Jacques Molgo talks about the difficulties in managing Treasury and Financing issues in a large, but decentralised business.

The Group employs over 35,000 people in more than 1000 agencies in 109 countries worldwide. In 2003, it generated €3.9 billion in revenues.

What are your responsibilities as International Treasurer?

My responsibilities are treasury organisation, financing, working capital, cash management, bank relationship management and financial risk management.

After two recent acquisitions (Saatchi and Saatchi in 2001 and Bcom3 in 2002), Publicis management decided to look in detail at how best to structure itself in the ten countries generating the largest revenues (US, France, UK, Germany, Italy, Spain, Canada, the Netherlands, Australia and Singapore). The operational side of our business is indeed very decentralised. It is not unusual to have about hundred entities in a single country. This allows us to provide different, personalised styles of service with various creative styles to our clients. However, this structure, with over 1000 business units, does make managing treasury efficiently quite a challenge.

The first duty was to identify what was the best structure for treasury, given the operational constraints of the company. After careful study, the Group opted to develop a shared services model already partially existing in France and in the US. In each of the ten largest countries, this meant introducing a shared service centre (SSC). Each SSC incorporates accounts payable and receivable functions, tax, legal, HR, most often client credit management and now also perform all the treasury activities, including financing, for that country. Where the brands are independent and operate worldwide, each SSC is responsible for all common functions on a country basis.

This is a semi-centralised structure, where activities are concentrated on a country level. We then obviously looked to appoint individual country treasurers within the shared services centres. Since last year, we have been in the process of widening the concept to the other large countries. I therefore travel quite often to meet main agencies’ CFOs, SSC Managing Directors and/or interview candidates for the Country Treasurer roles.

We could not afford for each entity to be responsible for managing its own bank relationships. This would inevitably result in the entity receiving a level of service at a cost which would not reflect the global size and reach of the Publicis group. We have started to implement a global approach to managing bank relationships. The first step was to agree a club deal with about ten core banks. I am responsible, together with the Director of Treasury and Financing, for managing these core banking relationships.

How are you held accountable?

I report to the Director of Treasury and Financing, who, in turn, reports to the CFO. We hold weekly meetings in which we review progress in those areas where I have responsibility. There are only two of us working in the group treasury. Most treasury staff are based in country, reflecting the semi-centralised structure. For example, we have about six treasury staff in both the US and France, three in the UK and two people in the overlay finance company also located in Paris.

What is the ‘Focus on Cash’ programme?

The programme was launched mid 2003. We started by going into the business units in the bigger countries to identify working capital positions, both within each country and across the brands. We wanted to identify which entities had significant working capital requirements and why. Every month, we start by analysing the trends, looking at the evolution and cyclicality of the business. We tend to find the business is very cash positive at the end of the year, although surplus cash is lower during the year.

Every month, Group Treasury works with the CFO who presents the key figures to the Management Board. We started to see the first positive results at the end of 2003. Over the course of that year, we managed to improve working capital, giving targets to each of our main brands.

This programme is not just about billing or collection systems, but also about analysing and streamlining processes in the Agencies and in the SSCs. Over the last year, we have had to spread the culture of managing working capital across the group and to identify areas of potential improvement. I have also had to educate various local CFOs on the impacts of working capital consumption. We challenge the brands and business units to justify their processes.

This means getting into the business units to work closely with them. We benchmark all the different units using certain benchmarks, such as Days Sales Outstanding, Days Payables Outstanding or Days Working Capital Equivalent. This helps us identify how we can achieve the best results, given the operational needs of the business. Although the concept is straightforward, it is important to be able to motivate people and to give them rewards.

This programme is interesting for me as a treasurer. Instead of concentrating only on capital markets and remaining very much a standalone function, we have to be involved in the heart of the business. Unless we understand the business constraints, we will not be able to make things improve. This is especially true for me, my experience being mainly industry driven. I should add that the backing of senior management is crucial. The monthly board level review shows significant emphasis is being put on this project from the very top of the company.

With this new model, we started to review cash management in each country. We wanted an efficient pooling of cash in each country. We could avoid running unnecessary overdrafts, whilst there were pools of excess cash in other entities in that country. In other words, before we started to arrange expensive external funding, we wanted to ensure we were using all available in-house cash to fund the business.

How do you arrange funding?

Our club deal was a significant step. It ensured we have access to a certain level of liquidity. It also enabled us to streamline our banking relationships to emphasise, to our core banks, the role they can play over the long term and of course to leverage terms and conditions.

We also are in the process of building domestic cash pools with zero balancing agreements. This allows us to avoid unnecessary overdrafts in some business units while having cash surpluses in other. At the same time, this saves spreads on the reduced borrowing. We have also rationalised our bank relationships, which will further reduce costs.

We review the different funding requests for all business units centrally at the moment, although we envisage delegating this to the country treasurers in the future.

On the funding side, we issued a convertible bond last year. We have reduced costs and extended the corporate portfolio’s maturity. We also have one exchangeable bond and two mandatory convertible bonds on the balance sheet.

At present, the company is not publicly rated. Although there is no urgency, we do intend to get a rating at some point, because it will give us additional funding opportunities and will maximise flexibility.

How do you manage risk?

On the foreign exchange side, our business is primarily domestic, so there are no huge exposures. We have some risks, mainly on the transactional side, between our operational currency, the Euro, and the US Dollar and Sterling. When we do hedge these exposures, we use simple instruments such as FX swaps and forwards. We also have some cross-border loans and borrowings, which we hedge on a case-by-case basis to avoid P&L hits.

Managing interest rate risk is also not a significant challenge. We have fixed most of our external long-term debt at an average of 4%. We are looking at the fixed/floating mix, but will not change this dramatically because of the low rate we have. We have been able to fix our borrowings at this relatively low level because of the opportunistic approach the company has had to issuing debt.

On the credit management side, we are of course looking at the quality of our receivables and the size of our overdues. This is a part of a project to introduce a more sophisticated approach to client credit risk across the company as a whole.

How do you manage bank relationships?

The number of relationship banks expanded significantly as a result of our acquisitions. Last year, we decided to restructure our bank relationships into a small number of banks which we could rely on for the medium to long term. Either I or the Director of Treasury meets with a senior member at each core bank on a regular basis, and at least once a quarter. At this meeting, we review the projects in each country and the local credit facilities. This gives us a more transparent way of working. This single point of contact is appreciated by both them and us, as it is more efficient. For us, it means that new facilities can be implemented much faster when they are needed.

When awarding business, we look to reward our core group of banks for their support, even though we want the banks which have the best capabilities in each country. Those in the core group will win a bid against a nonparticipant in the club deal.

We have decided against appointing a single bank per country. We tend to use either two or three cash management banks in each country. This gives us coverage in the event of a disruption to service. It also provides an element of competition between the banks in each location. We find this arrangement is a good trade-off between the need for back-up and the desire for efficiency.

How do you use technology?

Four or five years ago, every company would have a standalone treasury workstation with the corresponding database in each country. Typically, these systems would not interface with each other.

Today, the situation has improved a lot. It is now possible for us to introduce a common system for both the central treasury in Paris and for the ten shared services centres, which will cover all our activities from risk management to payments processing.

At present, we are already using web-based payments in some subsidiaries. We have a treasury management system in the USA which can perform some treasury tasks, but cannot fulfil all our objectives. We have a standalone treasury management system in France, with similar problems.

We are looking for a new treasury management solution, which could be a single platform with thin client access from the shared services centres and between the SSCs and major business units. We want to be able to consolidate information on cash management, liquidity and risk, for example, on the same platform. We are in the process of preparing a RFP and our objective is to implement a new system this year.

Although it is not my direct responsibility, we are also examining electronic bill presentment to reduce paperwork, improve the audit trail and to increase staff efficiency.

What are your challenges over the next few months?

I think there are four ongoing challenges.

1. We are starting to work towards implementing an international overlay bank to run an international cash pool from here in Paris.
2. The selection and implementation of a new treasury management system.
3. We want to develop a network of country treasurers to improve operational efficiency in those locations.
4. Finally, the biggest challenge is to continue to improve cash generation globally by making working capital work more efficiently.