A Custom Approach to Treasury Outsourcing

by Roger Saunders, Lloyds Banking Group

Treasurers have become increasingly aware of the opportunity to outsource their treasury operations to banks’ agency treasury services (ATS) in recent years. What is often less apparent is the differentiation that exists between ATS, and how this affects the type of services that an agency treasury can provide. In particular, many ATS’ business model is to provide a standardised service to treasury clients, which in turn enables them to leverage economies of scale. However, at Lloyds, we have focused on delivering a highly personalised, custom solution for each client, enabling us to meet their current and evolving business needs and exceed their expectations.

The rationale for treasury outsourcing

Treasury is increasingly recognised as a business-critical function, and as such, it is imperative for every organisation to establish the most appropriate policies, procedures, people and technology. The cost and complexity of achieving this can be considerable, however, in particular for companies which lack the scale and scope of treasury activities to justify the investment required. For example, to achieve the necessary controls over treasury processes, there needs to be adequate segregation of duties so that the same person is not responsible for both dealing and settling transactions. As an alternative, treasurers have the option of outsourcing their treasury operations to a specialist agency treasury, typically within a bank, that produces the daily cash position, conducts the day-to-day transaction processing and produces the necessary reporting. This enables internal treasury staff to concentrate on more strategic activities, such as financing, risk management, and business advisory, without losing control over daily activities. As treasury activities are conducted in accordance with the treasury policy, and treasurers have full visibility over all transactions, they benefit from a best practice treasury environment without the need to invest in the necessary infrastructure.

In the past, treasury outsourcing was most popular amongst US multinationals, that outsourced their European treasury activities to agency treasuries in Dublin, Ireland, taking advantage of the favourable tax situation. This is no longer the case, and while the number of organisations outsourcing their treasury remains relatively modest, agency treasuries now serve the needs of a wide diversity of companies. There are three key reasons why some treasurers have been reluctant to outsource their treasury activities to a third party:

i) The service offered by the majority of agency treasuries is standardised, in order to create economies of scale. Therefore, some treasurers have found that the specific needs of their business, such as reporting, may not be supported through an outsourcing route.

ii) As the majority of agency treasury providers are part of a bank, treasurers are often concerned that they are obliged to award their wider banking business to that bank.

iii) Treasury is a highly sensitive area, and as such, it is essential that data is held entirely confidentially.

At Lloyds’ ATS, addressing these concerns remains pivotal to our operation. Our services are bespoke to each client, enabling them to leverage operational best practices whilst supporting the specificities of their organisation. All information is held confidentially, with a separate physical and technical environment. Furthermore, ATS is part of the Financial Institutions business within Lloyds, giving clients access to products and services from across the market, not only from Lloyds Banking Group. Clients are not obliged to establish a wide relationship with Lloyds, so they are able to select Lloyds ATS for the services we provide, unencumbered by other considerations. By conducting our business in this way, Lloyds ATS has a strongly differentiated service offering that provides the benefits of treasury outsourcing without the perceived disadvantages.

Background to Lloyds’ agency treasury services

Lloyds first established its ATS division over 20 years ago, initially providing all the company finance and administration for the newly formed, special purpose vehicle, Guaranteed Export Finance Company PLC (GEFCO), a structure developed by Lloyds in conjunction with the UK government. From the point that GEFCO was incorporated, Lloyds provided all the relevant functions for the company, including issuing Eurobonds, transacting interest rate and currency swaps, refinancing loans, placing funds on deposit etc. In return, Lloyds charged a fee to GEFCO for the services it provided, as opposed to a margin on transactions. With excellent feedback on the quality and responsiveness of service provided, it was soon suggested that Lloyds extended its ATS to other third parties. [[[PAGE]]]

Building long-standing relationships

Since then, Lloyds has steadily built a loyal client base of selected entities with treasury outsourcing requirements. These often have very diverse business requirements, from financial institutions through to government agencies and corporations. There are a variety of reasons why these organisations have selected and continue to work with Lloyds as their agency treasury partner. Some of the factors that our clients tell us that are important to them include the following:

• We are able to provide a highly bespoke service according to each organisation’s needs. This often includes custom reporting, taking into account a client’s specific data, format, frequency and distribution requirements. While some customers may require only a few, regular reports, others rely on Lloyds to provide a large number of reports with varying frequencies or provided ad-hoc.
• We place a high priority on establishing and maintaining a close relationship of trust with our clients, so we have frequent meetings in addition to regular telephone contact, to make sure our services continue to meet and exceed their expectations, and to understand changes to the business.
• Working with Lloyds ATS does not need to be part of a wider relationship with Lloyds. Therefore, our clients are free to appoint us based on the quality of the service as opposed to having to consider treasury outsourcing as part of the wider banking relationship.
• We maintain a very strict ‘Chinese wall’ between ATS and the rest of the bank, with separate offices, systems, staffing and contingency arrangements. Consequently, there is no visibility over transactions, counterparties, rates etc. outside ATS. This is a valuable attribute for our clients who value the confidentiality that we offer.
• We charge for our services on a fee basis, according to the transaction and reporting services we provide, as opposed to taking a margin or commission on transactions. This means that our clients benefit from the best rates and most suitable transactions to support their treasury objectives, and the pricing of our services is transparent.

These factors have contributed to consistently high customer care scores, which remains our primary objective.

Business organisation

Lloyds’ agency treasury has distinct front, middle and back office functions, with a clearly defined segregation of duties. The front office highlights options to the client based on their cash position, forecasted cash inflows and outflows, in accordance with the treasury policy. The client then decides whether to permit these transactions to be undertaken.

We maintain a very strict 'Chinese wall' between ATS and the rest of the bank, with separate offices, systems, staffing and contingency arrangements.

The back office inputs transactions, makes payments and exchanges confirmations with counterparties. The middle office provides information and reporting both for the agency treasury staff to support decision-making and for clients in accordance with the parameters laid down in the client’s treasury policy. We use a current version of a sophisticated treasury management system, Summit, within a separate technical environment from the rest of the bank. This both provides an assurance of confidentiality and enables us to upgrade and configure the system according to our needs, without the need to co-ordinate with other areas of the bank. Using Summit, we are able to download data to other packages, such as spreadsheets, in order to reformat data to match clients’ reporting preferences.

The decision for treasury outsourcing

Many treasurers of financial institutions, government agencies and corporations of all types are finding that they are hard-pushed to find the necessary resourcing to support a full-function treasury department with the appropriate segregation of duties, technology and expertise. Outsourcing transaction processing to a trusted third party can be a valuable way of ensuring compliance with the organisation’s treasury policy and adoption of best-practice operational controls. The treasurer and his team can then focus on more strategic activities and deliver greater value to the company.

Treasury is a sensitive and business-critical activity, and it is a major decision for a treasurer to outsource the management of treasury transactions. In particular, a treasurer has to be confident in both the absolute reliability of the business partner, and that partner’s ability to manage the organisation’s treasury operations in accordance with the needs of the business. Banks that provide a largely standard service find it difficult to provide assurances on the latter point in particular. At Lloyds, we pride ourselves in our ability to use the best people, processes and systems to provide a service that is specific to the needs of each client, and recognises their needs, constraints and ambitions. Consequently, it is our privilege to maintain a very loyal client base with relationships extending over many years.