Alcon, a Swiss headquartered multinational, is the leading provider of surgical, pharmaceutical and consumer eye care products worldwide. The company has operations in 75 countries with over 12,000 employees and sales in 2010 of $7.18 billion. Recently acquired by Novartis, the company is currently combining its operations with the pharmaceutical giant’s own vision care division.

Deane Plummer joined Alcon in February 2009 as Treasury Manager, EMEA. He has worked in various roles with a number of financial institutions in Brussels, Paris, Frankfurt, London and New York. Most recently, he headed the Cash Management Sales Team for Deutsche Bank AG, based in Zurich, and was responsible for building up their presence in the Swiss market. Prior to that he was EMEA Product Manager for Citibank Private Bank, Geneva, focusing on custody and cash management services.

Eye care manufacturer Alcon has had a distinguished history. Founded in Ft. Worth, Texas in 1945, the company grew rapidly and was acquired by Nestlé in 1978. A partial IPO in 2002 saw the firm return to the New York Stock exchange.

In 2008, Nestlé announced plans to divest its remaining 77% stake in Alcon and Novartis acquired a 25% stake in the company together with an option to acquire the remaining 52% stake, which could be exercised by July 2011. Novartis valued the transaction at $12.9 billion. “The growth synergies are significant”, according to Novartis’ Chief Executive Joseph Jimenez, speaking when the final stages of the deal were announced in December of last year. The link up has been gradually taking place since 2008, with Alcon’s then President and Chief Executive, now Division head, Alcon, Kevin Buehler saying “This merger will create a stronger eye-care business with broader commercial reach” – which of course has implications for Deane Plummer in the Treasury.

In preparation for this eventual spin-off, Alcon needed to set-up a European Treasury Centre to takeover the activities that, to date, had been undertaken by Nestlé in Vevey. Alcon had also decided to set-up a shared service centre for its European finance activities in Switzerland and it was a natural choice to establish the treasury team along side the SSC in Fribourg.

In this interview Deane Plummer tells the story of the founding of the treasury and the challenges the merger brings.

You were brought in to build the treasury in Europe. How have Alcon’s treasury operations changed since the spin-off from Nestlé?

Yes, I joined Alcon in February 2009 and a year later, in April 2010, we added a second colleague. So we are a pretty small team and one of my key objectives was to automate as much as possible at the treasury level. This was also the driving principle when we designed the new AP process for the SSC. I was still surprised how much of the day to day accounting and reconciliation work was manual.

“One of my key objectives was to automate as much as possible at the treasury level … I was still surprised how much of the day to day accounting and reconciliation work was manual.”

Initially, the treasury was operating through our then-parent, Nestlé, which was responsible for activities including global netting, foreign exchange, investment and risk management. In some countries, Alcon entities participated in their cash pools and benefited from some inter-company financing, as well as sharing in their US CP programme.

We needed Alcon’s European treasury to be able to take on all these activities with a much smaller team. Whilst our central treasury was based in Ft. Worth, Texas, operationally, everything was executed out of Switzerland.

For example, Nestlé would execute FX deals, or invest surplus, in the name of the Swiss company and book these trades in their SunGard TMS. We received confirmations, monthly revals, interest reallocation reports and so on from their TMS. But all this changed as we disengaged and set about putting in place processes, as well as systems, to manage these activities.

For FX execution, we selected the 360T dealing portal after reviewing Nestlé’s FXall system and Bloomberg; we felt 360T was more user friendly and they were able to customise reports for us to manage the monthly revals, which we would have to do ourselves without a TMS at the outset. 360T also had an interface to Misys, for deal confirmations which, at the time, was used by us and Nestlé.

Our transactions tended to be fairly vanilla – FX outrights and FX swaps, mainly. Virtually all flows are managed via Switzerland but with 360T’s setup our US colleagues can also review our trades.

360T also enabled us to obtain quotes for short-term deposits, but we found it is just easier to call up the bank and do it directly. Decisions on how to manage strategic cash were undertaken by our colleagues in Ft. Worth, whereas short-term operating cash was managed out of Fribourg. As a result, we had to set up a totally new liquidity management structure, which is described below.

Can you explain your cash pooling structures?

We set up euro, sterling, Danish krona, Swedish krona and Swiss franc cash pools in Europe, all of which are zero balancing. The only exception to that is the Swiss cash pool, which is notional, mainly because that was a structure Nestlé had established and it was easier for the operating companies to keep using the same bank rather than make them set up new bank accounts, as well as accounting for all the inter-company loans. We have a longer-term plan to change this to zero balancing, but that has very low priority – the system works well currently; the Swiss franc flows are smaller when compared with our euro, US dollar and sterling flows, and it was more important to automate processes like AP.

With the euro pool we had to design the structure as efficiently as possible, as well as minimise the impact on the entities from an accounting stand-point.

Two main motivations lay behind our cash pooling strategy.

One, we wanted to gain visibility. That has become increasingly important since the financial crisis – we do not want idle balances sitting in banks with poor credit ratings.

Two, we wanted to redeploy cash effectively and quickly within the business. Furthermore, where we had been using bank facilities for working capital purposes, the banks had been tightening conditions and margins significantly.

How do you manage your bank relationships?

An RFP had already been issued to six core banks recommended by Nestlé when I joined Alcon. My first task was to analyse these and then select a bank that met the requirements of treasury and the SSC. We whittled this list down to three banks of which – and you must remember that this was at the height of the financial crisis – two were government owned! In the end, we selected Citibank and decided to have as much contingency in place. Ironically, concentrating our cash with one provider actually enabled us to manage the risk more effectively and efficiently.

We also automated sweeps from our other legacy banks which were still primarily being used for AR. This was relatively new at the time – to move those funds from the legacy accounts into the cash pool bank – and it has worked reasonably well, but is still not ideal. There is a cost associated with these sweeps and it is not optimal, but for a small team that needs an automated solution to sweep up the cash it certainly helps. We have a long-term plan to shut down those legacy accounts, and this will now depend on the outcome of the merger with Novartis and their banking strategy.

In terms of AP, we opened new accounts with Citibank across Europe and these were linked to the zero cross-border target balance. As part of the contingency measures mentioned above, we decided to join SWIFT to give us flexibility in case we needed to move to another provider or wanted to use one provider for a particular country. In fact, we already had a single provider for Scandinavia – part of our Nestlé legacy – as well as having a mini SSC for the Nordic countries. In the end, this provider was not ready to support the latest ISO XML standards, which we also decided to standardise on.

“We wanted to gain visibility. That has become increasingly important since the financial crisis – we do not want idle balances sitting in banks with poor credit ratings.”

We are one of the first corporates to use XML for both payments and statements based on the new ISO 20022 standards. We looked at various formats that could be generated from our JDE ERP system and decided that this would likely be the new standard and would also give us flexibility, as well as independence from a bank proprietary format.

The problem with such early adoption is that Citi were not always ‘live’ with the XML version of the payment type that we wanted to use. However, they were happy to work closely with us based on our priorities. For example, take confirming payments in Spain. They worked with us, knew our timelines and were very flexible in getting this set up. We have not always received that level of service from other banks, some of whom needed a lot longer to get ready, at least to manage it in every country. Some global banks, surprisingly, still do not seem to understand how a central treasury operates and are very slow moving.

What are your funding arrangements?

Historically we have generated significant amounts of excess cash – financing has never really been a requirement unless it has made sense to take on external debt. In countries where we have a thin capitalisation problem, like Poland, bank debt has made more sense – at least for the time being.

To operate the cash pools we agreed overdraft limits on the Swiss entities’ accounts. That is only in case we have a problem with our sweeps and the Swiss entity ends up short of cash. Alternatively, when we have a lot of flows into the trading company around the netting date it may work to our advantage if we go short for a day or two on the header account if we have been able to invest the funds more effectively.

We do not have any bonds but in the past we had a commercial paper (CP) programme in the US, backed by Nestlé. That was not particularly unusual for our structure – we had a lot of debt in the US and more cash in Switzerland.

You have also been working on a commercial cards programme. What have you achieved?

One area of AP that involved a tremendous amount of manual processing and different approaches in each country, is the settlement of individuals’ travel and entertainment expenses. We have sales people in each country and every time they see a client they fill in a spreadsheet with expenses. That spreadsheet is sent, along with all the receipts, to the SSC in Fribourg – you can imagine the time and effort spent to submit that and the time lag before getting paid back. Just the physical transfer of the documents stretches that further. It takes a lot of time and resources for very low level payments.

In the US, we already used the Concur Travel Management system, and we decided to implement this in Europe, together with a commercial card programme. We move to a hosted version of Concur and all the expenses will in future be processed through. Staff will have their expenses uploaded from the card provider and then input their out-of-pocket expenses. Once complete their manager, who could, in some cases be located in the US, will receive notification to approve the expense report. Doing this online allows expense claims and approvals to be done quickly across a lot of countries and significantly reduce the paper flow.

We are in the process of rolling this out into Europe, and started with a UK pilot in May. The staff processing expenses should see benefits immediately, travelling staff can stop pre-financing the company, and the firm as a whole should see the benefits well within 12 months.

An additional benefit is the granularity of expenses data the system provides. In the past it was hard to gain thorough oversight on that. The commercial cards programme gives us much more detail and widens the scope of these activities. Another application of this is in VAT terms – different countries have different rates, and an online, aggregated system may enable easier VAT reclamation on expenses when the manual process is often too resource-intensive to be worthwhile. Purchasing management is a key priority for the future and also an area where we look to achieve greater savings from the merger with Novartis.

What are your main aims for the merger with Novartis?

Alcon is more centralised in Europe than Novartis, although they have embarked on a finance transformation project and one of the challenges will be ensuring that the various work streams, integration of Ciba Vision, SSC integration, treasury integration and so on are all working in sync. We don’t want to undo what has been achieved in the last two years but we also want to benefit from Novartis Treasury’s scale in other areas. We have already started working closely together on credit management and country risk exposure and this has already bought some immediate benefits to Alcon.

In terms of integration, I see the situation becoming similar to that which we had with Nestlé in the past – Novartis will manage the strategic cash for us, execute FX trades to manage our currency exposures etc. We will also join their netting or clearing as they call it, too. They will take on a lot of the operational activities, which is a good thing bearing in mind there are only two of us in Alcon’s treasury. We have been so busy with the day to day treasury operations that we have not been able to look at areas like AR and financing options where I think we can add more value.

Overall our operations combined should become more efficient. Novartis will also be able to use our cash – they have a fairly large investment management team because they also manage the group pension. We will save costs by using their SWIFT gateway, and on the FX side there will be more opportunities for natural hedging when positions offset each other, for example.

In terms of systems, Novartis uses SAP and is looking to adopt SAP’s treasury module, so at some stage we expect to migrate over to that. We are in a good position and I believe Novartis are impressed with what we have achieved here in just a couple of years – we are managing 13 countries for liquidity and AP, together with over 40 participants in the netting.

What projects would you like to undertake that the merger will allow you to take on?

On the AR side there is currently very little standardisation. For example, some countries have been direct debiting customers when others are not, even though the clients are very similar. I will look into whether that can be rolled out to every country. That has led to issues in Scandinavia, for example. There sometimes clients have wanted to use direct debiting but could not because we do not offer it. We could also look at lockboxes for cheque collections in some countries. In terms of measurable impact that should help with our DSO if we can process receipts in a more timely manner.

Personally, I am interested in electronic invoicing. We already do this in Scandinavia because it is a requirement to do business with certain state hospitals. We operate in each country according to their standards but I think there is scope to standardise that process and roll it out to other markets.

“Treasury is acting as a consultant to the business units to help them operate more efficiently. The benefit for treasury is that we eliminate legacy systems and get the cash more quickly.”

In processes like this, treasury is acting as a consultant to the business units to help them operate more efficiently. The benefit for treasury is that we eliminate legacy systems and get the cash more quickly. For example, in Austria we are using the local bank system for direct debit which is all very manual. Again, we would like to manage this centrally through our ERP system. We are also developing the SEPA direct debit capability to offer that through the Eurozone countries.

With any of these projects there is the challenge of persuading the customer to come on board, and we need to make it clear they will benefit too. We certainly understand the benefits: when receiving invoices we see all sorts of different formats coming into the SSC. Benefits on the customers’ side include more certainty on payment timings, for example, and they also gain in terms of visibility.

In places like Finland, most state-run hospitals have a standard format and transmission processes. Unfortunately the private clinics do not so we have to come up with bespoke processes and tailor each invoice to each client.

It would be very helpful if country standards emerged and I think most customers would hope for a standard to be adopted – SWIFT, for example, has been doing a lot of work in that area. I certainly see potential here for efficiency gains for all kinds of companies in future.