). In more recent times outsourcing has made a return, not as the revolutionary concept it once claimed to be, but as a genuine option for companies to consider when looking at ways to improve their treasury function. However, many still are not fully aware of what treasury outsourcing actually is and what it can offer.
What is treasury outsourcing?
Simply put, treasury outsourcing is the outsourcing of all or part of the treasury function to a third-party outsourcing provider, or shared service centre. However, within this simplistic definition there are many nuances. “The industry still hasn’t been exactly defined,” says Gautam Dhillon, Founder and CEO at treasury outsourcing provider, The Treasury Outsourcing Company (TOC). “Many companies offer treasury outsourcing services,” says Dhillon. “Banks for example offer netting and pooling services, some companies offer front office outsourcing solutions and others middle and back office. The scope and variety of services is large and occasionally fragmented. To overcome this problem we have a simple model where we offer a complete tactical and operational outsourcing solution. The client can choose to outsource its entire front, middle and back office or components of each; with each activity being performed on world-class TMS.”
Treasury outsourcing services can generally be viewed along a spectrum of treasury operations. “At one end you have the bottom-end, high-volume processes, such as payments processing, which treasurers can outsource on an operational basis,” says Jackie Bowie, CEO at financial risk consultants J.C. Rathbone Associates. “At the other end of the spectrum there are the high-end acute decision-making processes which require technical and current market expertise, such as hedging strategies, which can also be outsourced on an ad-hoc/project-by-project basis.”
Just as there are two forms of outsourcing, discretionary and operational, there are two major types of third-party outsourcing provider. Firstly, banks can offer a range of treasury outsourcing services. Although this section of the market has been scaled back in recent years, one bank which still offers these services is Bank of America Merrill Lynch (BofAML). “Our outsourcing services complement the products which we offer,” says Suzanne Janse van Rensburg, Regional Head of Liquidity and Investments, GTS EMEA, BofAML. “And we are able to offer these services with the expertise and support of the bank fully behind it.”
The second type of outsourcing service provider is independent companies that focus on treasury as a key competency. “It is important that a treasury outsourcing provider has a treasury orientation,” says Pat Leavy, Executive Director at FTI Treasury, a provider of treasury outsourcing solutions. “The concentration should therefore be on practical corporate treasury risk management and for this corporate treasury expertise and knowledge are required in addition to treasury technology and best practice processes, which third-party providers like us can deliver.”
Providers of outsourced treasury technology, known as Application Service Providers (ASPs) are also regarded as third-party treasury service providers. These offer companies the ability to hire costly treasury technology such as a TMS, thus allowing the corporate to avoid many of the costs associated with these. The trade-off comes with the limited flexibility and customisation offered by many ASPs.
What can be outsourced?
Theoretically, all aspects of the treasury function can be outsourced. However it is extremely rare for a company to outsource all of its treasury activity. Due to this the treasury function is divided into three broad areas which can be outsourced; front office (execution), middle office (accounting and reporting) and the back office (settlement and reconciliation). The treasury can decide to outsource the entire office or alternatively some functions within it, keeping the others in-house.
How much of and what a treasury decides to outsource is very much based on the organisation’s individual circumstances and what can provide the most value. However, as FTI Treasury’s Leavy explains, there are four fundamental models of treasury outsourcing:
Full suite treasury outsourcing
–this model sees the organisation outsource the front, middle and back office to a third party.
Back and middle office outsourcing
– through outsourcing the back and middle office the treasury can focus its in-house recourses on strategy and execution.
Regional treasury centre outsourcing
– this model will see the outsource service provider manage the organisation’s regional cash and intercompany financing without the need for it to establish its own treasury function in the region.
Standalone activity outsourcing
– a company may choose to outsource a single activity should they not have the capabilities to carry it out in-house. Intercompany netting and intercompany lending provide good examples of these standalone activities.
A new and relatively undeveloped area which can also be outsourced is a company’s disaster recovery. “Our research suggests that many treasuries do not have a satisfactory disaster recovery policy in place,” says TOC’s Dhillon, “so, if for any reason a company is unable to get into the office or the systems crash, there can be large ramifications.” For Dhillon, outsourcing provides a logical safeguard against any disaster scenario and ensures that the risk of this is mitigated. “This is further boosted with the advent of cloud technology, allowing outsourcing services to be hosted in the cloud, meaning regardless of the disaster the data will still be remotely accessible and useable.”
While many aspects of treasury can be outsourced, our experts agree that there are some areas which should be retained in house. These include core competencies such as strategy development and any decisions around treasury management such as key performance indicators and service level agreements with its outsourcing provider (OSP). Bank relationships and treasury controlling are another two areas which a treasury should keep firmly in-house.
So far we have looked at what treasury outsourcing is and the areas of treasury which can be outsourced; but why would a treasury want to outsource its operations? The answer is primarily to reduce costs. There are however a number of other drivers which may lead a treasury to outsource its operations, which include:
– if a company is looking to purchase or update its legacy technology it may look to outsourcing as an alternative. In this relationship the set-up will be quicker and the ongoing maintenance of the technology removing the need for this expertise in-house.
– a treasury may not have the expertise in certain areas and may therefore look to outsource these processes.
– many treasuries with limited resources will often find they have a number of inefficiencies and an inadequate segregation of duties. Outsourcing some areas of the treasury function can help to resolve this.
– if a company looks to expand to a new region it may wish to outsource its regional treasury for that region rather than build its own infrastructure.
The wide range of drivers for outsourcing means that it can offer value to companies throughout its life cycle. For example, a start-up looking to acquire a centralised treasury function can achieve this quickly, with support and without the costs associated with establishing its own through outsourcing. Alternatively a company which is in the growth stage of its life cycle may wish to outsource some of its processes to help with its development and then look to insource these at a later date. Finally, a mature company may wish to outsource to radically change the culture of the treasury.