For many treasurers, embarking on a centralisation project is a white-knuckle ride, with many points to potentially derail it along the way. But the prospective efficiency and cost benefits make the end result worth the ride. Treasury Today Asia provides some tips for ensuring a smooth journey.
Centralising treasury operations is sometimes like riding a rollercoaster, according to Michael Spiegel, Global Head of Trade Finance and Cash Management Corporates, Deutsche Bank, speaking on a Corporate Forum panel entitled ‘Best practices in the centralisation of treasury functions: are corporates and banks aligned?’ at Sibos 2013 in Dubai. “And that is fine if, by the end of the ride, there is a smile on your face and the only thing you remember is that it was very exciting.”
Industry research shows that treasuries across both the developed and emerging markets are increasingly looking to centralise their operations. Based on the results from its Treasury Diagnostics Benchmarking Survey, Citi identified three key trends that reflect the growth in scope and influence of the corporate treasury, the second being an increased adoption of centralisation structures. The report, entitled ‘Navigating headwinds in 2013: top priorities for corporate treasurers’, stated: “The rise of emerging market multinational companies (MNCs) and expansion of their Western counterparts into these markets has accelerated treasury centralisation: 66% of respondents operate a centralised treasury, 60% use netting structures and 48% use an in-house bank (IHB). Of the companies with a centralised treasury, 72% use a TMS.”
Yet many treasurers are sympathetic to Spiegel’s analogy because the fear factor is very high in such projects. The act of pulling together the many different strands of treasury activity across a multitude of subsidiaries worldwide is daunting to say the least – “Where to start?” is the first question that comes to mind. It takes a lot of time and effort to design a plan and map out the path to centralisation.
A number of barriers are thrown up from the outset. Often local operations put up resistance out of fear of losing control over their cash flows. Then there is the material issue of losing local knowledge and expertise. In addition, as Spiegel pointed out in the Sibos discussion, the decentralisation of the regulatory environment is not supporting the centralisation effort, as jurisdictions implement their own interpretation of global regulations. The ‘spaghetti junction’ of technology systems that most corporates have inherited through mergers and acquisitions (M&As) can also be a barrier to effective centralisation.
The biggest and most overwhelming issue, however, is the right strategy and cost consideration. Anita Prasad, General Manager – Treasury, Microsoft, speaking on the same panel as Spiegel, said: “We have gone through a few of these projects and the cost can be sizeable given the size and complexity of what we are trying to achieve.”
For Microsoft, the expense was well worth it. “As a treasury professional, I look at the return on investment (ROI) which has been tremendous – after the first wave of implementation, a third party was brought in to do an assessment and they estimated that we were reaping benefits that were approximately 45 times the initial outlay,” said Prasad.
Satisfying its main objective, treasury is able to tell the Corporate Vice President and Treasurer, George Zinn, exactly how much cash the company has, which allows senior management to make the right strategic decision in the moment. “That ability to drive strategic decisions pays for itself and is where the value is,” she said, adding that it is not just about driving the data but also about business intelligence.
Also speaking on the Corporate Forum panel, Alawi Alshurafa, Treasurer, Saudi Chevron Phillips, a Certified Treasury Professional, said that he thinks of centralisation as an operational necessity. “Cost may be an issue for some companies, but this is the nature of your business. It is a critical project because at that point in time you just can’t run in the same old way anymore – you need to get out from under your legacy systems,” he said. “It is also a project where you can’t completely quantify how much benefit you will receive; but in terms of a qualitative difference, it was an easy sell for me.”
In an interview with Treasury Today Asia, Tatiana Nikitina, Senior Cash and Banking Analyst, British American Tobacco (BAT), says that some of the biggest benefits of centralisation from a treasury perspective is greater process consistency and efficiency, which in turn gives treasury greater control. “In addition, through centralisation you also achieve benefits and savings due to economies of scale. This is probably one of the driving factors in any treasury transformation project because you need to have a business case behind any change or project proposal.”
Centralisation is not for every treasury, thinks Nikitina, and depends on each company’s structure, systems, business model, geographical mix and internal culture. There is also the option to centralise selected parts of treasury. For example, although she would centralise most processes, such as bank account maintenance, payments and receivables processing, Nikitina would not think of centralising strategic decisions such as bank relationships, projects and risk management.
Prasad similarly believes that centralisation is not necessarily the end game for every company. During the panel session, she made the point: “It may or may not make sense for you. There is centralisation of policies, compliance and processes, but then there is centralisation of cash management, such as how we pool or bring the cash together, and those are two distinct areas. Having a dialogue with your peers or banks, those which are willing to share with you what other companies have done and what they can offer, is a great place to start.”
Microsoft has long operated a centralised treasury – the entire infrastructure, which includes more than 80 banking relationships, 190 countries, 45 currencies and 98 employees, is managed through Redmond, Washington. The only team that is not part of its centralised infrastructure is the credit services team because they support the sales team; as a result they are based in the same locations as the sales teams. In a separate interview with Treasury Today Asia, Prasad said that the credit services staff also serve as treasury’s eyes and ears and can provide insights with local regulators and banks, retaining that local knowledge needed to understand changes in domestic regulations.
The trigger for an increased level of automation within this centralisation framework was when the treasurer asked his direct reports a simple, but which in reality turned out to be, difficult question – how much cash does the company have? With a global footprint, treasury needed to have information as to where the cash is, what currency it is in and what Microsoft entity owns it. “Each one of us went back to him with a very different answer; the answers reflected the functional area of his directs. For example, the portfolio team looked at total investments, while the cash management team came back with a number that reflected total cash in bank accounts,” Prasad explained during the Corporate Forum. “Because we couldn’t come back with a single answer, we started searching into how to attain consistency in defining cash, and how to automate and ensure we can put a finger on the exact number.” This was the beginning of treasury’s journey towards business intelligence capability within the centralised treasury, so that today it can answer the question in real-time.
As part of this process that involved ensuring all its banking partners are on SWIFT’s ISO 20022 XML format, Microsoft treasury wanted to rationalise its banking relationships. It has now consolidated with approximately 80 that have strong commitment to SWIFT roadmap and have migrated to bank-agnostic connectivity through SWIFT, using a common implementation methodology with all its banking partners. Prasad believes that having a common implementation has created a win-win for both sides. “It has helped the corporate side in terms of ease of use, cost and efficiencies. It has also helped the banks employ the same methodology with all their corporate clients, which allows them to bring value-add activity to the fore.”
Electronic bank account management (eBAM) is the next big step for Microsoft because it will enable the centralisation of all bank account management processes. “I know we have all been talking about eBAM at Sibos for the past three years, so it is now about making it a reality and working on the digital identity and authentication,” she said.
Saudi Chevron Phillips’ journey
SCP’s Alshurafa told a similar story about centralising bank connectivity. SCP’s treasury and shared service centre (SSC) supports five Chevron-Phillips ventures in Saudi Arabia and UAE and effectively looks after of all aspects of cash management for the group.
Its centralisation programme was driven by the need for greater efficiency. Throughout the history of different ventures, treasury had various offshore and onshore banking relationships, with bank accounts in London, Saudi Arabia and UAE. “In the past, we were managing each relationship separately through a dedicated platform with each bank, which wasn’t efficient. Therefore, we needed to develop a solution, which is a payments factory concept,” Alshurafa explained to the audience in Dubai.
Two years ago SCP treasury began searching for a solution to increase its efficiency and help it to streamline the cash management processes across the whole group, as well as the day-to-day payments plus the liquidity needs of separate ventures. SCP decided to go with SWIFT in order to have greater visibility over its cash and went live in January this year.
Despite many banks leaning towards host-to-host connectivity, Alshurafa, like Microsoft’s Prasad, wanted to be bank-agnostic. “With the devolvement in the credit market, you need to look holistically at your bank relationship. You want to have the flexibility of delinking if and when you need to.”
He agrees that centralisation is “a wild ride”. “Banks have different technical capabilities. With some banks we went smoothly through the SWIFT implementation in a couple of weeks, but with others we really struggled.
“One of the problems we encountered, and it could have been our fault as well, is that we didn’t include enough technical people from the bank side in our initial planning meetings – and this is very important. If you only talk to a relationship manager, you wouldn’t necessarily get enough details about what the bank is or isn’t capable of – for example, specific interfaces with SWIFT. You need to put together a checklist and go through implementation and planning with the technical people on both sides,” said Alshurafa.
BAT’s centralisation project touched many more areas than solely banking relationships and like SCP went down the SSC route. In her presentation entitled ‘Treasury transformation: a way towards centralised treasury’ at the EuroFinance International Cash and Treasury Management conference in Barcelona, Nikitina detailed BAT’s decision in 2005 to move from a partly decentralised treasury structure to a centralised treasury operation with streamlined and integrated processes, which is “fit for servicing our global business”. BAT decided to consolidate treasury transaction processes into financial shared service centres (FSSCs).
According to Nikitina, treasury wanted greater effectiveness through:
Full overview of group funding and foreign exchange (FX) exposures.
One view of global treasury risk profile.
Optimisation of cash management across the group.
Automation to reduce manual treasury controls.
The aim was to reduce financing costs through leveraging bank relationships and infrastructure, cash mobilisation, improved multi-currency cash flow forecasting and reduced funding lines.
The project was rolled out in four phases:
Included standardising treasury processes, banking standards and master data; facilitating FSSC migrations; and building new key systems enablers, such as multi-currency cash flow forecasting (MCFF).
Involved implementing key system enablers, such as MCFF and SAP Treasury; rationalise bank relationships and infrastructure; and transform skills and capabilities.
Implementing treasury line organisation.
Embedding transformation and drive continuous improvement.
The company completed seven request for proposals (RFPs) over the past five years resulting in:
Facilitation of the move to FSSCs in Romania, Kuala Lumpur, South Africa and Costa Rica.
Standardised and simplified banking processes.
Improved control and security around banking.
Reduction in the number of banks globally by approximately 80 (33%).
Significant reduction of group banking fees.
In the future, the company plans to roll out SAP ECC6, move to one format (XML) and SWIFT, take advantage of the new opportunities for centralisation that the Single Euro Payments Area (SEPA) opens up, migrate more markets and processes to FSSC and continue bank rationalisation.
Tips for success
Before embarking on a treasury centralisation project, both Spiegel and Prasad encourage treasurers to identify what they want to accomplish and what the end business goal is, and then bring in the technology and resources to help reach that goal. In answer to Alshurafa’s problem, Prasad explained how they brought their banking partners together for a three-day workshop. “Ten banks came with their relationship managers and cash management and IT experts. We also had a SWIFT team as our neutral ‘Switzerland’ in the room. Because of this, we could agree a single implementation of the connectivity via SWIFTNet, as well as message formats.”
Nikitina’s advice includes getting stakeholder buy-in, which is true for any change management programme, and beginning with some system consistency, because a SSC can’t efficiently process payments coming from hundreds of different small systems. “In addition, I think that it is important to challenge everything that has been done from the very beginning. Ask why it has been done this way and if there is a better way of doing it, because this will enable a much bigger step forward. Centralisation is a huge project and it is more worthwhile doing that when the end game provides more benefits than incremental ones.”
She believes that SEPA has shown many treasurers just how many ways of doing the same thing exists, even within a centralised treasury – for example different file formats and ways of processing payments. “Once they have overcome the initial technical problems, there is a huge opportunity to centralise much more and make all payments from one euro account for example, or move to one format for payroll. During the SEPA migration, many treasurers discovered a lot of inefficiencies that could be eliminated or streamlined in future.”
Before the centralisation project begins, Alshurafa suggested starting with original research, including market study and visits with vendors, to see what is available; once the research is complete, conceptualise a plan and then shortlist preferred vendors or service providers. Scorecards and a RFP process based on company requirements and compliance are both useful. “It can be a tedious process but I encourage anyone who is embarking on a centralisation project to spend time researching and planning, because it is critical to get this right and any mistake in this process will be very expensive in the future,” he warns.