Published: June 01, 2012
At Reval, we are committed to understanding clearly the needs and aspirations of corporate treasurers in order that we can continue to deliver solutions and services that meet and exceed our customers’ expectations, both now and in the future. Consequently, 2012 marks a landmark year for Reval and our clients in two key respects: firstly, we entered the year with our new Treasury and Risk Management solution, and secondly, we conducted our ground-breaking Treasury Technology Assessment Survey, the results of which are presented in this article.
The research included 122 companies in UK, Ireland, The Netherlands, Belgium, Luxembourg and the Nordics. We deliberately made the decision to exclude existing users of Reval’s products. The results also represented a cross-section of industries, excluding financial services, which we will focus on specifically in a future research project. The survey was divided into three sections: an overview of treasury technology, treasury advisers and priorities for 2012. Based on feedback from participants, we will conduct the survey annually, potentially by individual country, as well as three separate surveys for the financial services industry. Establishing an objective, structured approach to the changing needs of corporate treasury departments is an important element of Reval’s market engagement.
1. Survey Results
We asked respondents initially about their current treasury management systems (TMS). Twenty-six per cent did not currently have a TMS, which was a higher proportion than we would have expected. We then discussed survey participants’ approach to risk management. The main themes that emerged were credit risk, fraud risk, liquidity risk, compliance risk, analytical risk, reputational risk, and morale and productivity risks. For example:
a. Credit risk
A key issue was credit risk, inevitably prompted by the global financial crisis. With continued market uncertainty, particularly in Europe, treasurers’ credit risk concerns have not yet been alleviated.[[[PAGE]]]
b. Liquidity risk
Liquidity risk was the other key priority for treasurers. In particular, the ability to forecast cash flow accurately is a priority in order to identify and manage future liquidity needs appropriately.
c. Compliance risk
Treasurers’ concerns over compliance risk included replacing manual tasks with automated processes to comply with Sarbanes-Oxley Section 404, but also accounting standards such as International Financial Reporting Standards (IFRS) 9 that is soon to be introduced, and existing requirements such as International Accounting Standards (IAS) 39 and IFRS 7.
d. Analytical risk
The focus on analytical risk came as no surprise, although there is typically less market attention on this than the previous risk categories. For example, while 80% of time is typically spent on producing information, often only 20% is then spent analysing and acting on this information. Typically the only way to break this cycle is to establish a more automated and systematic approach to the way that data is produced.
One finding that was particularly significant was the change in treasurers’ approach to risk over the past four years. While the lack of a TMS was probably acceptable in some companies before the global financial crisis, there is now a far greater awareness of the need for a disciplined, objective and systematic approach to identifying, monitoring and managing risk.
2. Technology Deployment
a. Survey results
The next question to respondents that had implemented a TMS was how this was deployed. Forty-six per cent of respondents had installed software, while 26% accessed their TMS through a web-based Application Service Provider (ASP). It was interesting that while there was a great deal of interest in Software as a Service (SaaS), SaaS solutions had not yet been adopted by any of the respondents. We see this as a convenient and flexible means of deploying the required functionality without the challenge of system maintenance or integration.
3. Challenges
a. Upgrades
We then looked at some of the challenges that corporates had around installed technology and where they believed that SaaS or other methods of deployment could help. The first issue was upgrades. Respondents with an installed TMS found that it is not very easy to upgrade frequently, but that technology can become outdated quickly unless this takes place. While business users wanted to take advantage of new functionality, technical users were more inclined to retain legacy versions.[[[PAGE]]]
b. Market-driven events
Users of installed technology were concerned that they were not in a position to use new functionality required through market, economic or regulatory changes if they were using legacy versions and were not in a position to upgrade quickly.
Respondents recognised that SaaS solutions would alleviate these issues as software is maintained up to date on a continuous basis, avoiding the resource implications and disruption of upgrades, and enabling users to take rapid advantage of new functionality.
c. Cost
Respondents indicated that the costs of an installed TMS can be substantial, including infrastructure, connectivity, licensing and implementation costs. Once again, many of the upfront costs are eliminated with a SaaS solution, enabling treasurers to link expenditure more closely with the value that they derive from their TMS.
d. Integration
Integration was cited as a considerable challenge by a number of respondents. In a large, complex and geographically diverse organisation, with treasury reliant on data derived from other parts of the business, many treasuries have to deal with a variety of interfaces. Increasingly, technology vendors are taking greater responsibility for technical integration than we saw in the past, which is proving highly beneficial for corporate users. For example, Reval’s hosted SAP interface is certified by SAP, enabling corporates to send or receive a wide range of data in risk management, cash management, hedge accounting, payments and forecasting directly to and from Reval without the need to set up this interface as part of the implementation project.
e. Administration
An installed TMS can also bring a considerable amount of administration. Often there are ‘super-users’ who set up new users and define user rights, as well as technical administrators to manage backups and disaster recovery. These are additional resource overheads that may be particularly difficult to support in a smaller treasury organisation. In contrast, with a SaaS solution, there is no need to invest in technical administration and support internally to manage the system.
f. Geography
Rolling out an installed solution across multiple locations can present logistical challenges and create substantial additional costs, unlike a SaaS solution where users can access the solution directly through the internet from wherever they are located, whilst enjoying the latest innovations in security.
4. Software Versions
a. Survey results
As evidence of the concerns outlined above, 22% of respondents were using the latest version of their installed TMS. This was typically due to cost or resource constraints, or competing priorities.[[[PAGE]]]
b. Consequences
As discussed earlier, the potential consequences of using an outdated software version may be considerable, particularly during periods of fast-changing market and regulatory conditions as we are seeing now. For example, with SEPA migration soon to be a mandatory requirement, treasuries need the version of technology that supports SEPA payment instruments. Legacy versions also prevent companies from leveraging new financial products and connectivity opportunities.
5. Interfaces
a. Survey results
The most popular type of interface amongst survey participants was a market data feed (38%). In addition, 27% had an interface between their TMS and online trading platforms, and 17% integrated with confirmation matching systems. Six per cent of respondents used their TMS on a standalone basis with no interfaces. In addition, respondents noted interfaces with online banking and payment systems and reporting tools.
b. Conclusions
It was clear from respondents that easy, secure connectivity between the TMS and ancillary systems for the exchange of information both internally and externally was a key requirement. However, despite the opportunity for straight-through-processing, survey participants recognised that maintaining interfaces between systems was an operational risk.
c. SaaS solutions
Using a SaaS solution enables users to derive the benefit of straight-through processing and high quality, timely information, whilst removing the integration risks. For example, Reval has a daily market data feed which is an audited process provided as part of our service. In addition, we have developed partnerships as part of our STP Community with FX trading portals, with ICD for money market transactions for robust integration, and with Fides for bank and payments connectivity. In this way, our solution becomes a hub through which users can access the services they require directly, without the need to develop a specific interface.
6. Technology Advisers
a. Survey results
We then moved away from technology to ascertain where companies sourced advice on treasury-related issues. Fifty per cent relied on the ‘big four’ firms for treasury advice, while 23% relied on internal expertise. Thirteen per cent of respondents worked with independent consultants with specialist treasury expertise. Only 3% of the people we spoke to considered their treasury technology vendors as advisors.[[[PAGE]]]
b. Using treasury vendors
It was a surprise to us that such a small proportion of respondents who have treasury technology relied on their vendors for advice. These companies have often developed substantial expertise in the best way of using the system and deriving value from it, including optimal processes, integration and control procedures, based on their knowledge of the system and experience of working with multiple companies.
1. Survey Results
The survey then considered treasurers’ main priorities for 2012. For 26% of respondents, cash management was the primary issue, while a further 25% were focused on counterparty risk. Cash flow forecasting was cited by 15% of participants, 20% mentioned FX exposure management, while 14% were seeking to improve cash visibility. Overall, 55% of participants ranked cash related topics while 45% ranked risk topics as their priority.
2. Business Trends and Treasury Responsibilities
a. Commodity risk
Commodity risk has historically been dealt with by procurement, with the exception of the largest treasuries. We are seeing a significant shift in responsibility from procurement to treasury, as part of a growing recognition of the value of a complete view of risk to each counterparty. This is part of a wider trend towards treasurers taking a broader responsibility for risk management, in order to provide an integrated view of risk and enable hedging activities and hedge accounting to be more closely aligned. We believe that these trends will continue strongly throughout 2012 and 2013.
b. Crisis risk
As the global financial crisis demonstrated, every market participant is affected by extreme market events, whatever their approach to risk management. As we have discussed previously, counterparty risk remains a treasury fundamental, and commodity risk is a growing area for treasurers, but these need to be combined with a robust approach to ‘what if’ management, with a firm handle on cash flow forecasting, liquidity risk as well as FX and interest rate risk management in order to identify and manage potentially huge swings in volatility.[[[PAGE]]]
1. Underlying Processes
Corporates of all sizes are seeking to integrate industry best practices into their organisation. This relies first on a firm foundation based on complete visibility of cash across the business. Once treasurers can see their cash balances, they are then in a better position to take control of them, building internal processes and cash management policies accordingly.
2. Optimisation
Many companies are still focused on developing their internal cash management infrastructure to achieve visibility and control over cash. Once this has been achieved, treasurers can then focus on how best to optimise their financing arrangements, investment strategies, payment and collection processes in order to maximise access to cash. An effective cash management framework is essential not only for cash, liquidity and working capital management, it is also the basis of a robust risk management strategy.
3. FX Risk
FX risk management continues to be viewed in sharp relief by corporate treasurers, not least because of on-going uncertainty in the Eurozone. While no-one knows yet what will happen, and the potential ramifications, the essence of managing risk is managing uncertainty. Treasurers are focused on the impact of extreme market volatility, as well as the practicalities of introducing new currencies should this scenario arise.
4. Counterparty Risk
The European crisis opens up not only the issue of FX risk, but also a new dimension to counterparty risk. For example, while European government debt was considered a safe haven in the aftermath of the global financial crisis, this is no longer the case. Treasurers therefore need to monitor their investment policies and counterparty exposures on a regular basis to ensure that these are appropriate to market conditions.
The on-going changes to credit risk is an issue from an accounting issue too. For example, IAS 39 states very clearly that counterparty credit risk must be included in the valuation, which is not possible in many systems today. There are still a large number of corporates that are not including credit risk in their valuations, and using legacy technology prevents them from doing so.
5. Collateral
A recent issue that has arisen is collateral and how this is measured. In the past, this was typically done by the bank, but now treasurers want to be able to reconcile this in their own systems.
Treasurers continue to play a critical role in steering the organisation through changing and uncertain times, and ensuring that the company’s liquidity needs continue to be met. Fundamental to achieving this is the right treasury technology, not only in the functionality that it provides, but also in the way that it is deployed. Treasurers are tasked to manage cash and risk, and rarely have the resources to spend time managing the underlying application. Using a SaaS solution enables treasurers to focus on the business priorities that we have identified here, and analyse data rather than collect it. At Reval, we continue to develop our solutions and services to meet and anticipate treasurers’ on-going needs, and take away many of the routine tasks that prevent them from undertaking the activities that really matter, such as positioning their companies for success during changing times.
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