Risk Management

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On the Road to Treasury Transformation: How Far Have We Travelled? As we face down the barrel of a European debt crisis, an uncertain global economic environment and geo political risk; how far have we really travelled on the road to transforming treasury into the strategic linchpin of the business?

On the Road to Treasury Transformation: How Far Have We Travelled?

by Jiro Okochi, Chief Executive Officer and Co-Founder, Reval

It’s now been three years since once mighty companies tumbled without cash, credit or liquidity. Today, a company should no longer be without its global cash position first thing in the morning. Bank and supplier credit risk should never again go unmonitored. Market exposures must be efficiently and accurately gathered with hedging strategies properly deployed. Liquidity forecasting should no longer be witchcraft, but an exact science. But as we face down the barrel of a European debt crisis, an uncertain global economic environment and geo political risk, it is worth examining how far companies have come in fulfilling the transformation of treasury that CFOs have called for, which will at long last make treasury the strategic linchpin to the business and health of the company.

Companies have certainly followed through with the natural reaction to hoard cash. According to Capital IQ data from 376 nonfinancial S&P 500 companies, or about 91% of the nonfinancial companies in the S&P 500, aggregate cash and short-term investment balances totaled $1.023 trillion by the end of Q1 2011. The Federal Reserve’s Flow of Funds report of September of 2011 shows $2.047 trillion cash being hoarded. One way to save cash is to squeeze out every penny profit by increasing productivity and efficiency. This did trigger a new buying cycle in treasury technology as companies are striving to improve business process in treasury with new technology, seeking better tools to gain better visibility into their cash and liquidity positions. In the U.S. and other progressive countries, treasury departments are turning to Software-as-a-Service solutions to gain the benefit of outsourced software and technology. So yes, some treasury departments have initiated change through system replacement, but many had antiquated systems to begin with and now had a budget to replace their old client server TMS.

In the U.S. and other progressive countries, treasury departments are turning to Software-as-a-Service solutions to gain the benefit of outsourced software and technology.

There are more reasons than the standard turn-over in treasury management systems to consider heading further down the road to full treasury transformation. The market volatilities in FX rates across the globe and the rollercoaster ride of commodities prices put the spotlight on companies who did not have the proper hedging strategies or, as in many instances around commodities were not hedging at all. Basic rolling hedging strategies were tested to the max as both exposures and hedges did not behave as expected. In times when stock prices soar and profits flow, hedging performance can be a rounding error. But in times of slim margins, every penny per share counts; yet, overall, there did not appear to be any noticeable new trends in hedging approach for 2011.

Certainly, the slew of regulatory changes in the market should be another driver for change in treasury. FAS 133/IAS 39 sparked systems purchases and hiring back in the early to mid-2000s. Dodd-Frank will do the same in the U.S. but in a more indirect way with non-financial corporations. Business conduct rules and margin requirements for un-cleared swaps will require companies to have better documentation (ISDAs, CSAs), confirmation processes, mark-to-market reconciliation and collateral management systems. Some of these changes should start making their way into regulation by the end of 2012, but overall seem low on the radar of many corporations.

While much of treasury transformation can be pegged to changes in systems and approaches to date, and can typically be measured by investment, one area that seems to still be lacking is investment in human capital. A 2010 AFP survey found that on average there were only 0.8 full time employees per $1 billion of revenue. While some of this can be offset by investment in improved treasury systems and automation, it’s still hard to understand how this can be so low. Most treasury departments do not have key redundancies in positions, and expertise in risk management is found in relatively few people, given the risk at stake.

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