Vodafone won the EuroFinance 2008 Award for Treasury Excellence in recognition of Project EVO, an ambitious plan to migrate all of Vodafone’s legal entities over to a single operating model. We talk to Phil Clark and Thomas Light about the scope of the project and its achievements.

What are your roles at Vodafone?

Phil Clark: As Deputy Group Treasurer I have worked in various roles within the Vodafone Group Treasury Department including the design and implementation of the company’s global cash management structure. I am currently leading a team responsible for the treasury aspects of a global ERP solution to be deployed across the Vodafone Group.

Thomas Light: EVO Treasury and Cash Management (TCM) stream lead. I was seconded from Group Treasury in March 2007 to develop the EVO TCM design and subsequently joined the project on a full time basis.

As the project has progressed, so have the nature of the challenges and the focus is now on implementations, performing governance of the design and providing treasury advice to EVO on behalf of Group Treasury. As the Vodafone TCM Single Point of Contact, I spend a lot of time co-ordinating the various key stakeholders.

“As the project has progressed, so have the nature of the challenges.”

You won the 2008 EuroFinance Award for Treasury Excellence in recognition of Project EVO. What did the project set out to achieve?

Clark: Project EVO is our business transformation programme, spearheaded by CFO Andy Halford. The objective being to implement a single integrated operating model supported by a single ERP system across Finance, Supply Chain and HR.

Our Group Treasurer made sure that Treasury was one of the components in the design and implementation of the project. The objectives for TCM are aligned with those of EVO as a whole and include improving visibility, control, and consolidating our presence.

Who was involved in the project?

Clark: The core Vodafone TCM team was resourced by Group Treasury with a team with Group front, middle and back office and operating company (OpCo) experience. We wanted to ensure the development of a balanced design that worked for all areas of treasury and the OpCos. This design has also further improved the level of communication and understanding between the teams.

Additionally, the Vodafone TCM team included a lawyer who, working closely with the team, developed the global cash management services agreement.

The key stakeholders for Vodafone were the global banking partners, Deutsche Bank and Citi; Accenture, our systems integrator; SAP consultants and of course most importantly the OpCos and Group functions.

Where did you start?

Clark: At the very beginning all the key decision makers from all the Vodafone OpCos were invited to a three day design workshop to agree the main process work streams. It was at this point that the Group Treasurer and I persuaded the attendees that TCM merited its own work stream along with the likes of P2P Reporting etc.

Light: We then started with identifying and agreeing a set of principles at a treasury steering committee (SteerCo) level. The treasury SteerCo included the Group Treasurer and a Group Finance Director, Paul Stephenson.

Then using our own expertise, and that of SAP, Accenture, banking partners and the Vodafone OpCos, we developed the TCM Core Business Model (CBM).

Visiting other corporates and attending ACT events and courses helped us validate our design decisions and ensured we considered all the options.

What were the key stages of the project?

Clark: Broadly speaking the key stages have been global feasibility, analysis and design stages, followed by individual OpCo analysis and design phases to pick up on required localisations (ie customisation needed for a particular location) ahead of their rolling onto the EVO platform, ie the implementation phase.

The objective of the analysis phase was to gather, identify and analyse the OpCo requirements. This was achieved through a series of workshops attended by around a dozen OpCos. We completed the RFP for an EVO global banking partner at this stage to ensure we benefited from a leading cash management bank’s expertise and resources from the outset.

During the design phase we had further workshops with the OpCos, at which we discussed and agreed the big picture structure and processes, filled out the detail, and we exited the stage with a ‘conference room pilot’ (CRP) at which a prototype system was built. The CRP was a challenge, but it ensured that all stakeholders, from OpCos through to other work streams with which TCM had interdependencies, were on the same page. At this time we also developed the global Cash Management Services Agreement with the bank, and the core connectivity between SAP and the banks.

The implementation phase involves rolling OpCos onto the EVO platform in waves, and will take several years. It starts with a ‘fit/gap’ analysis of the OpCos’ local requirements – these are then compared to the core business model and the localisations required are identified and developed.

What were the project’s main achievements?

Clark: Improving control and transparency, reducing cost structure and helping consolidate our presence were the key ones.

The EVO TCM solution improves control in a number of respects. Firstly with regards to FX, the TCM design uses the new Vodafone Procurement Company, the VPC, as a mechanism through which to remove FX risk from the OpCos (the OpCos procure from the VPC in their functional currency). This is important to the OpCo CFOs, who need to deliver against forecasts and budgets. From a Group perspective, visibility of OpCo performance is of course improved.

The VPC also provides an opportunity to better manage our currency mix. As a group we generate a surplus of EUR and build up a deficit of GBP due to dividends and extensive share buy-backs, which are only partially offset by GBP Vodafone UK cash inflows. With the introduction of the procurement company, through which ultimately 80% of the Group’s spend will flow, we have the opportunity to redress the natural currency imbalance, at least in part. The VPC will procure primarily in its local currency, the EUR, reducing the EUR surplus. Because the Vodafone UK purchases from VPC will be loan settled, the net GBP outflows will be reduced.

Light: The centralisation of the VPC has provided many other opportunities to improve control. It provides an almost one stop shop to engage with our supply chain on matters such as currency clauses, embedded derivatives and guarantees.

Clark: We have also been able to reduce our cost structure through EVO for a number of reasons. Perhaps the key to this is the appointment of global EVO banking partners, through which we have been able to exercise global leverage on pricing and reduce duplication of systems and processes across the OpCos.

Light: Cost structure is also improved through the significant automation we are able to introduce. Most of the OpCos already had something close to the EVO one touch payments solution for external payments. The real step forward in terms of design, made possible by moving onto a single instance of SAP, is an inter-company netting centre. This not only manages the settlement calculations but also automates the whole end-to-end process, from the business approved purchase order through to auto-allocating invoices settled on the basis of internal bank statements.

We have additionally employed and developed SAP’s in-house cash functionality in order to:

• Manage interest calculation and capitalisation.
• Automate periodic loan adjustments.
• Generate statements to keep the TMS in sync and also import from the TMS.
• Automate the loan adjustments resulting from the ZBA liquidity structure.

The full benefit of this in-house banking will however only be realised when all OpCos have moved onto the EVO platform.

Clark: Because we are consolidating to more meaningful bank relationships, we have been able to negotiate one global contract to govern cash management for all participating OpCos in all jurisdictions. This is not only operationally easier, with each OpCo signing a contract of adherence instead of a raft of new legal paperwork, but it provides a clear visibility and a process for escalating and centralising all material disputes.

What design challenges did you encounter?

Light: Getting advice was not a problem. There is a lot of excitement and marketing of new initiatives, products and services – the challenge was making sense of these, and evaluating the risks and benefits of each for Vodafone. Some of the more difficult design decisions included how to structure the accounts and liquidity structure, use of SEPA and numerous technology related considerations such as whether to adopt XML, SWIFT FileAct and WORMs! (WORM = write once, read many).

“There is a lot of excitement and marketing of new initiatives, products and services – the challenge was making sense of these, and evaluating the risks and benefits of each for Vodafone.”

New file formats and in-house banking technology are making the ‘on behalf of’ payments model a more achievable proposition, and it is now almost assumed for shared service setups. An ‘on behalf of’ payment refers to an entity making a transaction on behalf of another entity, ie some shared service centres open a single bank account (held in the name of the SSC) and settle various OpCo invoices from this single bank account. There then needs to be an internal recharging mechanism. It was a difficult decision to stick with the old payments model, where the VOCH (Vodafone Operations Centre Hungary, our shared service centre) transacts upon accounts held in the name of the OpCo.

We had the usual concerns around localisations to design that were required in some markets for legal reasons, issues around unreconciled items and rejected payments, and getting EVO scope customers to pay to the accounts. The key issue was that, because the OpCos needed to maintain local accounts for the purposes of billing, we would always need at least an EVO overlay account in each country to minimise cross-border transfers. However, the introduction of the global procurement company was a neat way to consolidate accounts while keeping complexity to a minimum. With 80% of spend ultimately going through the VPC, this becomes the only entity outside Group Treasury that needs to maintain foreign currency accounts.

From the outset we were keen to understand and take advantage of the SEPA initiative in terms of consolidating accounts and reducing bank charges. However, a majority of the OpCo payments were local and thus we did not always have the IBANs and BICs. Whilst we trialled an IBAN generator we did not achieve acceptable conversion percentages.

In the absence of any clear financial benefit, rather than trial other services or outsource to obtain the details, we decided to continue to settle local payments by ACH and will revisit the challenge post PSD (Payment Services Directive), when we anticipate the services will have higher accuracy rates.

We have, however, been able to benefit from reduced bank charges and consolidation of accounts with the new procurement company, which makes all its European payments from a single EUR account. This is possible as the VPC is collecting all supplier data afresh.

At the time of the first implementation, XML was just being introduced as the natural SEPA Credit Transfer file format, and news that SAP IDOCs would not be further developed reached us. We ultimately chose to stick with conventional IDOCs – the logic being:

• We could still transact SEPA payments, with our banking partner converting instructions to XML.
• The documentation on configuring SAP XML to transact in all currencies required is limited.
• Linked with this, the technical team lacked experience/knowledge of SAP XML, meaning increased costs/risk of implementation.
• IDOC is the standard SAP output format.
• We can send sufficient text information with an IDOC to obtain 90+% auto-reconciliation, and this is included in the instruction when the bank converts it to XML.

So in short, there were no material benefits to us being an early adopter.

A surprise for us was how difficult it was to introduce a ‘one touch payments’ solution without accepting the risk that a systems administrator could edit or add payment files into the process. Following discussions with banks and corporates we learnt that generally the risk is accepted, as ultimately the fraud would be picked up the following day. However, we were keen to mitigate the risk and with the implementation of WORM technology we successfully eliminated the risk of a systems administrator editing a legitimate payment file.

The risk we struggled to eliminate was the risk of a system admin dropping in an additional fraudulent payments file. To address this we maintained a final check on the banking web based portal to review/release files based on a file header level review. This final step was actually welcomed by our Accounts Payable (AP) team, who use it as an opportunity to stop payments where new information about a beneficiary has come to light.

“A surprise for us was how difficult it was to introduce a ‘one touch payments’ solution without accepting the risk that a systems administrator could edit or add payment files into the process.”

Clark: Cash forecasting has also been a challenge. The transactional basis of short-term forecasting meant this was something we have been able to address with EVO. However, the complex nature of information which drives a medium and long-term forecast means that this is being picked up as a whole separate project. This project, the Enterprise Performance Management (EPM) solution, will sit on top of our consolidation system.

Has the ongoing banking crisis had any impact on the project?

Clark: Not in terms of design. Both for business continuity and commercial purposes we always intended to have more than one EVO global banking partner, and we will continue to tender on behalf of the operating companies for their payments business as they join EVO. It has however increased the interest within Vodafone in cash management, particularly with regard to efficient liquidity structures.

What are your plans going forward?

Light: Really our focus for the foreseeable future will be managing the ongoing roll out of the EVO design to the OpCos. The key challenge here is likely to be managing the localisations necessary due to local legal, statutory, tax or business critical requirements.

We are continuing to work closely with banks and other corporates to assess the potential opportunities and challenges of the PSD (Payment Services Directive) and SDD (SEPA Direct Debit).

Since this interview was conducted, Phil Clark has been promoted to the position of Director of Insurance at Vodafone.