Calculated prophecies

Published: Jan 2013

The past decade has seen the evolution of the role of the treasurer from an almost administrative position towards more of a coordinator role, that is expected today. “In the past few years, treasurers have played the role of coordinator, particularly with areas like finance, tax and IT. They have been the centre of expertise and connect back to the lifeblood of the company, which is cash flow and managing liquidity,” says Steve Dwyre, Managing Director, Industrials and TMT at Lloyds Banking Group.

Yet now treasurers are making another transition. From this coordinator stance, the treasurer is being drawn on to play a much more strategic part in the firm – the heart of the business so to speak – deferred to by the CFO and participating in Board meetings more than they have ever done before. As the profile of the treasurer continues to grow, the number of talented professionals from a banking background who are choosing corporate treasury as a career choice is also rising, according to Stuart Ridley, Manager – Treasury at Robert Walters Recruitment.

As a senior figure, and an expert across many fields, the objectives of the treasurer are therefore shaping many of the trends that we can see coming down the road in 2013. As they juggle many balls of responsibility, the treasurer must respond to economic developments and regulatory changes, while also grabbing growth opportunities with both hands. The decisions they make are driving the industry forward.

A game of risk

Risk management is one of the areas in which treasurers have recently proved to be strong coordinators. Now often part of the risk committee, the treasurer may assist the banking partner with stress scenarios and management planning, taking the treasury function to the next strategic level. In this new, more involved approach, treasurers are being asked to present the Board with innovative solutions for counterparty risk analysis that goes beyond credit default swap (CDS) spreads and public ratings.

As they’re the ones liaising with the banks, treasurers understand the ratings and counterparty analysis processes, affirms Rajesh Mehta, EMEA Head of Treasury and Trade Solutions, Citi Transaction Services. “They are increasingly being seen as ‘the risk manager’, which in many corporate organisations is not a designated function per se. Whether it is with bank counterparty risk, credit ratings or potential sovereign default – treasurers get involved in all key stages of the risk management process. And investment committees are looking to treasurers to meet their risk management threshold.”

Naturally, scenario planning amid the Eurozone crisis has been employed and analysed on all fronts as market participants look to protect their capital, but Mehta believes that there is also a focus on guaranteeing business continuity. “The more evolved participants are taking prudential measures to ensure there are contingency measures in place – how ready is your bank to provide the necessary service if there’s a disruption?”

From a risk perspective, the way the treasury operates and how it is managed will only continue to rise in importance. This is currently reflected in the upgrade of the risk management capabilities of treasury departments – in both financial institutions and in the larger corporates, according to Rohan Douglas, CEO at Quantifi. “Given the turmoil in the financial marketplace, institutions are subject to a lot more volatility which is driving an increased focus on more accurate valuations and more comprehensive risk management.”

Supply chain support

In these uncertain times, corporates can face difficulties as regards credit lines and liquidity that they rely upon for the operation of their business. Treasurers, therefore, are aware of the importance of working capital and maximising the internal working capital resources. Treasurers are now much more the arbiters of working capital across the firm, says Mehta. “Most treasurers tend to act as the bank relationship arm of finance within the firm and are now preaching the value and importance of working capital and optimising internal capital.”

As for where the specific impact of working capital can be seen, the corporate treasurer is getting involved with their supply chain on a much more strategic level. “Treasurers know that companies, especially those who are focusing on emerging markets growth, have to optimise their supply chain in order to successfully grow, otherwise any weak link or potential disruption could become a constraining factor,” he says.

But for those corporates that may only have had lukewarm interest in supply chain finance (SCF) programmes previously, Lloyd’s Dwyre reports that the UK government in particular has been ‘encouraging’ companies to employ better strategies which will benefit suppliers and bolster the economy at large. “A lot of CEOs and chairmen are being pressured – especially if they have a portion of sales to the government – to go to their supply chain and help them. This has encouraged a tremendous upsurge in interest in SCF,” he says.

Show me the money

It’s no revelation that the interest rate environment for treasurers at the moment is extremely low. But the operational benefits of the investment and management of their respective funds is starting to become a challenge, according to Simon Jones, Head of Corporate Sales for Treasury Services EMEA at J.P. Morgan. “Corporates are beginning to wonder if having all their money with different banks, in addition to using money market funds (MMFs), is actually worth the amount of effort they put in, bearing in mind the poor returns. Considering the number of complex instruments employed, not to mention the regulatory changes in the MMF arena too, they are looking for efficiency and yield. This is driving innovation for simple deposit products that generate returns comparable to placing funds out on term deposit on a regular basis.”

Another theme that will continue to be high on the agenda next year, in this instance as a result of pressure under stringent Basel III criteria, is intraday liquidity, according to Ruth Wandhöfer, Head of Regulatory and Market Strategy at Citi Transaction Services. “Solutions to improve corporates’ use of liquidity will help in this respect, but banks themselves will need to find ways to better monitor and allocate liquidity usage. Pricing of intraday liquidity will become a more prominent area of discussion given the fact that liquidity constitutes an increasing cost to banks. This is further accentuated by the fact that Basel aims to discourage access to intraday wholesale liquidity and instead more liquidity is expected to be held by banks at all times.”

Banks are looking at the implications these regulations will have for corporates as regards investment and interest rates, says J.P. Morgan’s Jones. “Operating liquidity balances are becoming more appealing to banks as they are reflected more favourably in their liquidity ratios from a Basel III perspective. This again is really driving banks to look at new products for corporates. The aim is to simplify products for corporates and achieve high yields for them where their balances are operating balances – that is to say daily debits and credits.”

Technology rules

Treasurers’ objectives – driving efficiency in working capital and managing risk – are also driving the technology agenda. The challenge for banks in the current environment therefore, according to Citi’s Mehta, is satisfying this demand for innovation while also adhering to the mandatory regulatory demands, such as SEPA, Dodd-Frank, Basel, reporting, etc.

J.P. Morgan is upgrading all of its wholesale clients globally to the next generation of ACCESS Online, its electronic banking portal for treasury operations. The new platform includes integrated payment and reporting capabilities and user administration that will save treasurers’ time, while simultaneously improving their control environment, according to the bank. It will also include a new online user community where corporate clients can interact with their peers to acquire knowledge and leverage their experiences.

SEPA is coming

According to Wandhöfer, “the single euro payments area (SEPA) will need to be progressed towards compliance (end-date for migration in Eurozone is February 2014) and corporates are encouraged to get SEPA-ready with their respective banking partners. The Payment Services Directive (PSD) in Europe will be reviewed and a sequel is expected to be proposed by the EU Commission in April 2013.”

Next year is really going to be a critical year for corporates to decide what they are going to do to make the changes in order to be SEPA-compliant. Jones believes that corporates are starting to realise savings already, with pricing changes acknowledged thus far in markets like France, Italy and Spain with the existing legacy systems. Corporates are wondering how to become fully SEPA-compliant in order to realise the full extent of the benefits and cost savings on a pan-European basis before the 2014 deadline. But while a considerable portion of corporates are compliant with the payables side (SEPA Credit Transfers take up is currently at approximately 30%), much of the receivables side has not been converted (SEPA Direct Debit is at approximately 1%). “The biggest challenge to SEPA compliance is that the finance and treasury departments have not fully tackled the receivables side, as this conversion project requires a lot of time and strategy planning. It requires the involvement of the broader business and a change of management process across the entire organisation – a huge task for any business.”

“More and more clients therefore are actually moving towards a payment factory model – centralising all their payables and receivables in one place, so that they adopt a SEPA-compliant process through the one entity.”

Mobile is one area that seems to be going from strength to strength in the corporate arena. Since Citi launched CitiDirect® BE mobile, the mobile extension of its electronic banking system, last year, it has implemented the solution in 87 countries and accumulatively completed $10 billion in transaction value through the mobile channel. The advantage of mobile as an efficiency enabler for treasurers needing to conduct business while on the road is widely known, but there is now a more basic demographic trend that the banks must cater for. Mehta says: “We are seeing a convergence between the personal technology that is used by the average consumer and the expectation that corporate interaction shouldn’t be any less convenient. Treasurers are now expecting the same digital interface in their working environment.”

Corporates are looking for more flexible software that provides high performance and the development of technologies including multicore architectures are helping provide this. According to Quantifi’s Douglas, leveraging Intel’s multicores CPUs allows software to run much faster on what is now industry standard hardware. “To further simplify their IT infrastructure, more companies are also looking to introduce a hosting model and cloud computing. The ability to leverage computational power on demand and rent hardware on an as-needed basis, in addition to running calculations out on a cloud, has a lot of interesting applications in the financial arena where often computational requirements peak during certain times of the day.”

But the world of technology is fast paced. According to Dwyre, the industry has moved on from simply having a web and a cloud into a new world of ‘sensors’, which are becoming smaller and more ubiquitous in everyday life. “Linked to the cloud, sensory data that exists in the real world suddenly becomes available to the consumer and the business world. How sensors react to all the data that is being collected and how that data is used is the important part.” A concrete example of this is Lloyds Bank’s creation of the Arena platform, from which a treasurer can see every balance in every bank account and can even transact its foreign exchange (FX) across this one system that connects everything – no longer do they need to rely on a system that only the bank can access.

Many companies over the past few years have spent vast quantities of money on a treasury management system (TMS) or an enterprise resource planning system (ERP), but this buoyant market naturally tailed off when budgets were cut. Although a corporate might need a TMS or ERP, they could be holding out on implementation until they can spare the funds. But new providers are coming to the market who can actually offer the required system on a bit-by-bit basis, according to Robert Walters’ Ridley. “Two or three segments from the entire system might be absolutely essential to you, and you can pick and choose these to your specification. This is much more attractive to cash-strapped corporates than paying for an all singing, all dancing system that you are only using a fraction of.”

Opportunities and optimism?

For many corporates, the challenges of expansion into emerging markets can be daunting but the opportunities for growth are significant. Not a decision to be broached lightly because it has fundamental implications for the company’s business strategy and operating model, and risk management capabilities need to be assessed. Firms are nonetheless looking for advice on how best to make this move. Says J.P. Morgan’s Jones: “The scale and growth that corporates are seeing in markets such as China, India, Russia, Brazil, South Africa and Saudi Arabia means that an increasing number of expansion projects are going to be completed by European corporates. Naturally these ambitious firms will require the appropriate assistance as they make this transition, but the scalability of multinationals’ treasury operations in these regions is going to be very important in 2013.”

This invites another trend in the way of recruitment as treasurers for those multinationals will be spending a good deal of time on talent and staffing, according to Citi’s Mehta. While the focus is very much on efficiency and productivity, these companies also need to concentrate on growing their treasury teams. “This agenda can be a bit of a struggle. There are people who understand the corporate philosophy at head office but not the emerging markets, and vice versa. There is a huge amount of connectivity that’s required between the two worlds. And the numbers of candidates that can bridge the two worlds effectively are few.”

Despite the relatively stagnant treasury recruitment market as many professionals prepare to ride out the economic storm before making any sort of move, Ridley believes that many senior treasury professionals are now open to opportunities in the emerging markets and are looking for a new challenge. “Because the exposures in these regions are significant and the potential for market growth is so huge, treasurers are attracted by these potential opportunities. Businesses in these emerging markets will receive the most investment and their treasury teams will expand, which will further entice people to move.”

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