Treasury outsourcing was a hot topic some years ago, offering companies a way of increasing the efficiency of treasury activities or freeing up time for value-adding tasks. When banks pulled out of the outsourcing market, the topic fell off the radar for some treasurers. But others have continued to take advantage of specialist treasury outsourcing services, and there are a number of factors that may prompt companies with certain requirements to consider this approach.
As in other areas of business, treasury outsourcing can be an effective means of freeing up internal resources, buying in capabilities or making better use of existing staff. “Many treasurers realise that in order to enable their staff to make strategic decisions, they need to focus their staff on strategic activities. By outsourcing tactical treasury functions, a treasurer can better utilise their personnel by focusing them on more added-value activities and projects,” says Dan Carmody, Executive Director of treasury consulting, staffing and training firm TreaSolution.
Rather than being a thing of the past, treasury outsourcing could once again be a topic of interest for treasurers looking to do more with less. Indeed, TMS provider BELLIN has recently decided to work with a partner for treasury outsourcing. Beate Haumesser, Presales EMEA, who previously oversaw BELLIN’s treasury outsourcing division, explains that treasury outsourcing can be particularly attractive in the current environment for several reasons.
One is the high workload faced by many treasury teams. “The use of technology is necessary to streamline processes and boost security, but for various reasons not every company wants to acquire a TMS,” she says. “Customers can also save time previously dedicated to repetitive work, and can focus on valuable treasury tasks and prepare decisions.”
In addition, Haumesser says companies may seek pragmatic support to bridge a period where internal staff is blocked for other projects. Other considerations are that companies can access a service – and benefit from a system provider’s expertise – without having to undergo a selection process for a TMS application.
A short history of treasury outsourcing
“Outsourcing of treasury activities was very popular around the turn of this century,” says Sander Van Tol, Partner at independent consulting firm Zanders. “Some of the leading international banks and specialised treasury consultancies offered outsourcing services from their Dublin offices.”
Van Tol explains that the business rationale for external outsourcing was that external parties were able to provide a more cost-effective and redundant solution, compared to executing treasury activities in-house. He adds, “The outsourcing services were especially popular with US multinationals outsourcing part of the EMEA treasury activities.”
However, Van Tol continues, “in practice these portrayed benefits were not realised due to extensive communication required between the client (corporate treasury function) and outsourcing company. So many multinationals stopped their outsourcing contracts.”
And as Pat Leavy, CEO at Dublin-based outsourcing solutions provider FTI Treasury explains, there came a point when banks offering treasury outsourcing services exited the market. “Going back to the late 80s, when the banks first offered treasury outsourcing services, the expectation was that this would be a huge business revenue generating proposition for them,” says Leavy. “The combination of these revenue expectations, and the demands of providing highly customised solutions, progressively led to a solution where banks began to exit the market over a period of time.”
Rise of the SSC
Van Tol says that with outsourcing falling out of favour for some multinationals, these companies turned to a different form of outsourcing, using shared service centres (SSCs) – “this is the outsourcing of some of the more repetitive, low value-adding treasury activities to an SSC,” he notes. Van Tol explains that these SSCs could be either internal, ie company owned, or external SSCs run by some of the larger IT or accounting firms, and are typically located in countries with lower salary levels in order to realise the cost efficiencies associated with outsourcing.
While this approach has served many companies well, the situation continues to evolve. “Due to the more intensive use of technology for repetitive/standardised activities, the financial benefit of outsourcing to low cost countries is diminishing,” says Van Tol. More recently, it seems that market noise around outsourcing is growing again, “as corporates look to treasury outsourcing as a way of becoming more compliant, reducing operational risk while remaining lean and cost efficient.”
Flavours of outsourcing
Of course, while different trends have gained prominence at different times, treasury outsourcing never actually went away. While bank-run outsourcing services may have fallen by the wayside, specialist treasury outsourcing providers have continued to serve corporate customers – FTI Treasury, for example, has been operating since 1988. And as Leavy explains, outsourcing can take a number of different forms, depending on a company’s specific needs. These may include:
Setting up an overseas regional treasury centre or finance company. One common scenario is that of North American companies setting up a regional treasury centre or finance company in Europe for activities such as cash pool administration, managing foreign currency exposures and handling intercompany lending or intercompany netting. “Very often, companies don’t want to deploy a new set of resources in Europe, so they look for a third party to help them,” Leavy explains.
Retaining front office activities while outsourcing the back or middle office. Another situation that may lend itself to outsourcing is when a company decides to outsource back office activities (like confirmations, settlement and reconciliation) and treasury accounting processes in order to focus on front office treasury activities such as execution and intercompany loan administration.
Harnessing technology for specific activities. Organisations may be looking for an outsourcing company to provide technology for a particular process, such as intercompany netting, intercompany loan administration or managing a complicated balance sheet.
Outsourcing the running of the treasury. Last but not least, Leavy says some companies may simply be looking for someone to run the treasury on their behalf, including day-to-day cash management, executing transactions and back office processes.
While outsourcing can take many different forms, Leavy says one common feature of all these models is that decision making is ultimately retained by the company itself. “Things are either managed under a mandate or a policy,” he says. “In most cases, it’s about process – if you think about it, a lot of daily cash management is a process, as is foreign exchange execution and intercompany lending.”
Reasons for outsourcing
As these examples illustrate, the motivations for considering treasury outsourcing can vary considerably. Some companies may lack the resources, staff or experience needed to carry out particular activities, while others may be looking to free up staff to focus on more value-adding tasks.
“With the regional treasury centre example, the company may not have resources in Europe and may be looking for a structure that’s easy to establish,” says Leavy. “But you could have a situation where a company just wants to concentrate on strategic activities without being concerned about the back office resource or accounting resource.” In practice, Leavy says, most treasuries spend a disproportionate amount of time managing operations, rather than looking at strategic aspects of treasury management.
In other cases, changes to the business model, such as spinning off part of the business, can result in the need for treasury outsourcing, as the business that has been carved out may need its own treasury very rapidly. “Someone who already has an infrastructure in place can get a treasury operation up and running very quickly,” says Leavy. “We’ve migrated a global corporate within six weeks, including technology and process.” More typically, this can take ten-12 weeks – which Leavy says is considerably faster than recruiting a team, building a technology infrastructure and establishing processes.
A newer catalyst is the emergence of high-growth companies becoming internationalised very rapidly, which gives rise to the need for internationally focused treasury management in a short space of time. “In that case, companies may ask whether they can get someone to look after all this for them while they concentrate on the business growth dimensions of the business itself,” says Leavy.
And a further catalyst for adopting treasury outsourcing is the need to replace legacy technology which is no longer fit for purpose. “If somebody is already invested in technology, they’re probably less likely to consider outsourcing,” Leavy says. “But if they suddenly find themselves in the situation where the technology isn’t working and they have to invest heavily in a new technology infrastructure, they might ask whether there’s an easier way of doing this. We can find somebody that can deploy a technology platform and integrate that via our customer – what we would call ‘client-side technology infrastructure’.”
When to outsource
Treasury outsourcing will be more applicable to some types of organisations than others. Zanders’ Van Tol says that treasury outsourcing is more common “when organisations aren’t quite big enough to have their own treasury department; when the internal treasury teams don’t have the time to perform all the treasury management activities, or if they are lacking that core treasury expertise. In such cases, treasury outsourcing could be the perfect option since an external party that specialises in treasury management can bring valuable corporate treasury expertise and knowledge, in addition to the latest treasury technology trends, best practice and procedures.”
FTI Treasury’s Leavy says that in practice, the companies that lend themselves more easily to outsourcing “are companies that actually make something.” He adds, “If you think about it, if you make something in an international context, you tend to have international subsidiaries around the world – and with that comes international cash, foreign currency and intercompany lending. That gives rise to intercompany transactions that might require a netting proposition. A lot of our clients are in that space where they’re selling a product, rather than a high-end IT service offering.”
That said, Leavy says he also has clients which are domestic companies with complicated balance sheets that may not have the technology or expertise to manage complicated loan structures or capital market structures.
What to outsource
While every company will have its own specific requirements and goals, there are a few rules of thumb that treasurers should bear in mind when considering treasury outsourcing. BELLIN’s Haumesser says the activities best suited to an outsourcing arrangement include time-consuming tasks that occur repeatedly, such as data collection and reporting, as well as tasks that need a structured process, such as payment processing and netting – “In general, all tasks which do not need an individual decision/human intervention.”
TreaSolution’s Carmody, likewise, notes that in general, “tactical treasury functions that are repetitive are best suited for outsourcing.” He adds, “In many instances, if the treasury function can be flow-charted, all or some of the function can be outsourced.” However, he also notes that organisations should not fully outsource functions which include critical control security measures, and/or that require strategic decision making.
According to Haumesser, other activities that should not be outsourced may include tasks that require specialist knowledge of the company or its processes, such as liquidity planning. She also notes that outsourcing may not be permitted for some tasks due to compliance, such as “decisions about the investment or refinancing of cash positions.”
Van Tol says that in addition to low value treasury activities, “we now see also outsourcing of functional and technical support surrounding treasury technology solutions, like TMSs, payment systems and other specialised treasury technology software.”
He notes that despite the importance of a functioning TMS or payment system for a treasury function, such systems do not always get the required support from internal IT departments, which may be looking to standardise and outsource their own activities. “We now see consultancies and IT companies offering Treasury Managed Services as a way to provide a cost-effective solution to alleviate the key man risk to which they are currently exposed with their IT department,” he says.
Ingredients of a successful arrangement
When implementing an outsourcing arrangement, it’s important to get things right from the outset. As such, treasurers will need to give plenty of consideration to which specific tasks can be outsourced, and which stakeholders will need to be involved in the project. They will also need to ask the outsourcing provider some key questions. Carmody suggests the following as a starting point:
How long has your company been in business?
What is the response time if there’s a problem with these services?
Who is the single point of contact in case there are questions/issues?
How long are you able to provide treasury outsourcing services?
Communication is key in such arrangements, and BELLIN’s Haumesser emphasises the importance of initial communications in terms of ensuring all the relevant information has been passed on. As well as providing the necessary information to the service provider, she adds that companies should make sure they have a clear understanding of what the service provider will deliver.
It’s also important to understand that a strong relationship is key to any treasury outsourcing arrangement. “Treasury tends to include small numbers of personnel in large organisations,” says FTI Treasury’s Leavy. “It’s not like in the accounting, AP and AR environment where you can have hundreds of people working – you’re talking about a small number of people. So the expectation from a company that is considering outsourcing is that the treasury service provider is very integrated, and is part of their treasury organisation.”
As such, relationship is an important consideration – as is the ability to be flexible. Leavy also says a good service provider will look to add more value to the service that’s being provided by suggesting ways of reducing costs, speeding up processes and minimising risks.
But of course, there are also some pitfalls to avoid when implementing an outsourcing model. Carmody warns companies not to outsource too much too soon, for example. “It’s tempting to outsource all tactical functions upon contract signing,” he says. “I would suggest that treasurers consider outsourcing treasury functions in phases to ensure that all functions are being implemented and completed in an appropriate and secure manner.”