Conor Maher describes how HP manages cash in the EMEA/Latin America region and explains how they use technology within the treasury function.

How is the HP treasury structured?

In the mid-1990s HP initiated a project to replace its “incountry” treasury activities with a centralised model. This decision was driven by a number of factors not least the rapid pace of growth across HP’s business, greater complexity in the market place and a desire to have company-wide treasury risks managed in a more consistent and timely basis by treasury dedicated staff.

HP established three regional treasury centres. One in Singapore which looks after cash management activities for the Asia-Pacific region and one in Palo Alto which looks after domestic cash management for North America and Mexico, execution of foreign exchange and derivative trades (a model which pre-dates the current structure) and corporate finance activities for the parent company such as commercial paper issuance in the US. Our treasury IT infrastructure is also supported by the US based team. The third centre is located here in the UK.

Simultaneously we also took the decision to deploy a new global treasury management system (TMS) and chose Wall Street Systems.

What are you respponsible for in the EMEA treasury?

We look after cash management, foreign exchange exposure forecasting and provide treasury consulting support for over 250 sales, manufacturing, distribution and financing entities across EMEA, Latin America and Canada. Last year alone the operations team handled treasury flows in excess of $2.1 trillion and at fiscal year-end, 31 October 2004, was managing an investment portfolio of almost $13 billion.

Each morning we take over Asia’s end-of-day USD position and then manage the EMEA region, with most of our funding and investment activities completed by late morning. We keep back some liquidity for Latin America and Canada which we position during the afternoon and any residual cash positions are invested in both the local markets (non-USD) and New York/Offshore money market funds (USD). Our tax model does not permit us to freely pass back any cash surpluses to the US team and therefore we operate on an autonomous basis.

In addition to international cash management we are responsible for HP’s rebilling entity and operate a monthly multilateral settlement process for all inter-company trade balances. We also have a fully licensed bank in Ireland, Hewlett- Packard International Bank Plc, for our pan-European leasing business which, under the terms of its banking licence, has diverse funding needs to include inter-bank lines, deposit taking from other corporates and an ECP/ECD issuance programme. All back office treasury activities for the Bank are undertaken in the UK.

We also work very closely with our international and incountry tax teams. HP has one of the lowest effective US tax rates for a multinational of our size, 19-20%, and this results in the execution of various tax driven transactions as well as a complex legal model to manage.

Not a bad day’s work for an operations team of eight people!

What role does the Belgian Coordination Centre play?

The Belgian Coordination Centre (BCC) acts as our in-house bank. All of our entities’ bank account balances are reported daily by SWIFT MT940 to our hub-bank (JPMorgan) and then fed directly into our TMS, giving us visibility of our cash positions in each country. Through our hub-bank we have also established SWIFT MT101 linkages with our local banks, allowing us to initiate the movement of funds (cross-border and domestic) for same-day value.

The BCC operates same-day liquidity cash pools in EUR, GBP and USD and there are two advantages with this:

1. It allows us to recycle our cash internally and minimise external interest expense.
2. By concentrating our surplus cash positions we can leverage market pricing opportunities with much larger investment trades, typically $400m each, to achieve higher yields.

The BCC funds about 90% of our international subsidiaries. However we also have two other special purpose vehicles to fund those remaining entities excluded from the BCC for either tax planning or local regulatory reasons.

How do you make payments?

All of our vendor payments globally are processed from a shared service centre in Bangalore running on an SAP platform. When a subsidiary receives an invoice it is scanned locally and sent electronically to Bangalore where it gets loaded into the SAP platform and stored for settlement on 45-day terms. When payment becomes due, SAP produces a file which is handed over to our vendor payables bank (Citibank for EMEA/North America, JPMorgan for Asia) who route the payment file to the relevant branch for processing through the domestic ACH.

From treasury’s perspective we have an electronic interface which allows us to view the payment files as they are being submitted from Bangalore to the bank and ensure the respective account is adequately funded.

We also have in-country activity for non-vendor payments such as payroll and these are processed through local arrangements with our banks. Funding requests for these payments are communicated to treasury via a web-based tool.

All treasury flows are processed within the TMS.

How has the decision to settle foreign exchange through CLS affected treasury?

We settle each month over $15 billion of foreign exchange trades. This coincides with our multilateral netting settlement dates and, although this allows us to manage our local currency (i.e. all non-USD positions) needs very effectively, it exposes us to significant levels of intra-day settlement risk. CLS was an obvious solution for HP to pursue and in August last year we became the second corporate to implement CLS.

Much of the implementation effort centred on the TMS itself, in particular the need to separately manage CLS-settled trades. We also built a new electronic interface between Citibank, our CLS bank, to facilitate this and the other cash management initiatives being worked on together.

And CLS is a natural fit with our straight through processing objectives. Once we have executed our FX trades on the trading platform we import them into the TMS, confirm the trades through Misys Treasury (CMS) and then import the confirmation status back into the TMS to trigger settlement. To put it another way – once the trade upload is complete our operational input is only needed for exceptions handling (e.g. investigating a missing CMS confirmation).

With such an automated model is it any wonder that we will soon require our banks’ participation in CLS as a pre-requisite for doing business with us?

How do you use technology?

One of the many benefits of centralisation is the subsequent opportunity to standardise processes. And standardisation naturally leads to the automation of any recurring processes, reducing operating costs and helping to mitigate risk through an improved controls environment.

Straight through processing has been a central objective for HP treasury with almost all of our back office activities now automated. Just look at the FX model described above and you can see some of the potential opportunities.

On the cash management side we have developed our TMS to read information contained in the daily MT940 messages so that any recurring transactions can be automatically booked and reconciled in accordance with preset parameters. For example if the statement describes a zero-balancing transaction between two HP accounts it will be booked as such. If the statement indicates a bank fee, it will be booked as such but additionally flagged for operator attention to validate the charge. If no narrative is present the TMS will apply a logic process that looks for any transactions of equal amount and value date and book accordingly. Only after this process is exhausted are exceptions highlighted for investigation.

We have also developed an automated target balancing routine. This allows the TMS to automatically determine the projected end of day balance for an account, once the MT940 balance is adjusted for any forecast inputs, and initiate cash transfers according to pre-defined parameters. These parameters ensure there is always a minimum balance in the account to cover incidental disbursements but once the balance reaches a maximum level above which it is economic to transfer cash, the TMS triggers a sweep of surplus funds to the HP Coordination Centre.

These two initiatives alone have generated monthly savings of around 100 man-hours which is a significant benefit for our small team.

Are there any other benefits arising from such initiatives? When HP and Compaq merged we were able to absorb Compaq’s decentralised treasury function into our existing infrastructure without having to add a single headcount. To put some numbers on this, a recent treasury benchmarking study completed by Hackett highlighted our cost to revenues ratio of 0.02%, against an average of 0.16% for similarly sized multinationals.

Our next challenge is developing greater levels of automation within the front office environment. Take money market dealing for example and the time spent on the phone with banks bidding for time deposit or ECP business.

An operating model we would prefer is one that pushes your trade requirements out to the marketplace via a single dealing portal for on-line execution. The resultant positions would then be pulled back into the TMS allowing the automated back office processes (confirmation, settlement and next-day reconciliation) to complete the cycle. In one sense we view this as an extension to our internal target balancing routine which concentrates cash up to HP Coordination Centre level.

There are several players already in the market either offering components of this solution or at least with plans to follow suit.

HP is also actively involved with TWIST and co-chairs its corporate reference council with this being one of its strategic focus areas.

“When HP and Compaq merged we were able to absorb Compaq’s de-centralised treasury function into our existing infrastructure without having to add a single headcount.”

How have you been affected by regulatory changes?

HP has a large programme under way to ensure compliance with Sarbanes-Oxley. From my perspective Sarbanes-Oxley should simply re-affirm the effectiveness of our existing controls and procedures. No doubt however that this is timeconsuming work and there are other things we would prefer to be working on given scarce resources but clearly this is part of the evolving business environment we are facing.

what do you see as the big challenges over the next few months?

Aside from those I have mentioned another major development for HP is the JOBS Act (formerly known as the Homeland Investment Act) which President Bush signed last November. US multinationals, like HP, hold a total of approx $600 billion of cash offshore which they are either unable or unwilling to repatriate due to US tax considerations.

The JOBS Act will allow us to potentially repatriate offshore cash to the US at a preferential rate of 5.25% during the current fiscal year. In its offshore world, HP is used to being cash rich so the impact of JOBS will validate earlier investment decisions around our cash management infrastructure to help us manage the short-term cash forecasting challenges JOBS will present.