Jennifer Ceran speaks about the challenges of establishing a treasury in a rapidly growing company.

How is the eBay treausry organised?

The eBay treasury team is currently eight persons. We are a centralised treasury organisation, with no treasury personnel outside the United States. The department is structured into four major areas: Investments and FX, Corporate Risk Management, Treasury Operations and PayPal Treasury (our on-line payments business).

Because it is primarily a financial services organisation, PayPal has a separate treasury organisation dedicated to their operational needs but some functions, such as investments, are managed centrally at eBay to make the best use of our human resources. The PayPal treasury also reports to me so that we can leverage bank relationships and implement similar processes across common activities such as opening bank accounts and managing liquidity.

In addition to these areas, I am also responsible for corporate finance.

How are you held accountable?

We have corporate financial goals, which are general to everyone in the company. The aim of this is to approach our opportunities as one team, so that everyone is ultimately focussed on shareholder value. This is preferable to giving individual departments separate goals that may conflict with those given to other departments.

In addition, we have individual goals and metrics for each area. For example, in treasury one goal is to ensure our investment returns meet or exceed comparable benchmarks, which are investments with similar risk and duration profiles. In FX, we are challenged to minimise the adverse impact of foreign exchange on financial results. In risk management, our goal is to optimise our cost of risk. In cash management, our goal is to minimise cash in noninterest bearing accounts. In corporate finance, we want to maintain an “optimal” cash balance taking into account our short-term cash needs and investment opportunities.

However, it is important to recognise that we are an evolving treasury organisation and the development of our metrics is also an iterative process. We are still developing a treasury scorecard as a tool to manage our performance. For example, we want to measure the effectiveness of our risk management programs. To be able to do this, we need to determine what we define as the cost of risk. Is it the insurance cost? Or do we also include the cost of claims that we did not foresee as well the cost of our risk mitigation programmes? In general, developing our management process is iterative. We start by brainstorming how and what we want to measure. This plan is then presented to senior management. We then track the metrics over a period of time, after which we review our system of measurement to see how we can refine and improve it. Although we are still building the process at the moment, we are aiming to create a fully automated measurement process that is highly visible to management

How do you manage your cash? What do you do with the cash you have collected?

We have set up cash pools and zero-balancing accounts with some major global banks to manage our customer collections and corporate payments around the world. Transfers to centralize cash are automated as much as possible so that treasury needs to monitor only a few accounts. PayPal also operates a separate network of accounts to run its business.

We currently have about $2.8 billion of cash and financial assets. We manage this cash, first, through a boardapproved investment policy that takes account of internal funding requirements and risk taking parameters. Like many corporates, preservation of capital is one of our key investment objectives as is maximizing our after-tax, risk adjusted returns. We have established a capital markets review committee consisting of the CFO, VP-Corporate Finance, Treasurer and Assistant Treasurer. This committee meets quarterly to discuss our investment portfolio and strategy. We use our cash balances for day to day operating needs and to fund new business opportunities including both internal projects and acquisitions.

What role do you play in managing working capital?

xTreasury plays a role in working capital by partnering with our accounts receivable and accounts payable teams to improve our collection and payment processes. We are fortunate that we do not hold inventory as part of our business model, so our working capital needs are minimal compared to others.

How do you forecast cash flows?

Cash flows at eBay are not volatile and have been growing in line with our business growth. Cash flow forecasting is very important and is something we will be working on this year. When I arrived at eBay in April last year, I prepared a full year cash forecast. We currently use the indirect method for estimating our total company annual cash flow needs. This works by taking our planning figures and then making various assumptions for such things as days sales outstanding (DSOs) and days payable outstanding (DPOs) to derive our estimates. The first forecast for FY03 turned out to be conservative as the actual amount of cash generated exceeded the forecast. We are now in the process of refining the inputs at the corporate overall level and building better forecasts at the entity level.

How do you manage risk – credit, interest rate and foreign exchange?

For interest rate risk, we manage duration. Our capital markets review committee meets quarterly to review the past quarter’s results. This includes looking at what we did and what the duration was. At this meeting, we assess current market conditions, such as where the yield curve is, and identify our less than six months cash flow needs. As a committee, we then set our strategy for the next quarter. This will include setting a target (a range, not a single figure) on duration. This process provides discipline for the management of our investment portfolio.

For foreign exchange, we first try to minimize this risk through operational activities and then use forwards and purchased options to hedge significant exposures. For credit risk, we use diversification. Our community of users is highly diversified with over thirty million active customers. With respect to credit risk in our portfolio, we employ limits in both counterparty and sector risk.

How do you use technology within the treasury?

Using the available technology that we have today is a key opportunity and focus for eBay’s treasury team. There are many alternatives to improve the organisation’s effectiveness and how we use our scarce people resources. These include outsourcing of activities, leasing/buying an external system or building a web-based solution in-house. My view is to determine which of these three makes sense for improved productivity and risk management given the costs for each of the activities in treasury.

In the 1990s, treasury workstations evolved and were useful for tracking transactions in a single database, but they did not communicate well with other systems, such as bank systems. This meant a lot of data had to be re-keyed into multiple locations. Today’s open source technology allows different systems to interface with each other much better than ever. This minimises the need to select a single treasury system. As a result, I am a strong proponent of selecting the appropriate solution for each need unless a single treasury system delivers the value and flexibility for all functions that we expect.

When I joined eBay, we did not have a treasury department website, but we have now developed a basic front-end portal which we will build out over time. I want us to use our internal treasury website as our front-facing view to all of the systems that we need to operate efficiently, creating straight through processing and then obtain realtime reporting on our financial and operational risks. We have also scanned in all of our critical documents, such as insurance contracts and bank agreements, into a library on the website. I am trying to create a platform that will enable Treasury to operate remotely if necessary. This approach forms part of our business continuity plan, as we can continue to perform our critical treasury activities if we have access to the Internet in the event of an emergency, such as an earthquake where we are unable to work in our premises.

Each of my treasury team heads is in the process of leveraging a variety of solutions to build a world-class technology infrastructure for eBay.

Interestingly, we have just hired a treasury IT specialist to work in treasury operations. With our emphasis on technology, we decided the skill set brought by an IT specialist would be more valuable to the treasury operations function than a person with a detailed understanding of cash management and banking relationships. We can develop a treasury IT specialist’s business understanding on the job. We have also volunteered to be a test group at eBay and will be trained to maintain and update our website ourselves. I believe that having an appreciation and understanding of technology is an increasingly important part of the overall treasury skill set.

How do you cope with the various regulatory demands you face?

Some have been disappointed when they lost business. Instead of having small amounts of foreign exchange and money transmission business alongside the credit they used to provide, all banks are now bidding for a proportion of a much larger piece of business. This has led to a dynamic change in the way that banks treat us as a customer. Despite these changes, none of our relationship banks have refused to work with us.

What do you see as the main challanges over the next couple of years?

Our biggest challenges over the next few years relate to scaling our organization as eBay’s business grows and expands internationally. When I joined eBay last April, there was a treasury staff of four people and we had about $1 billion in sales. Now we are a team of eight people and $2 billion in sales. This year, the current guidance provided by our senior management is for $3 billion in revenue. We are expanding into many new countries and this brings new challenges in cash management, foreign exchange, risk management and investments.

While we are trying to manage the day-to-day requirements of the job (making sure that a foreign entity is funded on time), we are also trying to anticipate our future needs so that we can plan ahead and implement world-class treasury management practices to support our business. We need to do both, but there is only so much time in the day. It is a balancing act that each team member manages each day.

To this end, we have to build our team to support our growth and it is critical for us to get the right people in the right place at the right time. A strong, well-partnering team is key for me, so all team members are involved in the interviewing process. We are looking for people that compliment and expand on our overall skill set. Once on board, we work to make sure we train everyone appropriately and expand their knowledge across treasury and our company.

Another opportunity is educating the organisation around what treasury does and how we can play a strategic role at the company. We have already made some great in-roads here at the corporate level but we will need to expand our messaging to our international sites.

I am very pleased with the progress the treasury team has made to date. As the business expands and grows, it will also become even more critical that we execute well to support the company’s efforts to make eBay the world’s most efficient and abundant marketplace. The treasury team is looking forward to helping eBay achieve its goal.