Corporate View: Mark Kirkland, Philips

Published: Sep 2007

Based in the Netherlands, Royal Philips Electronics supplies products, services and solutions in the areas of healthcare, lifestyle and technology. Philips employs over 125,000 staff worldwide and reported sales of €27 billion in 2006. This month we talk to Mark Kirkland about Philips’ treasury operations, current trends in the treasury world and the future of treasury.

Mark Kirkland

Global Head of Financial Risk Management and Front Office Operations

Mark D Kirkland is Global Head of Financial Risk Management and Front Office Operations within the Corporate Treasury of Philips Electronics. The primary focus of the risk management team is to devise policies on FX, commodity price, interest rate, country and credit risk for the Group. The management team also provides advice to the Group Treasurer and Chief Financial Officer on the financial risks that the Philips Group runs. The front office operations group is responsible for the execution of all financial transactions by Philips in the financial markets. Finally, the operations team devises the cash management structure of the group ensuring the most efficient usage of cash.

Prior to joining Philips in December 1998, Dr Kirkland was employed by Merrill Lynch in London, New York and Frankfurt in the fixed income and commodity markets for a period of nine years. He was educated at the University of Strathclyde in Glasgow, Scotland obtaining a BSc(Hons) in Mathematics and a Doctor of Philosophy in the field of Statistical Stochastic Simulation.

How is Philips’ treasury structured?

Philips’ treasury is divided into three areas. The first is the corporate or strategic area, which is made of two product lines – corporate finance and risk management. This group defines the financial policies of the Group.

Then we have a much bigger group, which is customer based. This is made up of two areas as well. The first is the insurance group, which deals with the group’s insurance policies. The second is business finance, and their job is threefold – the internal financing of the group, using financial products to expand the top line and the bottom line, the turnover and profitability of the group, and helping the businesses with financial risk management.

The third main part of treasury is operations, which again has two parts. The first is front office operations, which includes the dealing room and cash management.

The second is treasury control, and this includes our middle office (checking the deals with the banks and settlements). It includes our payment factory which makes all the commercial payments for the group. It also includes our back office, which does the accounting for treasury, and treasury control.

Out of these six boxes I’m responsible for two – risk management and front office operations.

Centrally, treasury consists of around 50 people in Amsterdam. This may seem a large number but we include three areas which are often not included in treasury – insurance, the payment factory and treasury control. Outside Amsterdam, we have treasury staff in some countries where there are capital controls or foreign exchange controls, such as China, Brazil and India. The main job in these countries is cash management.

Can you talk me through your areas of responsibility?

Risk management is concerned with risk exposures relating to foreign exchange, interest rates, commodity price, equity price and liquidity policies. It also includes the credit risk of our banks, the credit risk of our insurance companies, the credit risk of our customers, and the country risk of the group. Our three largest exposures are (1) foreign exchange; (2) country risk, as we operate on a worldwide basis and (3) equity price risk as we own shares in other companies.

Front office operations consists of two parts. The first is liquidity management, that is gathering cash to the centre as fast as possible. We do this centrally for all countries without capital controls and/or foreign exchange controls. It’s highly automated and we pool the cash on a daily basis and place that in the market. Front office operations also includes our dealing room. We have one dealing room in Philips and all deals are done out of Amsterdam for the entire group. It’s a highly centralised, highly automated process.

A lot of people are busy with SEPA. I think the whole payment world is going through a revolution which the foreign exchange world went through few years ago with the introduction of bidding platforms like FXall and Currenex, which enabled deals to be executed online. That revolutionised the FX market for corporates in that FX sales became much less of a relationship business and much more of a price business. Something similar is happening in the payment business with the introduction of SEPA. Payments, like the FX business, is becoming commoditised where the name of the game for providers will be volume.

Do you see SEPA as something that will be genuinely useful for treasurers?

For very large companies like Philips it’s not that useful. It’s not that we don’t want it – it’s just that it’s too late. The idea of SEPA is that you can make payments in euro within the EU for the same cost as a local payment. The problem is that most people have spent time and money creating an in-house bank/payment factory, which effectively creates local payments out of cross-border payments.

An in-house bank is a bit like having a bank account with your mum when you were a child. When you got money from your granny, your mother took the money from you and then gave it to you to spend when you saw something you wanted. This is basically like holding an in-house bank account with your mum. In the same way, our businesses have a bank account with us.

So if a business in France needs to make a payment to a supplier in Germany, but one of the businesses in Germany makes this payment as an external payment, that becomes a local payment. The French business is debited in its in-house bank account, and the German business’s in-house bank account is credited. So you’re using your in-house bank/payment factory to make your cross border payments into local payments.

Most of the large corporates I know have changed all these cross border payments into domestic payments, so the impact of SEPA on them is rather small. For smaller or medium sized companies, SEPA will save enormous amounts of money because they haven’t had the manpower or the size of treasury to build payment factories and in-house banks.

SEPA will provide them with similar advantages. Inside the Eurozone, I hasten to add – it would be nice if SEPA were a little more ambitious and included the US and UK. But when a colleague brought this up with the ECB they almost choked!

Some companies are looking at adapting their ERP systems for use within their treasury. That is a major turnaround. A few years ago people had very specialised systems to do their treasury management, so they had a system to look at their risk management and a system to look at for their payment factory or in-house bank.

However, I see more people questioning whether they can use their ERP systems for this. The clear advantages of that are that treasury is really about managing risks and managing different financial attributes, but to understand how to manage them you have to have the data. Treasury has really become a massive game of data collection. If you are able to access the data easily from your businesses using a small number of people, and it doesn’t take your businesses months to create reports, treasury can make decisions in a swift and clear way, really adding value to the businesses.

Another trend has been a stronger focus on working capital. You see this especially in the retail industries where many retail companies have been very aggressive in dealing with their working capital. This is setting a trend for treasury to try to become involved, to drive working capital as low as possible, but at the same time not do things which destroy profit. Of course I can create all sorts of cash for my businesses if I’m willing to pay for it, but that’s clearly just window dressing. The secret is to have something which produces cash but doesn’t destroy value.

To what extent is the treasurer able to get involved in this?

The people in the company who understand the time value of money are the treasury department. If you think about factoring, reverse factoring or giving cash discounts, which businesses love to do because it improves their cash flow, one has to realise there’s a cost with this.

In most businesses, the financial arm of the business tends to be controllers, who are more or less accounting people. They may not have experience in the area of the time value of money. The department in a corporate which really understands this issue is the treasury.

What technological changes will be affecting treasury in the next five years?

Companies like SAP and Oracle haven’t been sitting around – they have been developing their capabilities in the treasury world. Five years ago, people who were choosing TMSs would have dismissed these ERP systems totally. Nowadays they have to consider them carefully, and in another five years’ time they will have to explain to their CFO why they didn’t choose the ERP system they have in-house. This is simply because if you are a CFO you want sense and simplicity (clarity, simple recording, and a technological base that is stable). You don’t want very large risks being reported by a system that isn’t as well supported as the reporting is for your underlying business.

What other developments do you expect to see in the treasury world?

If you look back to 10-15 years ago, many of the treasuries around the world had departments looking at economic trends, they took positions in the market and they tried to make money out of these positions. I believe that over time people understood that there was very little value in this because any upside made from these transactions wouldn’t get the shareholder multiple of the underlying business. So if a company made €20m by taking positions in markets, the share price wouldn’t necessarily reflect that, because it’s very difficult to repeat the next year, and also the chance of losing the money is pretty high.

Once you decide that you’re a cost centre, or that you’re not a profit centre, the next step has to be to minimise costs and standardise as much as possible. Over the last two to three years there has been a frenzy of standardisation and centralisation of many tasks throughout different corporates. By doing that you improve your control and you reduce the number of people in treasury, which, after all, is an overhead for business. You then have to look at outsourcing to technology, and finding the fastest and most efficient methods of achieving your goals. Then you go one step further and ask where treasury can really add value.

For example, most people would argue that countries such as China, India, Turkey, Brazil and Mexico are going to have the biggest population growth and relative wealth growth in the next 20 years. All these countries have undeveloped markets. One of the big problems in these countries is giving credit to the end purchaser. Most people in Brazil would love to have a flat screen TV but don’t have the credit to buy it. To grow the bottom line, you have to understand how to give credit to customers. The people who in my mind are best suited to link the financial markets with the underlying business are treasury people. I see the business of obtaining financing for customers as key. Of course, financing is a bank’s standard business, so the people in corporates who are best suited to discuss this with banks are of course treasury.

How do you see the treasurer’s role within the organisation developing?

I think that the treasurer’s role is becoming more key, and more linked to sales and marketing rather than simply being a kind of back office function close to Corporate Control. If you ask people in the sales departments of manufacturing companies what treasury actually does, they probably wouldn’t really know.

They might say, treasury sits in the headquarters and does something with money. I think in the future, this is going to be very different. If you talk about being a partner with your business, then you’re at the forefront, you’re driving your organisation’s sales growth. This puts you in a very different position with the CFO or Financial Director.

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