In this interview, Peter van Rood, Corporate Director of Treasury, outlines the key drivers behind the successful transformation of his department which won EuroFinance’s 2010 Treasury of the Year award.

Peter van Rood, Corporate Director of Treasury at AkzoNobel, has been at the helm of the company’s treasury function for the past three years. In that time he has had to deal with the funding and hedging aspects of a merger with a major rival and acted as the figurehead of a programme that overhauled much of the department he inherited in 2007.

Fortune 500 company AkzoNobel is the largest global paints and coatings company and a major producer of speciality chemicals. Headquartered in Amsterdam, the company has a 55,000-strong workforce and reported a turnover of €13 billion in 2009.

Treasury information

Like many with ancient forbears, AkzoNobel is proud of its origins. It can trace the branches of its family history to an 18^th century Dutch lacquer manufacturer. Over two centuries of mergers, acquisitions and divestments have seen it rise to pre-eminence in the area of paint coating.

Of the two hundred years of AkzoNobel’s existence, the past three have been notably challenging. Peter took the treasury reins in 2007 and in the intervening three years has seen the divestment of its Pharma business for €11 billion, the acquisition of ICI for around €11.5 billion, the on-sale to Henkel for £4 billion and the divestment of National Starch in June 2010.

The subsequent implementation of a Treasury Transformation initiative involved the implementation of a treasury group-wide staff review and infrastructure upgrade. The upgrade comprised a global redesign of cash management infrastructure, the review of its policies and the implementation of a complete new suite of treasury systems. The latter project took 13 months to complete and included the installation of SAP’s ECC 6.0 treasury software and the introduction of FXall and SWIFTNet.

In 2008 the company started a programme to streamline its global cash management arrangements, a process that has seen Peter and his team initiate the tendering of cash management activities regionally. As a result, cash management processing costs have come down – backed by some drastic reduction in tariffs (well over 60% in some cases) – and service levels are set to improve on the back of more coherent regional cash management offerings. The improved cost levels are the result of a reduction in the number of bank accounts, transaction price improvements, standardisation of payment processes and automation of many transaction related finance activities.

The A-Team

The AkzoNobel treasury team consists of 34 full-time members of staff in six locations, with the headquarters and the treasury department both located in the Netherlands (Amsterdam and Arnhem respectively). Other major hubs are to be found in Chicago, Sao Paolo, Shanghai and Singapore.

Peter has five team members reporting to him. For treasury they are: the Director of External Markets, the Director of Corporate Finance, the Director of Business Treasury, and the Director of Treasury Control. Since September 2010 his team has been extended to include the Director of Insurance.

The department operates under a mandate that supports the centralised execution and governance of its treasury activities. There are also treasury policies for the businesses and a treasury statute for the function, which covers the policies, role descriptions, limits and authorisations applicable to the treasury function itself. These policies cover the following five financial risk categories:

• Capital.
• Liquidity.
• Currency.
• Interest rate.
• Credit.

In this interview, we talk to Peter and take a closer look at AkzoNobel’s treasury operations.

What were your priorities when you joined the treasury department?

When I started at AkzoNobel, in September 2007, I found a function that was in a sense depressed. There was a lack of direction and staff did not receive the development opportunities needed to grow; there was limited partnering with other organisations in AkzoNobel; a general lack of excitement around the topic of treasury, and a high degree of anxiety around the announcement of a reorganisation that had not been executed.

Periodic staff rotation tends to go hand-in-hand with staff development. However, over the past ten years limited staff rotation had taken place. This was just another symptom indicating a stagnant organisation. To change this, in Q1 2008, we set out on our Treasury Transformation programme. Over the past ten quarters we have rotated some 70% of the staff, with some finding new employment in AkzoNobel and others seeking their future outside the company. This has allowed for new treasury staff with contemporary skills to join the function. The qualities that we looked for during our recruitment drive were: pride in performance, professional mastery, contemporary treasury experience, team working capabilities and communication skills.

The culture change that this brought meant that the department was more and more able to demonstrate a way of working that I refer to as ‘flow’. A person or organisation in flow is one where actions are seamless, hierarchy is a non-issue and communication is timely.

How have you approached the challenge of increasing productivity in your group?

AkzoNobel Treasury maintains a continuous focus on standardisation, automation and centralisation. The implementation of our new in-house bank and payment factory supports this to a large degree. Furthermore, it shows up in the application of electronic trading sites.

FXall, for example, gives us competitive bidding for FX business, as well as the operational benefits of straight through processing of FX deals. Before, our FX business was all concluded via the phone. Now we are able to seek out parties more consistently and have transparency as to what we do, with whom, etc. It has been a great platform to get operational.

In general AkzoNobel hedges all its transaction exposure. Economic exposure is hedged only by exception. Investment exposure is hedged through the natural offset that external debt in local currency can offer, which is therefore by exception as well.

For our liquidity management operation, we have chosen to use MyTreasury. This is a platform for money market fund selection and investment placing with similar capabilities to those FXall has for the FX market. It emphasised the trend towards virtual market places and straight through processing capabilities sought in enabling software.

In that context we are also exploring the group-wide application of an electronic trade finance platform. We have looked at a number of potential candidates (eg Bolero). When implemented, it would allow us to centralise trade finance co-ordination and create visibility as to what we do, when and with whom. It will drive more efficient use of trade finance instruments going forward.

What kind of targets and milestones did you set yourself for the Treasury Transformation project and how much progress have you made so far?

In terms of key performance targets, we aim to save some €20m a year globally through the implementation of our new cash management structure (bank accounts, sweeping arrangements, payment factory). These benefits now start to come in and will be fully realised by 2013, when all legacy systems have been eliminated and complete global rollout of bank account structures and systems has taken place.

The number of cash management banks is expected to go down from 140 to around 20 and the number of bank accounts from some 2,000 to 1,000, with more scope for reduction thereafter by introducing ‘receipts on behalf’, which will allow us to reduce drastically the number of collection accounts in open economies.

In addition, we set ourselves the target and then realised to implement a new suite of SAP Treasury systems (in 13 months, six modules), on time and within budget.

From an organisational perspective the aim was to improve overall efficiency by capturing synergies from the ICI acquisition and through the reduction of manual transaction type of activities with automation. We realised a reduction in costs of 31%. The number of FTEs went down by 39% whilst the quality of staff, as measured by skills and relevant working experience, has gone up.

You have also set up an in-house bank. Can you describe that in more detail?

Our in-house bank really is a shared service centre activity relating to payment release. Operating units send in their payment batches to us. We strip out any internal payments – these get cleared via the current account. Then we determine for each external payment the most efficient route of payment.

For instance we are able to avoid cross-border payments to a large extent by making use of the ‘payment on behalf’ model (ie making payment from the top holding non-resident bank account on behalf of a subsidiary). Finally we add to each payment record a unique payment ID. When batches are returned from our regional cash management provider this ID is used to reconcile external bank statements. The in-house bank sends daily an overview of mutations recorded on the current account with the affiliate to their ERP system for automatic reconciliation. This avoids wasteful internal dialogue at month end to reconcile current account balances.

Balances on external bank accounts are swept to the centre wherever possible. The infrastructure put in place really is the foundation, first and foremost, to manage liquidity more efficiently. Secondly it will be a great basis on which to pursue regional supply chain financing arrangements, with the help of our regional banking partners. Finally visibility of cash and debits/credits improves as result of our centralisation effort, allowing one to put in place more consistent controls around creditor/debtor management.

What lessons have you learnt from the implementation of your payment factory and what advice would you give to corporates about to embark on a similar project?

I would suggest considering the following aspects:

• Take your own ERP landscape as starting point when deciding on your systems. AkzoNobel is SAP-centric and its ERP system landscape is still very fragmented. This supported the case for an SAP Treasury software solution at AkzoNobel.
• Choose your consultant partner carefully – they can make or break your project. We worked with Zanders & Partners for the implementation of our IT solution and PwC for regional cash management tendering. Both firms greatly contributed to our success.
• Implement modules in parallel – it will create benefits in terms of throughput time.
• Stick to standard functionalities wherever you can. This will improve your opportunities to learn from others whilst reducing implementation time and improving future maintainability.
• Choose a banking partner that fits your requirements (eg service attitude, flexibility, professionalism). The process runs across your organisation as much as it does through that of your partner bank.
• Source your IT project adequately – don’t expect your staff to do two jobs for the same pay for long.
• Get quality assurance and sound project management methodology established as part of your project execution.

What do the next 12 months hold for treasury at AkzoNobel?

First and foremost I will do my very best to realise in the years to come a treasury function that remains an exciting place to work. Professionalism, pride in performance, continuous development and a deep sense of team spirit are all key to achieving this. When we do we will be well placed to deal with the challenges of the future.

We furthermore intend to continue building our relationship with the AkzoNobel business partners in the area of financial consultancy and support for their growth agenda. Partnership will also be sought between treasury and other corporate functions in pursuit of more holistic AkzoNobel-wide financial risk management. Examples are the area of consistent application of option theory across insurance and treasury, pension fund deficit management, global fiscal optimisation and capital investor management.

In addition, we will continue to build our partnerships with our banks, with our consultants and with our extensive network of large and medium-sized corporates who are willing to exchange experiences with us on treasury best practice. In some cases, this includes benchmarking and/or exchanging IT solutions. As of late we have been approached for discussion on topics like cash management, treasury system implementation and financial risk policies.

From a process perspective we will be focused on finishing what we have started. This implies a disciplined rollout of our bank account structures and payment factory. It will take at least another 24 months to realise, especially if you take into account the need to eliminate legacy structures.

As part of the finance community at AkzoNobel, we will work on standardisation, automation and centralisation of our financial processes. Given the treasury platform we have built, we can become an increasingly important partner to the businesses, especially in the areas of Purchase-to-Pay (PtP) and Order-to-Cash (OtC). Work in this area is already taking place, for instance by looking at the group wide end-to-end PtP process and by considering automation for cash allocation, using the functionalities developed for our payment factory like our daily data exchange on movements on their current account.

All in all a lot to look forward to!