Acordis is in the process of outsourcing the transactional side of its centralised group treasury to ABN AMRO IFSC in Dublin.

Can you describe how the Acordis treasury was set up?

As Courtaulds, we had a fully fledged treasury department with a dealing room. For many years, our policy had been one of decentralised exposure management by our businesses, but with centralised trading. We operated as an inhouse bank which did the dealing and cash management for all the Courtaulds businesses worldwide (subject to local regulations). The central treasury was also responsible for financing, debt, liquidity management and interest rate hedging. At that time, there were about six members of staff within the central treasury – typically comprising a treasury manager, three dealers, the deputy to the treasurer (myself) and the group treasurer. The group treasurer was also responsible for insurance.

After Akzo Nobel bought Courtaulds, the two fibres divisions were combined to create Acordis. During 1999, the management and venture capitalists CVC put together a leveraged management buy-out bid for the company, in which Chase acted as underwriter and arranger. I was very involved in the process of arranging the initial syndicated loan, which included putting the syndicate together and drawing up the loan agreement. This was all completed so that, in January 2000, Acordis became an independent, privately-owned company.

How was the Acordis treasury function structured?

Once independent of Akzo Nobel again, we were completely responsible for all aspects of treasury, including debt and any short term liquidity. It was clear that the transactions base was smaller and more variable in Acordis than it had been at Courtaulds, with a narrower range of currencies and a smaller range of requirements of instruments and complexity. Therefore, a smaller Acordis treasury team was required comprising two dealers, an assistant treasurer and a group treasurer. Following relocation from London to Derby this was in fact a new team (apart from myself as group treasurer).

Why did you consider outsourcing the treasury function?

Not long after a disposal at the beginning of 2001, which had enabled us to pay off both our external and shareholder debt, it was announced that Acordis proposed to sell some of our businesses to a new CVC vehicle. The CFO, the ex-group treasurer of Courtaulds (who is now a part-time treasury consultant with Acordis) and I were asked to review what the new entity (known as NewCo) would require in treasury terms. Although we felt that it would have quite a big treasury requirement, creating a new treasury would be quite difficult.

Articles in the press on treasury outsourcing prompted two thoughts. Firstly that it might be appropriate for NewCo and secondly that it might also be the way forward for Acordis. If the NewCo project had gone ahead (it was blocked by Brussels on competition grounds), Acordis would have had even less of a critical mass in terms of volume of transactions, but with potentially more volatility. Despite this likely fall in the level of transactions, we would still have to maintain a certain staffing level in order, for example, to cover fluctuations in daily volume and holidays. In addition, we recognised that we would need to invest to up-grade our treasury management system which we had implemented around 1997/98. In both cases, we needed to consider whether such expenditure was justified. It was on this basis that we started to consider outsourcing.

How did you evaluate whether outsourcing would be appropriate?

After discussions with two consultants, and once it was clear that the NewCo project would not go ahead, we became convinced that outsourcing could be appropriate for Acordis as it was then (and as it is pretty much now).

After getting internal board approval, we met a long short-list of providers in September 2001. From the six on this list, a mixture of independent providers and banks, we constructed a final shortlist of two (both banks).

How did you decide what functions should be outsourced?

In many ways that decided itself as we had always had a natural split between the transactional (including backup, settlement etc) and the policy, advisory and strategic aspects of treasury’s role.

Was it a conscious decision to go for banks, or did they just happen to be the best?

It was a combination of the two. We were convinced of their capability to provide what we wanted, albeit in different ways. We also felt that both at the time and for the foreseeable future, it was more viable for Acordis to go for a relationship bank. One reason was that it was important that our other banks were comfortable with our decision.

There was some concern that if we went with a bank they might want to control who would win our ancillary business. We wanted the outsourcing business to be a transaction in its own right, which was viable for both parties on a standalone basis. We were able to manage this aspect very easily.

Recent discussions with our other banks have shown that they are happy with outsourcing and why we have done it. At the same time, they know that they can still bid for business (such as FX and deposits), which will be awarded on exactly the same basis as it used to be.

How did you choose between the two banks?

Having got down to the final two banks, we wrote our own very complete RFP. This included three volumes – one contained the detail of our requirement in a number of areas (for example, on interest rate management, cash management and FX), one contained a set of appendices of mandates, deposit and FX counter-party lists/limits etc., and the final volume contained sample reports. We felt it was important for them to understand what we did, why and how even though we stressed that we were not seeking to replicate but were happy to reengineer.

How long did this process take?

The process from giving them the RFP to making the final selection took about seven weeks. This was longer than we had thought, although we had built some slack into the timetable as we felt that it was more important for both parties to get the requirements and thus the response right .

In November, when we had received the responses but before the final decision, we went back to the board to get the fee structure, the implementation costs and the choice ratified.

How difficult was it to persuade the board?

The way that the board operates meant that it wasn’t difficult. It isn’t very large and its members are very open, so they were very aware of what we were doing at every stage.

Control issues and the ability to monitor the outsource provider are also important factors for the board. The way that the outsource provider operates on your behalf must be absolutely clear and understood by both parties. This means having robust agreements with clear and incontrovertible lines of responsibility. In our case, the concepts behind the control structure were in place, meaning that we had to rewrite rather than rethink them. Therefore, it was probably easier for us that it would be for some people.

How did you approach the implementation process?

The implementation process has taken longer than we envisaged. This was partly deliberate because we decided not to do anything until the beginning of this year as both the bank and us have December year ends.

We have a treasury services agency agreement, which is the core legal document. Then each module (foreign exchange or cash management for example) is controlled by an operating guideline. The operating guidelines are robust and clear documents that will be given to the dealers, back office and others within the outsource provider. They are the rules for whatthey do, but also govern who is liable in the case of errors etc.

We have also used these operating guidelines (where they relate to what the outsourcer is doing for our businesses, i.e. FX, currency options and netting in particular) as the basis for the internal procedure manuals.

Some treasuries would not need guidelines in the way we have written them. On the other hand I would say to someone considering it, don’t underestimate how important they are and don’t underestimate how long they will take. Also be absolutely certain at every stage that both parties are happy with every word that is written.

What are you responsible for in the outsourced situation?

Exactly what I was responsible for previously. All we have outsourced is the transactional side of treasury – the dealing room and the back office to the dealing room. I am still adviser to the board of management and to the businesses, I am still responsible for the strategy and policy aspects of treasury and for setting the controls and procedures. The only thing that has changed is that I am now responsible for supervising the outsource provider in Dublin, rather than the dealing room across the corridor. Because I had devolved responsibility to the dealing room over many years, I don’t envisage being referred to any more or any less in the future than in the past. However, because there is a third party involved, there are liability issues. Therefore the guidelines have to be that bit more explicit and totally mutually accepted.

How have you managed your relationships with your operating units?

The only real problems have been in relation to some of the systems which are Internet based and which have caused a delay in the testing. We told the operating units what we were doing last October. We have involved them at a number of stages, culminating in open days in April, at which the operating units had the opportunity to meet members of the outsource provider and see demonstrations of the FX and netting modules. Although there have been one or two problematic issues for one or two businesses, as a whole the project has got a lot of support within the group.

How will the change affect the operating units?

All that has really changed is the way they transmit their instructions to the dealing room. In the past, they tended to use the phone to book internal foreign exchange contracts. Now they will use the Internet to enter deals and retrieve some reports. For netting, they will now create a payments file on pc and then send it by email, rather than send it by fax.

Are there any changes that you might have had to have made, had you not taken the decision to outsource?

One thing that I would have wanted to do was to upgrade our treasury management system to allow for electronic confirmations and settlement of deals together with electronic input by units. The second area that I would have investigated would have been the segregation of duties within the treasury. Had we not outsourced, I would have, for instance, had to implement a system of remote authorisation of transactions.

Both of these changes would have required significant resource, which would have been difficult to justify given the level of transactions going through the Acordis treasury. By outsourcing, we have been able to maintain the segregation of duties that is important as a protection against fraud and we have been able to introduce electronic confirmation and settlement of transactions much more easily than would have been the case otherwise. This is, of course, the purpose of shared services.

Are there things that you know now, that you wished you had known before the implementation process started?

I have been surprised by the level of documentation that needs to be in place before the banks will accept MT101s and send MT940s. There is no standardisation, so each bank’s requirements are different. The work that has been necessary so that all our banks accept electronic payment instructions and third party delegation has been more time-consuming than I had expected. This has also created some problems in relation to information retrieval for cash management purposes. Also we are the first user of the Internet based system and this has proved to be harder than anyone envisaged.

Despite one or two minor problems, you have described what seems to have been a very smooth process.

I am not sure that all involved would call it “smooth”! However, it has been generally successful I think and the main reason is openness. Throughout the process, we as treasury have been open and frank with all parties about both what we were doing and also why we were doing it. Our culture has always been one of openness, which is important because it should mean there are no surprises. Were we used to operating in a different way, then I think that the process could have been more difficult.