Treasury Practice

On the crest of a wave

Published: Apr 2016
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Wherever they may be located, every treasurer likes to feel they run a tight ship but there is always room for improvement not least because the world is constantly changing. Treasury Today Asia looks at how ‘best-in-class’ can be achieved and, keeping one eye on the horizon, how it can be maintained.

‘Best-in-class’ is a well-worn term often bestowed on technology but when it comes to treasury, no matter how good the tools, if the strategy, structure, processes and people are not similarly at peak performance then the function may be found wanting. In today’s volatile global environment just ‘getting by’ is unlikely to be good enough. Indeed, despite the term ‘best-in-class’ being somewhat subjective, there is something of an imperative to fulfil the notion that what is being delivered really is the best it can be.

“Best-in-class is about doing your utmost to make sure that you serve your corporate strategy as close as possible,” comments Ingmar Bergmann, Corporate Treasurer & Head of Corporate Finance at publicly listed real-estate investment company, NSI. In a similar vein, Denis Ecknauer, APAC Regional Treasurer at global engineering firm, ABB, believes that a best-in-class treasury must be seen as “a key internal function capable of adding value and supporting the company’s business portfolio”.

Given that no two companies are exactly alike, finding a suitable yardstick by which to measure ‘best’ is not always easy. Notwithstanding this difficulty, the key to improvement lies first in being able to fully understand the company’s internal processes, and then always being open to new ideas, of which Bergmann suggests looking to the market – at conferences, seminars and your peer group, for example – “to try to understand where necessary improvements can be made”.

Cost pressure is often at the root of any change but finding new ways of optimising the cost and effort underpinning standard processes will enable the shift of energy towards the more strategic involvement of treasury: automation of standard processes frees up skilled personnel for more cerebral tasks. It is thus vital in this model to have the right people on the ground: for Ecknauer it should definitely be a case of “people driving numbers, not numbers driving people”.

In practice, KPIs and internal and external benchmarking are often used but should be broad enough to include soft factors and behaviour targets that demonstrate where additional value is created by treasury far beyond the simple executional model. For ABB, by measuring and equating diverse multiple factors against its many different locations, it is possible to understand the relative weighted value of even the smallest outposts and the same applies to the comparison of external partners. “It allows us to compare apples with pears,” explains Ecknauer.

To set a good benchmark, keeping treasury ears and eyes open for the ever-changing regulatory environment, business conditions and evolution of technology is essential. For Kenneth Ng, Director & Corporate Treasurer for luxury travel retailer, DFS, and his team, it is also important to learn how treasury peers address business issues. This does not need to be a complex process: in addition to obtaining a quote from at least three different banks for forex trades, it also benchmarks the market average to ensure that the prices quoted are close to the market price. “DFS is constantly audited by internal partners and we need to prove we have the tools and capabilities to get the best deal in the market. That is our main KPI.” By using these tools it saves costs and time as well as complying with audit requirements. Having perfected the process for funding and investments, DFS’ treasury is now able to access information on peer deals across syndicated loans and corporate debt markets. As Ng comments: “We have a view on where the market is going and an understanding on how we can position ourselves to better negotiate long-term funding with our dealer banks.”

Of course, uprooting established processes for the sake of it will win few friends and may even, at the hands of resultant instability inherent in any major change, present increased risk. However, with a solid business case, a best-in-class project will demonstrate the capacity to “enable and facilitate” as Ecknauer puts it.

Making it count

Regardless of the origin of change, the bottom line focus for any business is on the money – “for the shareholders to make profits but also for the employees to make their living”. For Ecknauer, a best-in-class treasury must be one which “always contributes to the value chain of the core business”. For it to be “recognised and embedded as an advisor” not just at a transactional level but also amongst senior management, it must be ready, willing and able to counsel their strategic views and decisions in areas such as M&A, geographic expansion, changes in business portfolio and regulatory matters.

However, although closer involvement across the business brings increased credibility to treasury, this is not about paying lip service to the notion of added-value, but must instead be an active and ongoing process. To this end, Ecknauer ponders just how many treasurers are willingly involved at the sharp end of industry and understand how their end-products are manufactured, or how many sit down with their salespeople to understand their issues and competitive disadvantages where, for example, competitors are offering financing.

Risks differ from company to company but where in the past senior management may have been content with believing ‘no news is good news’, as far as treasury was concerned, this evidently is not the case today. It matters how deep treasury’s involvement is in the rest of the business and it is important to understand that treasury cannot just be seen as a cost efficient operation when it comes to achieving best-in-class status: it also needs to demonstrate levels of performance beyond numerical studies of headcount or transactional costs, for example.

A considered approach

Where the move to best-in-class suggests a significant change for the organisation of treasury, and its banking processes and relationships, its systems and infrastructure or workflows and processes (or any combination thereof), it behoves treasury to put in place a formal system to manage the process. Of key importance to the process of building best-in-class is to formally analyse, understand and to map what needs to be achieved and why, before making decisions on technologies, partnerships and people.

Of course, in an ideal world, any shift to best-in-class would be sanctioned without reference to the price tag. But effectively balancing the needs of operational treasury with those of cost control is essential and it is not always an obvious choice where to cut and where to spend.

In a small in-country treasury unit, a limited number of personnel is often expected to fulfil multiple roles. Whilst this may satisfy a general business need for cost savings, this approach can create internal operational risk where critical staffing situations can quickly be reached (if annual leave clashes with sick leave, for example). Delaying investment in technology will also save costs but may also see skilled staff wasting time carrying out basic ‘number crunching’ tasks just to provide standard reporting. Automation may attract a cost but it will prevent such inefficiencies, allowing personnel to focus on “intangible value-added activities”. But, as Ecknauer points out, this will only be possible if there has also been a notable emphasis (and expenditure) on quality and training on the ground (wherever treasury is present), developing the skills and knowledge to provide robust and intelligent cross-functional support across the organisation.

Bergmann too adds a dash of relativism with any comparative approach he uses. When negotiating the terms and conditions of NSI’s new corporate facility, it took to benchmarking against comparable real estate companies. But many of these businesses have been listed for far longer, have a more international outlook, better ratings and so on. When this is understood, he says the discussion about differences ceases and benchmarking becomes a matter of “keeping aligned with the trends and being able to admit when matters are not on track”. In this way, he feels that the business not only knows where it stands today in terms of best practice, but also can realistically manage the outcome of its strategy relative to its competitors.

One company which has used best practice to its advantage when reshaping its treasury function is American multinational General Motors (GM). Having been through a project to implement an ambitious treasury transformation project across Asia (part of a global initiative to optimise treasury operations), there is still more to come as it continues to respond to the changing environment.

Before embarking on the initial project, GM was using several local banks for payments and cash management services in different countries across Asia. Core treasury activities were carried out by in-country treasury teams and without a TMS in place, processes were largely manual, resulting in inconsistent accounting and treasury processes from country-to-country. The goal of the project was to improve GM’s treasury operations by automating and streamlining processes. “The first step that we took was selecting our regional partner banks,” says Niyant Shah, Manager, International Operations at GM. “We invited some of our global partner banks to participate, and then selected two banks following a comprehensive evaluation process focusing on a variety of different criteria including technical and SWIFT capabilities, in-country capabilities, pricing structure and geographical coverage.”

Having selected the two banks, the next stage was to switch payments and receivables activities from existing local banks to the two regional partner banks. GM also standardised bank account structures across the region which included a concentration level account used to carry out treasury activities, the use of dedicated operating accounts for activities such as payables, receivables and tax and also a two-way zero balancing structure was put in place to move funds between the operating accounts and the concentration account. “It is crucial that we do not disrupt daily operations when we transition bank activities,” says Ying Cao, Manager of International Operations at GM. “In order to achieve this, we adopted a staggered approach to transition only one type of activity at one time and a new service only went live with the regional bank partner after successful test and pilot runs.” A single TMS deployed across the region will act as a single source for the company’s global debt position, letters of credit, fixed income, FX and commodities transactions, the platform also being used to execute core treasury activities such as investments and FX trades.

Taking action

When a rapidly worsening economic climate was threatening to destabilise the Dutch real estate market Bergmann took this as his cue to instigate a change to a best practice financing model. In order to avoid the worst of the coming storm, the company had set about developing a new corporate strategy. “I made a point of inviting myself to the discussion table just so that from a treasury perspective I could understand where we wanted to go to and why,” he explains. With necessity very much the mother of invention, Bergmann concluded that treasury strategy “should as close as possible be linked to corporate strategy”. The ideas and information that flowed from these meetings offered treasury invaluable input to the new strategy created in their wake.

In another demonstration of financing best practice, engineering firm, Larsen & Toubro in India initiated an internal discussion on how significant cost savings might be achieved by replacing high-cost bank debt with bonds and commercial paper. “Financing a power generation company in India was a difficult proposition when the company was being formed around five years ago,” explains Vipul Chandra, the firm’s Head of Treasury. “The debt required was about $1.2bn. There was thus a large banking consortium, comprising 23 banks, the management of which was onerous and also the debt was at relatively high cost.”

The corporate finance team went to work on a plan to replace bank debt with bonds and commercial paper. The debt issue achieved pricing efficiency by breaking up the size into multiple tranches, and closing each on a bilateral basis with multiple market participants, including Indian banks, Foreign Institutional Investors (FIIs) and mutual funds. The valuation methodology used for the call option exercise was an innovation in the Indian capital markets. By structuring the bank loan prepayment on specific dates, the team was able to completely avoid the prepayment charge. “Under the solution, the entire banking consortium was replaced with a few deals in the capital markets space, thus improving process efficiency and resulting in productivity gains for the finance team,” says Chandra. Thinking ahead and using innovative solutions resulted in the reduction of interest rates by 3.5% on the entire $1.2bn debt. The team’s message is clear: keep reviewing the portfolio for potential improvements, and understand that innovative solutions can and should be tried out for meeting business requirements and must not be discarded just because they haven’t been previously tried out in the market.

The triumph of treasury

Success with building a best-in-class treasury may be defined when “everyone is happy with what they have for the cost paid”, comments Ecknauer. “But as humans we will never be satisfied and happy enough with what we have,” he continues. This is where the role of benchmarking and KPIs comes into play but Ecknauer also urges a practical response, stressing the importance of not missing the boat on technology investments and also of asking the right questions, from top down and bottom up, “so there is the understanding of expectations in both directions”. Indeed, he adds for good measure that to become a best-in-class treasurer it should never be forgotten that whilst it is not possible to make all of the people happy all of the time and that the true professional is driven to constantly seek improvements, business is all about people and that treasury “cannot be seen as playing an isolated, execution-only role”.

I made a point of inviting myself to the discussion table just so that from a treasury perspective I could understand where we wanted to go to and why.

Ingmar Bergmann, Corporate Treasurer & Head of Corporate Finance, NSI

Indeed, teamwork has played a crucial role in the success of the treasury revamp at GM. There has been considerable cross-functional and cross-geographical involvement right across the group, with Shah’s international operations team working closely with the corporate team in the US as well as with the local teams, in-country. “From a core functional perspective, the treasury team was driving this – but there was also involvement from accounting, IT, legal and other functions. At the same time, we were working very closely with our regional banking partners to make sure that we were all aligned.”

The key to success for Bergmann lies in closely linking treasury strategy with corporate strategy. But he encourages treasurers to keep up with developments and understand where adjustments or refinements may be needed. For this to be effective, he urges senior treasury personnel to “make sure that you invite yourself to strategy meetings because normally treasurers are not invited”.

Indeed, proactivity is vital when seeking best-in-class. For treasurers who are often required to work with heads of other functions, Bergmann states that is essential to ensure you are not just waiting for them to contact you. “I call it management by walking around. It could be seen as a lazy approach but it always generates information you can use in your own work – and it always gives rise to discussions that can lead to new ideas.” In pursuit of a best-in-class treasury, “don’t be afraid to walk the floor!”

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