Neil King joined Carphone Warehouse as its first Group Treasurer in 2000. Treasury Today talked to him back in September 2004 about how he established a new treasury department in a rapidly growing company. In this issue we revisit the company and hear just how far his treasury operation has come in the intervening years.

There have been a number of significant changes to the structure of CPW since Treasury Today last caught up with Neil King, Group Treasurer at Carphone Warehouse (CPW), at his West London office. Not least of these have been the joint venture established in May 2008 with US firm, Best Buy Inc, and the de-merger of CPW’s own Talk Talk business in 2010, the latter leading to the development and eventual departure of a parallel treasury team.

It would be natural to assume that these events impacted heavily on CPW’s treasury operation, but Best Buy were “particularly hands-off” as far as treasury was concerned; King still runs the function for all of Europe and funding remains external. However, he has taken a number of practical and far-reaching decisions in the intervening years as to how to best run the treasury operation. All things considered, one aspect has remained remarkably and impressively constant, and that is the steadfast adherence to the spirit of what is called by others the KISS principle. KISS, for the uninitiated, means keep it simple, stupid. In a world dominated by complexity and change for changes sake, his approach is refreshing.

The principles of treasury for King are about identifying what you have and keeping it simple. “I cannot see any requirement, unless there is a direct cash benefit, to do anything other than in the simplest way,” he states. Challenges are issued to businesses within the group from time to time regarding complexities that have become apparent – perhaps around the increasing number of bank accounts or multiple levels of pooling or sweeping. “Sometimes we work with them to simplify things but other times we have to impose it.” Most subsidiaries view this process from the perspective of the good of the group as a whole, not just isolated units looking after themselves.

The view of doing what is best for the group is one shared by CPW’s board. Since the de-merger, King has enjoyed a treasury-specific power of attorney for every company in the UK group and for some overseas entities. This vote of trust enables him to take significant decisions on many treasury matters (with some, nevertheless, being retained by the board), speeding up the process of decision-making and bringing further simplicity to the function.

The more things change …

CPW reached a peak of complexity in 2007/08, just before the joint venture. “Since then, matters have actually simplified as parts of the business have gone,” recalls King. Back in 2000, the plan was to expand into more European countries but CPW has retrenched to a certain extent, having sold off the retail business in Switzerland and pulled out of Belgium altogether. It is still very much a western Europe-focused company. By limiting expansion, for now, it keeps certain funding complexities at bay, although retrenchment in part due to the individual economic and commercial environments in each country. “We are in the markets where we feel there are positive commercial opportunities,” he states.

King remains true to his belief that for CPW, centralisation is the only way of running an efficient treasury. It is led by a set of “firm treasury policies”: for example, he insists that there can be no unsettled inter-company balances anywhere in the group other than for direct funding, except with his specific approval, which might be given, for example, for a specific tax structure. He admits to being quite a “stern task-master”, requiring documentation and adherence to agreed policies, but has concluded that this level of control is essential to ensure the efficiency of the treasure operation.

Currently, all funding is provided automatically across the group through a zero-balancing structure although this is likely to change during 2013 as individual currency pools are established at different banks and the overlay structure dismantled. This management of inter-company funding gives treasury “a lot of comfort”, especially as group cash flow is continually scrutinised, King commenting that CPW has “the best knowledge of our cash flow that we’ve ever had right now”.

Flexible friend

Through good times and bad, CPW’s treasury priorities have remained much the same: security of the company’s cash, funding and liquidity. It is, however, harder to stay true to some policies when times are tough. As such, certain processes may witness a degree of flexibility. In a period of almost zero interest, when trying to explain the time-value of money and the strict policy of centralising liquidity to junior treasury personnel, King acknowledges that he will be challenged (and readily admits that his own view is sometimes split) when it comes to adopting “the correct traditional behaviour” or being more pragmatic about the way in which the firm funds itself.

The effect, over the last six to 12 months, has been that whilst CPW’s treasury is fully centralised, the company has started to permit, and even encourage, the uptake of some local bank facilities to assist in managing liquidity at the local level. Some of these facilities have been carved out of the main revolving credit facilities (RCF) as ‘ancillary facilities’, the accommodation of which led to the RCF being extensively amended last summer.

Translational hedging simplified

Although some local costs may come in a ‘foreign’ currency, CPW is not an exporting company; it exists to sell in its local markets. In 2004, the plan was to move towards loans made in the local functional currency of each unit; this has now become “absolute policy” with the group running a strictly controlled translational hedging policy. The absolute nature of this policy is extended to ensure that no business unit can hold a bank account in anything other than in its functional currency. “We encourage our businesses to be sensible and protect their margins by hedging if they wish to, but we do it centrally, settling everything through the netting system.” The netting system is run every two weeks and covers all external currency payments and all foreign exchange (FX) deals for the subsidiaries, as well as the more traditional settlement of inter-company balances.

Implementation of the policy was “not hugely popular at first” as everyone had to work to a fortnightly cycle rather than being able to pay at will. But most now see the benefit of not having to account for FX contracts, revalue banks account and so on. It’s simpler and there are hopefully no surprises from FX coming up through the accounts; the central treasury knowing about currency issues in advance, and monitoring its foreign exchange positions every day. “As far as possible, I think we’ve taken that area of transactional risk out of the system,” states King, adding that “probably to the sadness of many of our banks, FX is now not a large part of what we do.”

Finding funding

In terms of funding, it has become almost “second nature” for CPW to be involved in refinancing, having done so more than a dozen times since 2004. CPW remains cash-generative and its gearing is “modest”; its current needs are therefore met by its current core banks and won’t now be re-financing until next year. It has never used the bond market, however, in 2009, when times were rather “interesting”, CPW used its significant receivables (mainly from the well-rated mobile networks) to structure a secured facility that was used to the early years of the joint venture with Best Buy. “It was the only way we could get the amount of liquidity we required,” recalls King, noting that it was “expensive and difficult”. By July 2011, he had refinanced that deal back into the more straightforward bank market.

Outsourcing and technology

King’s team runs part of the payments function (the disbursement of cash), but the shared services centre (SSC), which was established in Portugal for CPW in the early 2000s, was fully outsourced around two years ago to operations in India and Romania (the choice of location depending on the countries being covered). This now acts as the payments factory (with internal authorisation) and handles most management accounting, accounts payable (AP), cash reconciliations and so on.

In 2004, most the of investment management of the significant insurance reserves (CPW has an insurance company providing handset insurance for customers) was outsourced to professional fund managers but this has been progressively, and now fully, brought back in-house. The rule of simplicity (in part a response to increasing regulatory pressure in the insurance industry as well as smaller amounts being retained in reserve anyway) has been applied, with much stricter parameters and transparency brought to bear on investments (mainly money market funds (MMFs), via ICD’s platform, and bank deposits). This, says King, has served CPW well, “allowing us to retain liquidity and security of our funds during the last few years of uncertainty”.

The TMS used by CPW (the old Richmond system, now part of the Wall Street Systems portfolio) is delivered on an ASP basis (and linked closely to CPW’s other systems). But this is going to be opened up for tender in the 2013/14 financial year; the system search naturally placing simplicity and cost somewhere near the top of the requirements. By this time, every system the company uses will have been tendered at least once since the de-merger, comments King. “It’s useful to look at these things with an eye to saving money.”

CPW has also engaged with the SWIFT bureau, Simplex, (it could not justify the cost of its own direct membership). Once live, connectivity will allow the group to submit its own payments files, direct debits, take confirmations and so on. The roll-out will start with bank reporting and by the time the Single Euro Payments Area (SEPA) project has finished (CPW will be SEPA-compliant for direct debits (SDDs) shortly with SEPA credit transfers (SCTs) following later in the year) this too will function via the bureau and not a bank platform. King anticipates “modest savings” here in terms of bank fees, but through automation also expects efficiency savings. Importantly, it also means CPW heads closer towards bank systems’ agnosticism.

Some of the new systems being brought in display a degree of complexity. But, as King comments, they will make the operation much more efficient. “And I don’t see that the complexity of systems steps away from the idea of a simple treasury; we’re just trying to do our simple things in a much more efficient manner.”

Since 2004, CPW has been through a lot of changes and King admits that systems development had, for the duration, not been a priority and had possibly fallen back in terms of more recent treasury trends and developments. It is now improving its systems and one of the key aims is to ensure treasury is no longer beholden to bank software. “In talking to other treasurers,” says King, “they say the same thing – they would like not to be tied to their banks.”

SEPA is coming

SEPA figures hugely in the life of CPW. It has a major IT project (ongoing since November 2011) to become SEPA-compliant “as quickly as possible”. “We will have to be compliant anyway by February 2014; we want to be done by summer this year,” King states.

The first tranche of the SEPA project covers direct debits, catering to many of CPW’s insurance policy holders across Europe and the UK who pay by this means (and amounting to millions of items each year). SCTs will follow: the evidence is that this too will be significantly cheaper, notes King. To expedite matters, CPW has a full-time developer working solely on this project.

The SDD process will be fully automated and managed by a single bank, giving CPW same-day use of the funds, which in itself provides satisfying efficiencies by removing intrabank transfers. By using one bank and arranging a standard tariff, CPW will significantly reduce its costs (close to £700,000 – gross of Simplex and other systems charges – in a full year on bank charges alone, notes King). There is more: “We will become bank agnostic and be able to change banks much more quickly, if we choose to, once we’ve done all this work.”

Banks: all change

Back in 2004, the process of bringing in Deutsche Bank (DB) as an overlay bank was just being completed. The decision to go down the SSC route meant it was also due to become CPW’s payment factory provider. In effect, DB scooped up most of CPW’s cash management business, except for some local cash collections. Handing so much to one institution was beneficial at the time because it allowed CPW to dispense with multiple banking relationships across multiple countries, bringing discipline to proceedings. With cash being pooled more efficiently it also reduced idle cash and reduced interest costs.

But now, states King, “the lesson that cash is a valuable resource has been fully learnt, right across the group” and over the past few years there has been a change of direction, and, with DB no longer central to the funding of the group, there will no longer be just one bank handling all cash management, with CPW instead splitting its cash management by currency, which may lead to different banks handling different currencies. Optimising cash management remains important but CPW has now found reason to go beyond the “one-size-fits-all” bank. “It was great for the discipline and gave us huge benefits for many years. But it did start to become hardwired into our systems and our brains,” explains King.

Breaking out of the routine and becoming more imaginative was “quite hard work”, especially on the IT side. In fact, the consolidation of banks in summer 2011 (from 16 to six: three UK-based, one French, one Dutch, one Swedish) was quite an upheaval in itself, he admits. Those banks that remain have worked towards “trust and understanding” and have realised that they now have “a seat much closer to the head of the table”: all are equal in terms of distribution of business and all strive to provide an equal service. “We’ve got closer relationships now with our six banks than we ever did with 16,” King says. It would seem logical to expand the core banking group to cover CPW’s geographical footprint, and a Spanish and German institution would seem likely as markets recovers.

New challenges

Having a firm grasp of CPW’s treasury operation means the next challenge for the team is really just the old challenge – that of “doing it all properly”. “I’m sure we’ll never get an award for being the most inventive treasury,” says King, “but we have done everything we have set out to do and we’ve done it properly; we’re still here, we are solid and well-funded, which is as it should be.”