Published: October 01, 2008
Until 2001, Tesco relied on a series of spreadsheets and in-house-developed applications to manage its treasury, risk and cash management. As a growing company, with expansion in Asia and Europe, as well as suppliers globally, Tesco’s treasury technology requirements were also becoming more complex and diverse, so the decision was taken to implement a third-party treasury management system (TMS). Following a rigorous selection project, Tesco selected and implemented SunGard’s AvantGard Quantum.
Although the system was implemented successfully to cover the company’s core requirements, Tesco’s treasury did not have the resources to optimise the way in which it was used, so ‘phase 2’ objectives such as integrating the TMS with its banking systems were never undertaken. Instead, a payments report was produced from AvantGard Quantum and the relevant payments typed into its banking systems. Therefore, many of the potential benefits of straight-through processing were lost.
Treasury was in a position to review the wider systems landscape to achieve more efficient transaction processing and a higher level of straight-through processing.
Over the next five years, the TMS was not upgraded and Tesco took the strategic decision to review the key processes in treasury, and the underlying systems framework. The aim was to ensure that the most appropriate systems were in place to support the company’s current and evolving requirements, and used in the most efficient and integrated way possible.
Firstly, Treasury conducted a market analysis of treasury management systems to verify that AvantGard Quantum was still the optimum TMS for its needs. Having confirmed this, the team decided to upgrade the system to the latest release to take advantage of technology and functional improvements and efficiencies. Treasury was also in a position to review the wider systems landscape to achieve more efficient transaction processing and a higher level of straight-through processing.
For a commercial organisation like Tesco, it is not always easy to justify expenditure on ‘back- office’ systems. As the TMS was already in place, implementing a new, visionary technology framework did not require major capital expenditure, but there were still significant costs in addition to the internal and external resources required to deliver the overall project successfully. Some elements of the project, such as implementing a new confirmation-matching system, were difficult to justify in terms of quantitative value, and therefore did not have a specific return on investment attached to them, but it was important to take into account the qualitative benefits, such as improved control. With others, such as online dealing, there were clear qualitative benefits, primarily better quotes through price discovery.
One of the most important parts of the project has been to migrate from managing the technology infrastructure in-house to outsourcing it to a third party. The TMS is a specialist application with a limited number of users but a number of interfaces, so ideally it required support from people who knew the system. It was difficult for Tesco’s IT department to provide this type of support, which needed to focus more on large-scale applications directly related to the services that the company provides to its customers. Consequently, Treasury’s proposal to outsource the hosting of its IT infrastructure met with little resistance, and the IT department was able to advise on how to avoid problems that had been encountered with previous outsourcing arrangements. Having reviewed different outsourcing options, the decision was taken to expand the relationship with SunGard which now provides hosting services to Tesco. [[[PAGE]]]
Chris Rowland, Group Treasury Accountant at Tesco explains:
“The decision to outsource the hosting of our treasury IT infrastructure has been a vital element in delivering our roadmap. Before taking this decision, there were few people who understood our systems, we had no service level agreements and performance was often poor. Now, the organisation that understands our systems best is managing them day to day, we have defined service levels and performance has been substantially improved.”
Although Tesco had used a single bank dealing system, this was not integrated with the TMS so each deal had to be input individually into the system. As it could not be used to obtain competitive quotes, there was no price tensioning and therefore limited value. Treasury reviewed various multi-bank online dealing portals and selected 360T on the basis of its bank participation, instrument coverage and ease of use. This was then integrated with the TMS so that deals transacted in 360T are updated automatically for back-office processing, accounting, risk management and reporting.
The decision to outsource the hosting of our treasury IT infrastructure has been a vital element in delivering our roadmap.
Tesco had an existing system in place for online confirmations, but again, this was not integrated with the TMS. Consequently, deals had to be entered into the confirmation-matching system for transmission to the relevant counterparties and the matching status was then manually updated into the TMS. Treasury made a decision to replace the system with Misys which has a two-way interface with AvantGard Quantum. This means that the confirmation can be transmitted directly from the TMS to the counterparty bank via Misys’ system and the matching status imported so that the full deal status is stored in AvantGard Quantum.
Tesco had a system in place to obtain market rates for revaluation, etc. but there was a manual transfer of rates into the TMS. To improve the timeliness and accuracy of revaluation, accounting and risk-management reporting, Tesco has implemented Bloomberg, including an automatic upload of rates into AvantGard Quantum. [[[PAGE]]]
Despite its substantial expansion into new markets, Tesco worked with a small group of banks, primarily HSBC and Citi. Before embarking on the project, Tesco used three online banking systems for payments and balance reporting: HSBC, Citi and UBS. One option was to connect these systems to AvantGard Quantum as many other companies have done. However, each of these three interfaces would have been slightly different, according to the file formats required by each bank, which had to be amended whenever the TMS or the banking system was upgraded. As Tesco has acquired new businesses, the number of banks with which Treasury needed to connect was already increasing, reaching 16 banking systems, so this option was not considered viable. Some companies address this by routing third-party bank payment and statement messages through their core banks, but this is unpopular with the banks, expensive and increases the reliance on these banks.
Furthermore, although Tesco was satisfied with its core banks and had no reason to wish to change, there was a concern that building these interfaces would make it difficult to add or change banks in the future. This issue would potentially be more of an issue in the future as Tesco intend to implement a centralised payments factory for its commercial as well as treasury payments.
Consequently, achieving bank independence from a connectivity standpoint was considered an important objective by using a non-proprietary gateway to connect to the banks and standard formats so that new banks could be plugged in easily. Having seen large companies implementing centralised payments factories, with SWIFT as the channel to connect with their various banks, Treasury reviewed SWIFT but discounted the Member-Administered Closed User Group (MA-CUG) model as it was considered impractical to join multiple CUGs and potentially too expensive.
With the introduction of SCORE (Standardised CORporate Environment) in 2007, SWIFT access became a more realistic and affordable option for Tesco and provided the non-proprietary, bank independent channel to the banks that Treasury was seeking. Chris Rowland explains:
“Not only did we need to consider connectivity with our core banks, but as our activities became more complex and our banking relationships increased, SWIFT provided a way of connecting with our banks in a consistent way.”
Having reviewed the various options for SWIFT connectivity, Tesco initially decided that the most convenient way of connecting to SWIFT was through a service bureau. Treasury reviewed the various service bureau offerings that were available and decided to extend its existing working relationship with SunGard, as it was easy to integrate with the systems already in place and users had confidence in the supplier. However, soon after this decision was made, SunGard became a SWIFT member/concentrator so Tesco opted to use this service instead.
The banks initially had mixed responses to Tesco’s decision to connect through SWIFT and did not necessarily have experience with the SCORE model, which meant that the on-boarding process was possibly more cumbersome and bureaucratic than it needed to be. There was also still a fear amongst some banks that using non-proprietary technology, which contributed to bank independence, was not necessarily in their best interests. With many of the major banks now committed to SWIFT corporate access, these concerns have largely been resolved and Tesco’s banks are now working enthusiastically to facilitate connection.
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While the internal aspects of SWIFT connectivity have gone smoothly for Tesco, a significant challenge has been the lack of standardisation. For example, while the SWIFT MT 101 payment message is largely standard (e.g. the first four fields are SWIFT requirements), there are still inconsistencies amongst banks, such as the use of the fifth field. Chris Rowland explains:
“The variations between banks in their payments messaging means that we need to map different formats for each bank. While our SWIFT Connector allows us to map to the various file formats (and different message types) that each bank accepts, which may not be the same in every country, it is something which needs to be managed as part of the project. This is likely to change in the future, particularly with ISO20022, but in the short term, it is an issue which needs to be taken into account.”
Tesco is now close to completing the delivery of its treasury technology framework and is in a position to use SWIFT for its treasury payments (FIN messages). This is being rolled out globally, including supporting its business in Asia by connecting with HSBC through SWIFT. Once this project has finished, Treasury will then turn its attention to its low-value, high-volume commercial payments by implementing a centralised payments factory. This will also connect through SWIFT using FileAct.
This article appears in HSBC’s Guide to Corporate Connectivity launched in September 2008. The Guide includes a series of additional case studies and commentary from HSBC experts.
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