Cash & Liquidity Management

Treasury outsourcing

Published: Sep 2014

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:

  1. Full suite treasury outsourcing

    –this model sees the organisation outsource the front, middle and back office to a third party.

  2. Back and middle office outsourcing

    – through outsourcing the back and middle office the treasury can focus its in-house recourses on strategy and execution.

  3. 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.

  4. 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.

Why outsource?

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:

  1. Technology

    – 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.

  2. Specialist expertise

    – a treasury may not have the expertise in certain areas and may therefore look to outsource these processes.

  3. 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.

  4. Location

    – 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.

Our research suggests that many treasuries do not have a satisfactory disaster recovery policy in place, so if for any reason a company is unable to get into the office or the systems crash, there can be large ramifications.

Gautam Dhillon, Founder & CEO at treasury outsourcing provider, The Treasury Outsourcing Company (TOC)

Benefits

Other than the simple advantage of reducing costs, an outsourcing arrangement has the potential to deliver a number of additional benefits to the treasury and the organisation as a whole. These include:

  1. Allowing treasury to focus on strategy – as the treasury is being called upon to be more of a value-add strategic business partner, outsourcing the day-to-day activities can provide the in-house team with more time to focus on this.

  2. Increased focus on the activities which remain in-house, thereby increasing efficiency.

  3. Organisational benefits – outsourcing can allow the treasury to improve its organisational structure and create an improved segregation of duties, mitigating the risk of fraud and error between back and front office activities.

  4. Reducing costs – the outsourcing provider should be able to make use of economies of scale and provide certain services at a lower cost than they would be if performed in-house.

  5. Speed of implementation – following fundamental shifts in the organisational structure of the company, a merger and acquisition (M&A) for example, outsourcing can be used as a method to introduce the required new treasury activities more quickly than establishing these in-house.

  6. Flexibility – the outsourcing provider may be able to adapt to a corporate’s changing requirements quicker and more efficiently than if completed in-house.

  7. Data quality – very often an unanticipated outsourcing benefit is that the quality of the data that is produced is higher. The challenge for the corporate receiving the data is therefore how to use it.

Concerns around outsourcing

Despite the benefits which outsourcing can offer corporates, there are a number of issues which are highlighted by treasury professionals about the practice which historically have prevented greater uptake.

The fear of relinquishing control surrounding treasury operations is the main issue around the practice of outsourcing. Although it is inevitable that by outsourcing a certain degree of control will be lost, the fear may often be overstated. “Despite the perceptions, in the outsourcing world most, if not all, the decisions and control remains in house,” says Leavy. “All actions taken by an outsourcer occur within discrete parameters and with very limited discretion from the provider’s point of view. The main decisions remain in-house – it is just the processes behind these which are outsourced.”

The seeds of this mind-set may be found during the early days of treasury outsourcing where it was promised to be revolutionary. “The initial vision of outsourcing was to outsource everything including decisions and strategy,” says Leavy. “This ultimately never happened and in reality shouldn’t.” For Leavy the mind-set remains because the purpose of outsourcing hasn’t been fully communicated to the treasury community.

Another area of potential concern regarding outsourcing is around security and this is something which should be considered carefully by treasurers when looking to establish an outsourcing arrangement. “Ensuring the client’s data is secure and confidential is critical and corporates need to be sure that the right security is in place,” says BofAML’s Janse van Rensburg. TOC’s Dhillon agrees. “There needs to be strict controls regarding who can access the data both within the OSP and once it is sent back to the client. If a service is web-based then encryption will also be required.”

In addition to the loss of control and security fears there may also be wider effects caused by outsourcing treasury operations which can cause issues for the department. One of these is job restructuring or job losses which can affect both the efficiency and moral of the treasury. A second area of potential concern surrounds the relationship which the treasury has with other operating units. By outsourcing, these relationships may be altered, so the impact of these should be carefully assessed by the department.

Full value

If a treasury decides to set foot into the outsourcing world, how can it ensure it receives full value from the arrangement? “An outsourcing relationship is very much like a marriage,” says TOC’s Dhillon. “Regardless of the client’s outsourcing motivations there should be constant dialogue between both sides with each understanding the scope of work, KPIs and SLAs. Once this happens the relationship is then on a firm footing.” For Dhillon this is the key to obtaining the most out of an outsourcing agreement and insists that a lack of dialogue and strategic scope alignment is a serious problem. “The clients who get the most out of the arrangement are the ones that enter the relationship with a clear scope. This then enables the OSP to deliver and be measured against demanding KPI and SLAs.

If, on the other hand, the client has not fully scoped the requirements and proceeds to outsource treasury activities, this will be problematic even if the OSP is meeting all the KPIs and SLAs, since the strategic scoping exercise was incorrect. This means the client will ultimately be unhappy with the venture,” he says.

Engagement in the process and asking questions is also seen by Bowie as key to the treasury obtaining the most out of the arrangement. “This allows us to understand their concerns and tailor a solution to fit their individual needs,” she says. If they step back then often the outsourcing service provider will not feel fully briefed.” Many outsource providers are now also now able to provide flexible bespoke agreements to suit the diversity of corporate needs. This is, however, something which again can only be arrived at through dialogue.

Ensuring the client’s data is secure and confidential is critical and corporates need to be sure that the right security is in place,

Suzanne Janse van Rensburg, Regional Head of Liquidity and Investments, GTS EMEA, Bank of America Merrill Lynch

Future outsourcing

“Corporates will say that they are outsourcing more now than ever before,” says Bowie. “However, this is rather misleading; prior to the financial crisis corporates were heavily reliant on their banks for both ideas and strategy. This may not have been perceived as outsourcing because there is no explicit fee for the services but in reality this was a form of quasi-outsourcing in itself.”

Despite the evolution of the market outsourcing is not yet a mainstream treasury practice and is still viewed by many through an outmoded lens. To change this, the industry is required to communicate the scope and benefits of outsourcing more efficiently to the treasury community. On the other hand the developing role of treasury may see the popularity of outsourcing increase. “Traditionally treasury has been seen as a cost centre,” says Dhillon. “If you outsource treasury processes the activity that was once seen as a cost centre becomes a profit centre for the OSP, this shift can be transformational for the treasury function and the captive organisation as a whole.”

It must be noted that a potential barrier to the greater use of treasury outsourcing in the future comes from the fact that operating costs have been able to be reduced, not through outsourcing but through automated cash management solutions. This has allowed corporates to remove a large degree of the recurring daily duties from their operations, although it must be noted that not all the benefits which can be obtained through an outsourcing agreement can be accessed this way.

Ultimately, outsourcing remains polarising amongst the treasury community. For some, outsourcing is a great way to reduce costs and create greater efficiencies in the treasury. For others, it is something which will lead to a loss of control. Then there are those that sit in the space between the two. So while not being the revolutionary solution it once promised to be, outsourcing must be regarded as another option open to treasurers when looking at ways to reduce costs and increase efficiency.

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