Siemens Financial Services GmbH coordinates a network of financial companies from the group’s headquarters in Munich. The group employs 1,600 people world-wide and offers a wide range of financial services to multinational companies and public sector operators. These services include sales and investment financing, treasury services, fund management and insurance brokerage.

Can you start by telling us about the way treasury is structured at Siemens?

Siemens AG, the group, has a Corporate Finance and Treasury (CFT) department. It is relatively small and is mainly responsible for setting guidelines and determining the finance strategy.

Siemens Financial Services (SFS) is a subsidiary of Siemens, which was originally founded as a centre of competence for financing issues and to manage Siemens’ financial risks. SFS has since expanded and Treasury and Financing Services (TFS) is one of its six lines of business.

The treasury business is done by Treasury and Financing Services on the basis of a service level agreement which was concluded between Siemens Group’s Corporate Finance and Treasury (CFT) department and SFS. So this is a sort of internal outsourcing if you want. We act in the name of Siemens AG and all the transactions we execute figure under the name of CFT in the group’s balance sheet.

What are the services you provide?

We provide more or less all treasury-related services. The common tasks are securing payment capability at any point in time including payments execution, the disposal of the current accounts into cash pools, liquidity planning and steering, FX risk management and interest rate risk management. We also launch capital markets transactions and are the impulse driver for the group’s finance strategy.

SFS is also a developer of solutions. Can you tell us a little bit more about your finavigate® system?

finavigate® is an ASP-based in-house banking system. It has been developed and designed internally by Siemens Financial Systems.

We use it to manage the group’s bank accounts and liquidity. So, in other words the managers in charge of our current accounts and cash pools get all the information they need through finavigate®. They receive electronic bank account statements, payment advices and estimates that are automatically calculated. These estimates are based on the advices and bookings and indicate how much money will come in on an average day and even suggest how much money should be transferred to or drawn from the account to reach a zero balance.

In addition to bank account and liquidity management we use the payment factory functionality in finavigate®. The system performs logical checks so that incomplete or incorrect payments are returned before they are sent to the executing bank for processing. All payments are also checked against terror and embargo lists, such as the ones released by the US Treasury’s Office of Foreign Asset Control (OFAC).

Finally, we do our inter-company clearing and accounting through Finavigate®. We book all inter-company accounts, which are the in-house accounts of all operating units, in the system. We have about 4,000 such accounts in 40 currencies. The objective is to achieve straight through processing by booking all incoming cash flows on an automated basis. This accounting is done with regards to the inter-company accounts, but we also book our financial accounting within treasury through the system.

We offer finavigate® as a whole or in individual modules to third parties in the form of an application service provided over the internet. Currently the system is in use very successfully at six companies.

When did you implement this in-house banking system?

We took the decision in January 2001 and went live in October 2002. We started with the module for the inter-company accounts with the support of cash management and cash pooling and added other functions like the payment factory over time.

Do you have estimates of the savings that you have made?

In total, we estimate we have achieved savings amounting to €10m per year. In addition finavigate® reduced our regular IT costs, if you compare it to the operating costs of the old company accounts. For the old system, we used a mainframe computer and a very old fashioned one which created a lot of operating costs per year. The running costs of finavigate® are quite low. We are talking about €300,000 to €400,000 per year, compared to €5m with the old system, so IT savings are substantial.

And do you have a treasury system in addition to that?

Yes, we do also have a risk management system. We have recently implemented a new system called Myrex. It interfaces, of course, with finavigate®, so we can transfer the cash balances into our risk management system and book all financial transactions through finavigate® into the inter-company accounts.

Do your subsidiaries still have bank accounts?

At Siemens AG, all entities can have their own accounts, but they do not need to because they can use internal accounts. It depends on the country. In Germany, a part of the cash flows is coming directly into our inter-company accounts, other payments are going into the bank accounts of the operating units. However, from there they are cash pooled. We have about 50 to 60 cash pools in total.

Wherever it is possible and subject to any legal constraints, we implement a cash pool and we are the leader of the cash pool in the name of CFT. But do not forget Siemens is located in about 190 countries around the world and there are still a lot of countries where the legal environment, capital market restrictions, currency restrictions and tax problems do not permit the creation of cash pools. There are also still a lot of countries left where we prefer not to do it because of the political risk.

How is the cash pool structure organised? Are there regional cash pools or is cash concentrated centrally whenever possible?

This depends on the bank. In principle, we are not going for a single bank, but a multi-bank solution. When we started the concept ten years ago, the approach was to get our hands on the liquidity worldwide to the highest extent possible. The approach was to look at the account structure and then to decide where to open the cash pools in the respective countries. In the beginning, we just wanted the liquidity and opened the cash pools where the operation had a critical mass. So for example, in France we have three cash pools.

We started the project in 1998 and managed to get 95% of the liquidity and also about 95% of our external debt under our central management. The remaining 5% is held in emerging markets or countries with restrictions. 5% represents about €800m, so that €800m of liquidity and €800m of debt is still located at the operating units. This may seem a lot for some companies, but if you divide this amount by all company locations and four or five legal entities in every country, in the end it is not that much. I cannot see that we can drive the percentage even higher. This is more or less impossible.

How many banks do you work with?

Now that depends from which point of view you look at it. Treasury works with about 40 banks on a global basis. We dramatically reduced the number of banks three years ago. I consider just over 30 banks our relationship or key relationship banks and the remaining number of banks I would call niche banks. For example, you need a bank in Scandinavia for payment purposes and you have other areas where you need these niche banks.

However, that is only the treasury. For Siemens as a whole, we would probably talk about more than 1,000 banks if you take into account all the local banks.

From a treasury point of view, we try to concentrate on a small number of banks. Working with 40 banks is alright for a company like Siemens, because we also have to consider that, if we decided to make a larger acquisition at some point in the future, we would need a number of banks with strong balance sheets, who are in a position to offer us M&A financing.

You mentioned the payment factory in finavigate®. Does this payment factory process all or most of the payments for the subsidiaries?

You cannot define it like that. The payment factory processes all payments that are executed and authorised by German or US units as well as cross border payments. Our main objective is to avoid cross-border payments by operating units.

I am not talking about cross-border payments in the sense that one operating unit in France pays an operating unit in Germany. We avoid this in any case with our inter-company clearing.

I am talking about payments Siemens operating unit in France has to pay a German supplier for instance. Those crossborder payments are done wherever it is possible through finavigate®. In total, our payment factory processes approximately 10 million transactions annually or about €140 billion a year.

We do not process local payments in countries other than Germany and the US. This is done by the operating units due to regulatory issues, such as Central Bank reporting, it might create fees on the beneficiary’s accounts etc.

We also like to remain diversified with regards to operational risk. If everything was concentrated in one payment factory, it would mean a higher operational risk.

SFS is also a consultant to the operating units. Could you talk a little bit more about that?

We have a separate department in SFS which acts as a consultant to the operating units on a global basis. The US and Canada, Central and South America are served out of our office in New Jersey with regard to cash management. We have a finance company in China, which is in fact the only finance company that has a foreign shareholder which has received the licence for non-financial institutions by the Bank of China. This company serves our 50 plus joint ventures in China. The rest of Asia receives services from our Hong Kong office. Out of Munich we serve Germany, Europe, Africa (mainly South Africa), the Middle East and South America with regard to inter-company financing.

The services we deliver to the operating groups within Siemens are mainly with regard to foreign exchange risk, from risk analysis to hedging strategies and it normally ends with the hedging contract as such. The financial risk or the FX risk stays with the operating unit until they hedge with us by using an internal contract. In emerging markets, we also advise subsidiaries on working capital financing which we often provide ourselves. However, if we do not want to take on a certain country risk or political risk, we support the subsidiary in obtaining the loan from a bank under our credit support.

Our CFO at Siemens stressed the importance of internal advisory even ten years ago when he was in my position because he thought, and I think he is right, that risk recognition is very important. The idea was that the operating units should be able to concentrate on selling their products. In order to do so, they would need support and professional advice in terms of financial risk management.

In my opinion, this approach has been very healthy for Siemens. If you just consider the past ten years, we had quite a few crises, from Asia, Russia and Mexico to Argentina and we have not had any surprises with regard to unexpected currency losses. This is due to our currency guidelines and the internal advisory on how to handle these risks in the daily business environment.

It is also important to note, that Siemens is an EVA (Economic Value Added) driven company. This means that interest income or expense is not relevant for the operating units as their performance measurement is based on capital cost and working capital. If they kept cash in their bank accounts the interest they would earn on it would not pay the capital costs.

This leads to a situation where the operating units’ excess liquidity or liquidity needs are just booked on the inter-company accounts. This supports a centrally co-ordinated financial management and makes interest rate risk management a lot easier for us, as we can implement our own ideas and strategies.

What is there left to do?

I have been responsible for the treasury during the past five years. We have done a lot of things and achieved several milestones. Managing interest rates is one milestone which we have implemented just at the right time (in 2003). Finavigate is another of the cornerstones, as is cash management in total.

Of course we would be delighted to have one European payment system or payment format. SEPA, or however you want to call it, but we are far away from that. If I speak to my experts, they have real doubts whether the banks can manage to find a single approach. In our opinion, this single approach will be necessary because banks are forced to lower costs and I think that at least in theory it would be the easiest way to cut costs. In practice, it will be more difficult to achieve because it is more or less every bank or every country for itself.

With regard to cash management, we started last year in June to oblige the operating units to announce every account they have. This is also done within finavigate®. At the time, we counted 5,500 accounts of which more than 3,000 were under our direct influence. This is not bad if you keep in mind that we have company locations in 190 countries. This year, due to several acquisitions, the number has risen to about 7,000 accounts. Therefore, the target is now to reduce dramatically the number of accounts.

The other objective is that in the future, and this will take some time, we will also try to develop finavigate® in a direction, which enables the subsidiaries to deliver their own payments to increase security within our payment area. We then would not debit our accounts, but give it back to their bank and they will debit the subsidiary’s accounts directly.