Treasury Practice

Making the most of performance metrics

Published: Jul 2019

Two business people looking at analytic metrics

The evolution of treasury over recent decades has been accompanied by the rise of key performance indicators as vital measures of effectiveness not only in treasurers’ own terms but, increasingly, in terms of their contribution to the wider business and its strategy. As such, KPIs are destined to become ever more important.

Over the last few decades corporate treasury has matured considerably, with advances in IT notably supporting increased standardisation of operations and processing which, in turn, has led to greater integration of treasury practice with the core operations of the organisation.

Greater integration has meant greater awareness and appreciation of just how important the remit of corporate treasury is, not least among the C-suite, and has led to development for key performance indicators (KPIs) to measure and manage its operations from the group perspective. These KPIs have become increasingly sophisticated over time. Nowadays, good corporate practice demands that treasurers use a wide range of metrics and KPIs to measure key areas of treasury, from capital structure to risk management. But a company’s needs can evolve over time – so it’s important to review those metrics on a regular basis and make sure they continue to support the overall business strategy.

But you can’t manage what you don’t measure, as the old management adage goes. And in the world of corporate treasury there is always much to measure. Indeed, research by KPMG found that almost two thirds (63%) of treasurers use a set of KPIs to measure the performance of their various treasury activities.

But while treasurers commonly use metrics and KPIs to assess the performance of treasury, there are different ways of approaching this task. Not all metrics will be applicable to every treasury – so it’s important to make sure that the measures looked at are the ones that are most relevant to the company and its strategic direction.

Likewise, treasurers will sometimes need to review the metrics they use to make sure they continue to reflect the company’s evolving strategy and remain fit for purpose. Fred Schacknies, Senior Vice President and Treasurer at global hospitality group Hilton, says that in doing so it’s important for treasurers to remind themselves that KPIs should serve to focus attention at the highest levels of the organisation and drive results on what matters most: “to that end, KPIs need to increase visibility over the state of affairs with operations and accountability as to who is ultimately responsible for driving what. In most cases in finance, there may not be such a thing as an optimal or normal number as there is, for example, for human vision, blood pressure or temperature; there may only be a direction indicated, more or less. In such cases, setting targets may be arbitrary but that still helps to set a goal against which progress can be measured and motivated.”

Implement and communicate

If over recent decades IT played a critical role in helping with the development of the modern, integrated treasury and rise of KPIs, then new technology more broadly is helping to sustain that trend. Schacknies says new technology is not only driving the generation and proliferation of data but can also facilitate with its exploitation by organisations. Automation in particular, he says, offers a number of benefits to treasury, not least helping to ensure the timeliness of data processing and the visualisation of data analysis for generating key performance metrics: “when that is done right, it gets the message across the organisation much faster and more clearly. In practice, therefore, KPIs should be getting easier and faster to produce and understand for firms”.

Schacknies cautions, however, that there is a growing risk of firms struggling to cope with the volume of data that can be derived using technology nowadays: “Under such circumstances the bottleneck in the process of producing and analysing data becomes the end users themselves. Despite advances in automation and visualisation, we as managers can only concentrate on so many things at one time. So, in my view, the real benefit of technology will be the application of machine learning to identify drivers and optimisation paths for KPIs faster and across wider and more diverse sets of data than is possible by humans alone. Once KPIs are optimised, I imagine the next step will be to apply artificial intelligence to figure out which organisational KPIs should be optimised in order to maximise value drivers at the enterprise level.”

In considering his top tips for treasurers looking to implement KPI policies, Schacknies advises:

Start with why: avoid the temptation to define KPIs based on what data is currently available or easy to produce. Imagine what questions you would want to be able to answer, in order to be the most effective treasurer possible for the CFO, if there was perfect access to all data, at all times. Define KPIs according to those questions, even if it means data can only be observed infrequently, informally or approximately at first. Then identify the gaps between that vision and the current state and create a plan to get there.

Stay prioritised: KPIs should inform treasurers’ communications upward and outward within the organisation and should be the basis to motivate changes in behaviour within their team. There may be much more data that must be monitored (management metrics) or reported to outside parties (compliance metrics) and available just in case (FYIs) but this shouldn’t be confused with KPIs.

Be consistent: follow through with the production and assessment of KPIs to ensure their importance is understood, even if the production processes are still informal and the data still approximate.

Be flexible: KPIs should be tied to the long-term goals of the organisation, but even those goals may change. Furthermore, treasury understanding of how to best achieve those organisational goals may evolve over time. Hence, it must be prepared to adapt KPIs to change with the evolution of the organisation.

Ultimately, however, the impact of a KPI policy and process will be determined by how successfully the information gathered is communicated to the rest of the business. “It really does come down to making sure your message is level-appropriate for the intended audience,” says Schacknies. “My own goal is to make sure that my boss – the CFO – and everyone else above him knows what they need to know, which is anything impacting those strategic KPIs. Everything else that happens operationally in support of that is part of the ordinary course of business and need not dilute the communication with senior leadership.”

Schacknies says the same applies when his peers across the organisation have demands for information from treasury: “It’s very much on a need to know basis – it’s about respecting people’s time and ability to process information, and giving them information that’s most useful for them.”

He adds: “KPIs are a useful tool in any application of management, but shouldn’t be confused with purpose. Even for those working in finance and in corporate treasuries, there is more to our work than optimising a set of numbers. The success of any organisation, large or small, stems from the ability of people and teams to work together effectively. That means knowing how to communicate one’s needs, to understand those of others, to build networks of supportive business partners and to lead change.”

Demonstrating value

Research on treasury KPIs by Nordic bank Nordea certainly paints a generally positive picture of how treasurers themselves feel about KPIs today. There is good news: the vast majority of the more than 160 large corporates surveyed for the study have a formal treasury policy, and about three quarters say they have an established set of KPIs. Around two thirds are satisfied that these KPIs are contributing to treasury effectiveness, and many expect their use of KPIs to grow.

Even better, says lead report author Johan Trocmé, is the finding that treasury performance is getting visibility at the highest levels of the business: for many corporates, the CEO and the board are directly involved in deciding treasury KPIs and monitoring outcomes. Thirty-eight percent of treasuries surveyed say that the board ultimately decides on their KPIs.

Trocmé says: “For treasurers that are looking to take a seat at the top table and demonstrate their potential to add value as a strategic adviser to the business, this is an unmissable opportunity. The select handful of KPIs should demonstrate, in no uncertain terms, that the treasury function is supporting the business in ways that really matter. On that particular score, most treasuries’ KPIs are not achieving that goal yet.”

The success of any organisation, large or small, stems from the ability of people and teams to work together effectively. That means knowing how to communicate one’s needs, to understand those of others, to build networks of supportive business partners and to lead change.

Fred Schacknies, Senior Vice President and Treasurer, Hilton

Just 21% of corporates say their KPIs are “directly derived” from strategic company goals. Only 17% share KPIs with other business departments – despite the fact that important objectives, such as improving working capital management, must involve departments like sales and procurement.

In considering the steps corporate treasurers should take to become more closely aligned and supportive of the wider organisation, Trocmé first points out that more than nine out of ten treasuries have a written treasury policy. “The treasurers we spoke to are certain what their mission is, and are clear about their operational responsibilities. And these responsibilities – like optimising liquidity, ensuring the availability of funding, and protecting against financial risk – are undoubtedly critical to keeping the business afloat.

“But if you’re to build your profile and win recognition for your contributions, it’s not enough to be keeping the treasury engine running smoothly. You need to show the rest of the organisation, and senior leadership, that you are supporting their priorities, and have bought in to their goals.”

And the clearest way to do that, says Trocmé is to derive treasury objectives and associated KPIs directly from the corporate mission. “It’s not always easy to make the connection between what the treasury does on a daily basis and the CEO’s vision of innovation, market growth and profit – but the connection is there, and it’s certainly worth digging for.”

Another approach to ensure closer alignment with wider business is to forge closer relationships with other departments and mutually agree shared KPIs that all recognise are important: “For instance, it’s impossible to optimise working capital measures like DSO and DPO without support from other departments, such as local finance teams, sales and procurement. Yet only 17% of treasurers today have shared KPIs.”

Number one metric

Treasurers also need to make stakeholder satisfaction their “number-one metric,” says Trocmé. During his research for the KPI report, he says many of the treasurers were puzzled when it was suggested to them that they should be measuring other departments’ attitude to the treasury. “The general view is that the business expects the treasury, as a support function, to just get on with things in the background. That’s why only 40% of treasuries make any effort to measure stakeholder satisfaction. Even for those that do, only a few stakeholders are involved – only 30% talk to the board, and only 9% to procurement – and measurement is overwhelmingly ad hoc.”

Trocmé, however, is clear that measuring stakeholder satisfaction is important, pointing out that as a support function, and moving into advisory, proving customer satisfaction is key to demonstrating the treasury’s value to the board. “All that advice treasurers offer about currency risk, about project finance, about contract terms, about bank choices – shine a light on it. Show that you’re doing more than keeping the engine running.”

“The simple act by treasurers of conducting satisfaction surveys will also raise their profile not just with the CFO but around the business – opening dialogues that can help them all do a better job, identify good ideas, and show that treasury is committed to supporting the whole company. In fact, we believe that if you make stakeholder satisfaction a real priority, month after month, it’ll change the way you and all your team approach your role, encouraging you to be even more flexible and get different perspectives on the issues you’re working on.”

Lastly, Trocmé highlights the importance of focusing on team performance. He explains that although treasury’s traditional tasks have great potential to be automated or simplified through technology, much of the real value treasurers add today and in the future actually relates to people: “It’s about relationships, advice and complex decisions. This makes the team you run of critical importance. Our research has found that the average treasury is only around seven people, and that means every person counts. They need to be managed effectively.

“Yet only 44% of treasuries use KPIs to evaluate team performance, and only 8% benchmark against other treasuries. This is a missed opportunity: KPIs provide a vital input to guide training, development, recruitment and other aspects of people management, and peer benchmarks give you a real-world measure for comparisons.”

Interestingly, he says, almost 60% of treasuries surveyed by Nordea say that KPI outcomes “never” or “rarely” affect their team bonuses. “If treasurers are confident that their team is performing well, and that their KPIs are aligned to the right objectives, then that should be built into their compensation packages – to encourage the right behaviour across the team.”

Above all, says Trocmé, treasurers should always bear in mind that KPIs are “a great opportunity”. He adds: “Most treasurers believe that KPIs are already making a difference to their performance. But we’ve identified an untapped opportunity to use KPIs to accelerate your evolution into a strategic advisory function.

“But there’s one more way that you can use KPIs to generate value for your team and your business: incorporate them into your briefings to your banking group. Your KPIs reveal what matters most to you, and that insight can help your banks suggest new approaches to helping you achieve your goals.”

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