Treasury Practice

The art of benchmarking

Published: Oct 2013

There is an adage in business circles that what cannot be measured cannot be managed. By benchmarking, treasury professionals can measure their performance against their peers and implement improvements if necessary. But what sounds straightforward is, in practice, quite complex.

There are two main approaches to benchmarking: firms can compare themselves to their peers, or they can benchmark their performance against internally set key performance indicators (KPIs). Even if firms choose to benchmark themselves against internal KPIs, they should have some knowledge of what other treasuries are doing in order to set realistic KPIs or understand the differences. Across both types of benchmarking only one thing is clear: there is no ‘one measure fits all’ approach.

The idea of tracking best practice in treasury operations gained popularity following the introduction of the Sarbanes-Oxley Act (SOX) in the US in 2002 along with similar legislation elsewhere in the world. In a 2012 Journal of Corporate Treasury Management paper, ‘Monitoring, benchmarking and improving treasury performance: the practical application of KPIs in treasury’, Paul Higdon, Chief Technology Officer (CTO) at IT2 Treasury Solutions (now part of Wall Street Systems), stated that these regulations required “a very substantial increase in controls and the scope of documentation requirements in treasury and finance operations”. This development in part defined the emerging standards of best practice for corporate treasury operation, he observed.

Another factor driving this change was the devastating losses suffered by companies such as Enron due to fraud or treasury errors. “At the time when the response to the events that led to SOX introduction was being evaluated, one general conclusion was that specific individuals within corporations or institutions were seen to be at fault,” stated Higdon. “Therefore tighter regulation of organisations was needed to ensure that the company and shareholders were protected against such rogue employees.” This objective was achieved by improving internal processes, reporting and controls.

Fast forward six years and the financial crisis threw another spanner in the works. One of the striking post-crisis changes for treasury is the recognition that once considered routine tasks now carry significant risk and associated overheads. Such tasks included raising cash funds and analysing cash availability. Treasury’s role in cash management, funding, financial risk management and other key areas is now seen to be critical to the profitability, smooth operation and even viability of an organisation.

It is understandable in the light of this new environment that corporate treasuries should seek to determine how well they are performing in their roles. However, there is no standard approach or readily available guidance. For some corporate treasuries, external input from consultancies is seen as the key to benchmarking. Others adopt internal measures but, for many benchmarking is simply not undertaken.

“Benchmarking is essential in measuring the performance of the treasury team as a whole and also for measuring individuals’ performance,” says Paul Stheeman, an independent treasury consultant, based in Germany. “Every company wants to be best-in-class and there is no reason for the treasury function to be excluded from that aim.”

Companies should combine the traditional benchmarking of measuring performance against their peers with the internal, KPI approach. “Treasuries have to follow company strategy and adhere to it, but they also should measure their performance versus their peers,” Stheeman advises.

Here at Treasury Today we have been conducting benchmarking studies since 2009. More recently we have included a separate section on KPIs and, with the input of our corporate respondents we have developed seven key treasury disciplines against which KPIs are deployed. The table below defines these treasury disciplines and the top three KPIs used against each. In more recent studies we are now identifying the actual measures companies are achieving against the above and allowing respondents to benchmark themselves not only against the whole Study universe but also against their respective industry sector.

Table 1: Top three KPIs

Treasury discipline No 1 KPI No 2 KPI No 3 KPI
Overall treasury efficiency. Cash visibility. Cash pooling structures. Costs as a percentage of total treasury costs or revenue.
Core cash management efficiency. Cash flow forecasting accuracy. Cash pooling structures. Balance/transaction reporting.
Working capital management. Days sales outstanding (DSO). Days payables outstanding (DPO). Days inventory outstanding (DIO).
Liquidity management. Cash flow forecasting accuracy. Short-term investments. Short-term funding.
Risk management. Mark-to-market. Hedging effectiveness. Value-at-Risk (VaR).
Funding/balance sheet management. Net debt/EBITDA. Net interest expense. Weighted average cost of capital (WACC).

Source: Treasury Today 2012 European Corporate Treasury Benchmarking Study

Benchmarking against peers

One of the most significant challenges of benchmarking how a treasury is performing against its peer group is determining exactly who the company’s peers are. Corporate treasuries – like corporates themselves – come in all different shapes and sizes.

Dino Nicolaides, Head of the Corporate Treasury Advisory Team in London for consultancy Deloitte, says benchmarking is about understanding how a company’s treasury function compares to those of similar companies. “It is how you define ‘similar’ that can vary,” he says. “This can be based on industry sector, company size irrespective of the industry in which you operate, or based on geographical location. How you define your peer group will determine the value you get out of the benchmarking exercise.”

Bas Rebel, Senior Director, treasury advisory at PwC in the Netherlands, says that for “quite some time” benchmarking should have been higher on the agenda of corporate treasurers, but wasn’t. “The key problem is that treasurers still believe their situation and company structure is unique and therefore difficult to compare with the outside world,” he says. However, recently PwC has been asked more frequently by clients about how other treasuries are organised and what their focus is. “So there is an interest to understand how peers are working. However, that is still not close to formal benchmarking. The one situation where we are involved in a more formal benchmarking against peers is when a business case for change has to be made or approved.”

“Benchmarking gives us the opportunity to identify where we stand and how we develop over time among our peers. The external comparison is essential for the progress of a unique corporate function like treasury.”

Karsten Kabas, Head of Corporate Treasury, Merz GmbH & Co. KGaA

In order to have meaningful comparisons, treasurers need more than a couple of corporates with whom they are comparing themselves. Once a reasonable sample of peers is established, the next challenge is to recognise that every organisation is different, with its own treasury policy, structure and risk appetite. “You need to flex the statistics in order to ensure you are comparing apples with apples. For example, if you compare two FTSE100 companies, one might be operating in ten countries and the other in 150. The latter will be using very sophisticated cash management techniques in order to concentrate cash and move it around the world. Comparing those cash management procedures with the ones employed by the former company won’t be suitable” says Nicolaides.

“Benchmarking gives us the opportunity to identify where we stand and how we develop over time among our peers. The external comparison is essential for the progress of a unique corporate function like treasury.” Karsten Kabas, Head of Corporate Treasury, Merz GmbH & Co. KGaA

Setting KPIs

In a February 2012 blog, IT2’s Higdon writes that KPIs provide “a structured and objective environment for assessing the effectiveness, accuracy and rate of improvement of critical treasury processes”. Treasury KPIs are valuable at all levels of an organisation, potentially enhancing the quality, level of policy compliance and efficiency of treasury.

“Corporate treasurers are increasingly being encouraged to adopt a KPI programme, under the direction of senior management, often at Board level,” he writes. “A KPI programme is typically delivered through the implementation of an enhanced treasury policy, and manifests as a new set of mandatory processes, integrated with the treasury workflow.”

But as with benchmarking against peers, a similar conundrum exists in setting KPIs – which ones are appropriate for a particular treasury operation? The choice of the optimal set of KPIs for a particular treasury can be an exacting exercise as the wide-ranging objectives include streamlining management reporting, improving the quality of all kinds of treasury operations and measuring, analysing and documenting operational compliance with treasury policy. The set of KPIs ultimately selected for a particular treasury will not only reflect the specific treasury policy and workflows that are in place; it must also reflect the business policies and priorities of the whole organisation. The KPI selection that works best for a given treasury will have been chosen through detailed analysis of those features of treasury operations that correspond to the highest levels of risk exposure.

“The treasury employs a variety of KPIs to ensure benchmarking efficiency. These include transaction costs, refinancing risk, covenant ratios and FX hedging amongst others,” says Daniele Vecchi, Group Treasurer at Majid Al Futtaim in Dubai.

Intelligence gathering for establishing KPIs is a major challenge. A corporate treasurer can contact their treasury peers and friends, and try to glean information about their practices, but such an approach is fairly ad hoc. Ideally the treasurer needs to get a larger statistical sample. But this sort of benchmarking must be used carefully. A large statistical survey may tell you that 35% of treasuries practice A and 25% do B, etc. But what does that really tell you? Jeff Wallace, Managing Director at US-based Debt Compliance Services comments “economic factors drive different behaviours. Benchmarking should take into account what is driving different behaviours in a particular set of treasury practices. Sometimes it will be volume in terms of the number of transactions, whereas sometimes it is the industry itself.”

While many observers believe industry is a big driver of differences in treasury practice, others point out that, at the end of the day, treasuries are pretty much the same. Money goes in and comes out, and there are risks to manage.

Stheeman outlines the main KPIs that companies most often use to measure their performance. These cover:

  • Personnel

    – costs.

  • Cycle times

    – based on regular types of activities such as cash forecasting, bank account reconciliation, cash pooling, etc.

  • Cash flow forecasting

    – balance versus actual.

  • Stranded cash reduction

    – reducing trapped cash or having the amounts at as low a level as possible.

  • Counterparty risk

    – how high losses are over time and how to reduce them.

  • FX and interest rate performance

    – there are several ways to choose a benchmark, but an appropriate one needs to be found and measured against.

  • Bank charges

    – how much are you paying for treasury services and which banks are you using.

  • Bank relationships

    – related to the above. How well are your banks doing and how do they compare with each other?

  • Cost of credit

    – how does this compare to other organisations and internal targets?

“The main focus of our benchmarking processes is related to maintaining relationships with our banks. In essence this means: how we choose the banks; how we manage our FX exposures; and how we manage our finance costs,” says Kamal Goyal, CFO at Alumco in the United Arab Emirates (UAE).

“The treasury employs a variety of KPIs to ensure benchmarking efficiency. These include transaction costs, refinancing risk, covenant ratios and FX hedging amongst others.”

Daniele Vecchi, Group Treasurer at Majid Al Futtaim in Dubai.

In setting KPIs treasuries should set realistic goals but also ensure these goals are not too easy to achieve. Benchmarking models coming out of spreadsheets that are so complex no-one understands them, are not any use. You need to understand the KPIs and how they are measured or else you will not get a result with which you can be comfortable.

In order to determine the right set of KPIs for any particular situation, the treasurer needs to be very clear about their organisational objectives and about the guidelines defining how those objectives are to be achieved — the treasury policy. When selecting KPIs, the organisation’s current or future capability to deliver the required results, at the required levels of accuracy and timeliness, should be considered carefully. The selection of the appropriate KPIs for a given treasury naturally depends on the nature of the company’s business, as well as treasury’s defined role within it.

Nicolaides says a number of metrics and how they differ between companies should be considered during a benchmarking exercise. These include:

  • Treasury organisational structure.

    How are treasury activities around the world organised? Some organisations may centralise at headquarters (HQ), while others have group treasury but delegate to regional treasury centres to take over activity in that continent. In benchmarking, the treasury must compare itself to similar companies of similar size in similar countries and ask “are we falling short of this peer group company?”

  • Quality and skills of key people within the treasury function.

    Key individuals that determine treasury policy and strategy at central and regional centres should be compared with the key individuals in similar organisations. Is a company employing people of the same calibre?

  • Governance.

    The involvement of the Board in terms of overall treasury strategy and how authorities are delegated within the organisations, from the Board to the CTO, finance, treasury committee or even in regions, should be compared and analysed.

  • Policies.

    This can be a difficult area to tackle. You have to isolate the risk appetite of particular organisations. If one organisation has insignificant foreign exchange (FX) risk, their policy will be to ignore it. Another organisation that has extensive FX risk exposures will engage in significant hedging activities. If you compare their treasury policies, you should isolate risk appetite because it is irrelevant.

  • Core treasury activity.

    How a treasury identifies, measures and manages risk, including FX, interest rate, counterparty risk, cash management and liquidity risk. Companies should look at procedures and again isolate the risk appetite of other organisations if irrelevant. How do the procedures of one organisation in terms of identifying risk compare with those of another? Does the treasury have a procedure to identify whether there is a risk or whether it has gone undetected? Are there processes over time to manage and observe changes in risk exposures?

  • Operational procedures.

    Such procedures include front office dealing activities such as derivatives trading, hedging, confirmation and settlement. How does the treasury compare with similar organisations? Systems and technology also should be considered – how automated are these processes versus the peer group? Where is the technology in terms of the industry practice?

  • Reporting.

    This is strongly related to KPIs, on which the treasury report to senior management. Benchmarking should consider how complete the KPIs are and how the reporting on them compares with other organisations.

Getting it right

What is clear is that benchmarking in treasury has to be managed with great care. It is important to measure the right things and it is very easy to measure the wrong things.

For example, a focus on funding costs can overlook the fact that the funding itself may not be required, if the treasury improved its management of working capital. Additionally, a good working capital metric, such as cash conversion cycle (CCC), may push higher costs elsewhere in the business. For example, it can encourage business units to give expensive early payment discounts, or secure longer payment terms from suppliers, who may incorporate a higher funding cost in their base prices. Finally, a focus on bank charges may reduce the bank charges, but will this result in damage to banking relations which causes significant increased cost further down the line?

The main point is that treasury activities, while they need to be monitored for efficiency, also need to be looked at in the context of their overall cost. This is always extremely difficult and it requires a high level of organisational maturity: the organisation as a whole needs to be very clear as to its priorities.

Learning what your peers are doing always helps in this process and our Treasury Today Benchmarking Studies are proving very popular among the corporate treasury world, particularly the KPI section. As a corporate there is only one way to get the full results of this year’s surveys – participate. So if you wish to benchmark your KPIs against the industry and learn what else other companies are doing, please participate in these Studies.

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