by Eric Humbert, Treasurer, EMEA Central Region, CSC
Implementing a cash and liquidity management project can be a complex process, particularly in a decentralised organisation where there is a variety of internal stakeholders who are critical to the success of the project. In this article, Eric Humbert, Group Treasurer of business solutions firm CSC, shares his experiences of the initial stages of a cash centralisation project, with additional comments by Thomas Eisenhuth, Societe Generale. Societe Generale provides local banking services to CSC in parts of Europe today, and is part of CSC’s evaluation for the second phase of the project.
Background to the project
The experience of implementing a cash management project will vary considerably between organisations according to their culture, business organisation and cash management objectives. CSC, for example, is a largely decentralised company resulting from a number of mergers and acquisitions. Three years ago, we made the decision as a group that we should reorganise the company along more centralised lines. From a treasury perspective, we recognised that analysts were looking more closely at cash, including both the cash flow information that CSC was producing and how it was used. We therefore embarked on a project to centralise cash management based on a single technology platform. Our objective was to enable us to make better use of cash across the group, improve efficiency and control, enhance reporting and reduce costs. One element of this project was to establish external cash pools to centralise cash and make it available to treasury. At the same time, we recognised the significant value that our local finance teams add to the business, so we decided to maintain a decentralised approach to payments and retain the local expertise that each team had built up.
Defining a project approach
We made the decision to adopt a ‘step by step’ approach as opposed to trying to make radical change very quickly. There were various reasons for this:
Firstly, centralisation was a significant organisational and cultural change, and we wanted to ensure that key individuals across the group were supportive and engaged in the transformation;
Secondly, we knew that it would be more difficult to centralise our cash in some regions than others; therefore we decided to develop experience based on a limited number of countries which we could then apply to other regions;
Thirdly, we needed to ensure that our cash pooling project was aligned with our global hedging programme.
Based on this strategy, we started with Austria and Switzerland, with a view to centralising cash into a euro cash pool located in Germany.
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Internal communication
Key to a successful cash centralisation project is to communicate clearly with internal stakeholders, which include senior management and local finance teams. Convincing senior management of the need to move to a centralised cash management organisation was relatively straightforward, as they recognised the existing challenges we were experiencing and understood the potential benefits. A greater challenge, but of equal importance, was to gain the support of our local finance teams. We needed to articulate clearly what we were doing, how it would impact them, and how it would benefit the company. In particular, we wanted the local finance teams to recognise that as they would continue to manage their own payments, they would not be losing control over their activities; rather, they would simply be accessing funds through the in-house bank rather than externally.
Establishing a clear communication process, and anticipating potential objections and worries were vital to avoid resistance and encourage ongoing support, as our local finance teams would continue to perform vital activities: managing local payments; providing information for cash flow forecasting purposes, and acting as experts in their local markets. For example, in central and eastern Europe, banking conventions are different from those in Germany, so we benefit considerably from the local experience and knowledge that they bring.
We recognised the importance of communicating not only with finance managers, but with every team member. This was vital to avoid resistance to the project, but also to ensure that any challenges with centralising cash in each location were addressed. As we discovered, there was a difference between ‘will not’ and ‘cannot’ when it came to supporting the project; in the latter case, the local teams were very helpful in explaining legal restrictions in countries such as Poland. To achieve the level of two-way communication that we needed, we held kick-off meetings in Austria and Switzerland, so that people got to know the treasury team, and we could address any concerns face-to-face. After the initial kick-off, we conducted regular conference calls and email exchanges to create a regular communication channel. This is also a model that we will roll out to other countries as we extend our centralisation project further.
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Bank relationships
We decided to maintain our local bank relationships whilst implementing a series of regional cash pools to centralise surplus balances and fund local accounts automatically based on a zero balancing arrangement (i.e., a physical cash pool). Consequently, although each business unit would still work with its local bank, we would achieve the overall benefit of a single banking relationship at group level, with one credit line, one interface and one set of bank account reports. In addition to maintaining local autonomy and expertise, we also wanted to demonstrate that the new arrangement would bring specific advantages to the local finance teams. For example, we have not included a margin in our in-house banking rates, so business units generally receive an equivalent or improved rate to those available from their local bank.
Having defined the project clearly, and communicated with internal stakeholders, selecting the right cash management bank was the next crucial step in our cash management project. We found that the majority of banks were able to provide the products and services we required from a technical point of view. Therefore our decision was based primarily on issues such as the quality of the relationship, the cost of services, and the flexibility, usability and security of banking technology.
Initial project steps
Having decided on a partner bank, we had to co-ordinate the legal documentation. This was a significant process, as all the business units and their local banks had to be involved; effectively, each cash transfer involved three parties: the local bank, pooling bank and CSC. There were also a series of internal changes that needed to be made. For example, we needed a way of calculating and posting interest on internal accounts for cash pool participants, and change the way we performed account reporting, as the external balance on each local account would be zero each day. Zero balancing transactions needed to be differentiated from other payments and collections and treated as intercompany loans.
As our objective was to reduce costs rather than to expand our administrative overhead, and with limited resourcing available, we wanted to focus on value-added tasks. Therefore we decided not to perform daily interest calculations ourselves, and outsourced this to our bank instead.
Extending centralisation
The project so far has already proved highly successful, both from a treasury perspective and for our local finance teams. Consequently, having now implemented the first stage of our cash pooling project, we are now looking at centralising our cash on a pan-European basis. This will involve three new cash pools: a GBP pool in the UK; a Nordic cash pool based in Denmark, and a euro-denominated, multi-currency cash pool based in Germany, which will be the largest of our cash pools, ideally incorporating our central and eastern European currencies. This will need to be aligned with our global hedge programme, however, to ensure that we do not create any negative impact as a result of additional currency exposures.
We would identify three key factors in ensuring the success of a cash pooling project: firstly, the degree of internal communication; secondly, managing any resistance in a proactive and personal way, and thirdly, selecting a banking partner that not only fulfils our functional requirements, but has the competence and flexibility to adapt to our business organisation.
