This Issue’s question

“How is treasury benchmarking evolving? With increasing use of technology, are there any new measures which should be used to benchmark the performance of treasury departments?”

Liam Ó Caoimh

Associate Director

Zanders Treasury & Finance Solutions

Earlier treasury benchmarking exercises focused on the organisational elements of the treasury department: the number of full time employees (FTEs) in the treasury team, how much time was spent on risk management in comparison to cash management, how many FX trades were done on a monthly basis, for example. Over the last decade, as treasury has been thrown into the spotlight, more questions have been asked of the treasurer as to the activities undertaken by the treasury team – and more importantly how well (or not) the team performed in managing these activities. In parallel, the increased usage of treasury management systems (TMS) by corporates and the increased capabilities of these TMSs have also significantly enabled the evolution of more operational treasury benchmarking.

The next step in the treasury benchmarking evolution is the measurement and subsequent benchmarking of the ‘value’ treasury is adding to the organisation. Treasury value can be aligned with the creation of shareholder value (SHV) or economic value added (EVA) as introduced by Stern Stewart & Co. in 1982. EVA, however, measures the value of the organisation as a whole and therefore to understand the treasury value a split between business value added (BVA) and treasury value added (TVA) is required.

BVA can be created by focusing on the core business activities: sales growth, profit margin and investments. This is the most important SHV component of a successful company. However, no organisation can be consistently successful without the strategic and operational support from its treasury department. Therefore, TVA can be created by optimising treasury operations, risk management and corporate finance – but this can be easier said than done! Calculating the total TVA for a large multinational can be extremely challenging and treasurers should focus on what drives treasury value.

Here, key indicators can be of assistance and are typically defined based on risk (KRIs), performance (KPIs) and value (KVIs). These will help guide the treasurer to quantify the overall total benefit and purpose of the treasury department.

KRIs represent early warning signals and limits risk in which treasury needs to operate. The focus is on how corporate treasury manages risk. Examples include: financial covenants, hedge targets and ratios, counterparty limits, financial headroom, risk bearing capacity, earnings-at-risk (EaR) or cash flow-at-risk (CFaR), or rate sensitivity. They can also focus on how well treasury has control over its operations – hedging performance or the overall risk reduction of the organisation, for instance.

KPIs aim to measure operational excellence of the treasury processes. Examples include: cash flow forecasting accuracy, target weighted average cost of capital (WACC), and speed of account opening and percentage and timing of confirmation accuracy. KPIs generally measure how well treasury is able to perform its day-to-day activities.

KVIs are the metrics by which the added-value of the treasury function is measured. These are typically based upon the discretionary mandate it has been given by the company. Besides ‘traditional’ operations such as the realised hedging result, treasury can act as a consulting partner to other business units. This ‘intangible’ added-value can be measured in a treasury value scorecard, enabled by technology and reporting from the TMS.

Previously, it was difficult to benchmark different types and sizes of treasury organisations on a specific treasury area but a three-stage approach of: i) gaining control ii) optimising performance and iii) achieving strategic objectives, can help. This allows true ‘value’ benchmarking of a best-in-class treasury, irrespective of type and size.

Rudolph Janse Van Rensburg

Treasury Technology & Director

TreasuryOne

With the rapid adoption of treasury technology, benchmarking has become a key focus for treasurers. Treasurers are now able to switch their focus to becoming more strategic in their organisations and they have the ability to be more proactive – and benchmarking is a large part of this.

Looking at our corporate clients specifically (we are based in South Africa), the need for cash visibility has been a big agenda item because most of them already have a large footprint across the rest of Africa, or are looking to expand their Africa operations. Typically, the first benchmark that they want to improve is the number of existing bank accounts vs the number of daily reported bank balances. This might seem a simple task for European treasury professionals, but in Africa this is easier said than done. At TreasuryOne, we regularly benchmark client X against client Y to let client X know whether they are ahead of or behind the curve when it comes to cash visibility enjoyed by their peers.

Another trend that we see quite a lot is treasuries benchmarking each other on the number of bank accounts that they have in the group. This is a bit trickier as you need to have two clients in the same or similar industry for this benchmark to make sense. This is especially useful for a client that is currently running a decentralised model to compare to treasuries that are already enjoying the benefits of centralisation.

There are many so-called ‘mathematical’ benchmarks that are widely used, specifically with FX, where treasuries measure their intraday execution in terms of the daily high/low for a specific currency that they trade to measure effectiveness of daily FX trades executed. These mathematical benchmarks are relatively easy to measure if you have the correct tools. The benchmark that we find is of the utmost importance is visibility of FX exposures. These exposures are sometimes kept in disparate systems and sometimes even spreadsheets, and what we have found is that treasurers are not happy with the regularity with which the exposures are measured against hedges. We found that in most organisations where spreadsheets are used, this happens at most once a week. This is only possible if volumes are low, and is unmanageable on spreadsheets when volumes are high.

What we have successfully implemented for a number of treasuries is the ability to integrate the treasury system with the source system where exposures are generated, be it an ordering system or ERP software. In my view, benchmarking exposure visibility is one of the key benchmarks with which treasury performance should be managed, especially on the FX side. Most treasurers are responsible for compliance to board policies relating to exposure vs hedges, but without accurate and timely visibility over exposures this task is extremely difficult and in some cases almost impossible without the use of the correct technology.

Bruce Meuli

Global Business Solutions Executive, Global Transaction Services

Bank of America Merrill Lynch

To understand how treasury benchmarking is evolving, it helps to look at both the objectives and the methods. One overriding objective is to gain an understanding of your performance against a peer group on predefined factors. This information can be used to identify performance improvements and even inform your strategic direction, as part of a regular review process, or to gain buy-in for a specific transformation opportunity.

Other types of benchmarking that complement this external peer group benchmarking can be overlooked however, in particular, internal benchmarking. Often the greatest value from a comprehensive exercise comes not from a relative score against peers, but from identifying areas of underperformance and better understanding the factors creating that underperformance. Good benchmarking can result in useful insights which have identified areas for real improvement.

In this regard, the next step in the evolution of treasury benchmarking is using external benchmarking in conjunction with a structured analytical improvement programme that utilises a range of techniques and tools. The external benchmark may tell you where you are against your peers, but it does not provide any insight into how to improve and manage performance.

There are many different benchmarking methods, from online surveys and in-person interviews to corporate forums and structured diagnostic workshops. It can be difficult to obtain accurate and applicable peer information, and the information obtained should be applied in accordance with its validity and accuracy. Here, the evolution of treasury benchmarking has meant changing the content and direction of survey questions. However this can be constrained by the need to maintain data consistency and create valid comparisons over time.

Technology has had a dramatic, though not always direct, impact on treasury and this is reflected in the content of benchmarking. For instance, because shared service centres have emerged to enable operational centralisation and to implement and manage standard processes, data standards and ERP, they have become a standard factor in benchmarking surveys. The increased use of technology has also directly resulted in greater benchmarking content on data and system security, technical infrastructure and system delivery such as the cloud and SaaS, and the total cost of ownership and integration with banks and other internal systems.

What is currently under-represented in benchmarking content is the role of treasury in e-commerce. This is a core competency of treasury but is sometimes underappreciated. Greater benchmark information would better highlight this area and demonstrate the added strategic value treasury can provide to businesses.

There are many other areas related to technology that could gain more focus in benchmarking. The management of third party vendors is one, as is the ability to manage across a geographically-dispersed organisation. Exception handling and STP rates could be better incorporated, as could metrics around the interoperability and flexibility of treasury’s operational capability, and the level of technology and process expertise. What is clear is that technology – both directly and indirectly – has significantly changed treasury benchmarking and will continue to do so in the years ahead.