Published: April 01, 2008
One of the ways in which Virgin Atlantic's Treasury wants to distinguish itself is the level of automation we are able to achieve.
The Treasury department at Virgin Atlantic has similarities with many other treasuries: we take care of foreign exchange and interest rate risk; we guide and shape cash management strategy and manage the group’s liquidity. Although Treasury is a centralised function, various Virgin entities, such as Virgin Holidays and our Cargo division, each have different ERP systems and our business units and overseas offices hold separate accounts. Cash management is very important for us as a relatively cash-rich business. This includes both ensuring sufficient levels of liquidity and also enhancing the value of the cash we hold to meet our business requirements and achieve our strategic goals: to deliver the highest quality of service in a cost effective and innovative way.
Although we are similar to other treasuries, one of the ways in which Virgin Atlantic’s Treasury wants to distinguish itself is the level of automation we are able to achieve, through efficient use of technology, connectivity between systems and ultimately, the highest levels of straight through processing. By concentrating on automation and providing high quality processing and decision-making, the small team in Treasury can fulfil a wider variety of functions and play a more strategic role within the company. This article discusses the benefits, the barriers we have experienced when implementing our technology vision and how we in treasury envisage the future.
When looking at our treasury technology strategy, we have incorporated all of the various transaction components which Treasury handles, including liquidity management, cash forecasting, cash positioning and reconciliation, deal capture, settlement and payment. We believe that by implementing a strategy to automate activities across all of these functions, rather than simply focusing on one or two areas, we can drive greater operational efficiency by eliminating the time-consuming and error-prone methods of data entry and processing. Furthermore, Virgin Atlantic is still a relatively young company and is characterized by dynamism and innovation. By implementing a robust technology infrastructure, we can support business growth and expanded responsibilities without increasing our cost base. [[[PAGE]]]
Fig 1 illustrates Virgin Atlantic Treasury’s roadmap for automation from cash position through to settlement. Deal entry first takes place on-line for higher volume, more commoditized transactions such as FX and money market. Deals are then passed automatically through to our treasury management system (TMS) AvantGard Quantum. The next step is to transmit payments derived from treasury transactions into a central Payment Hub (which also processes non-Treasury payments from our various ERP systems, as described below). Payments are approved and released from the Payment Hub to our banks through SWIFT.
While this is our ideal, we have not yet achieved every aspect of it - for example, as with many companies, we continue to rely on spreadsheets and standalone solutions for some aspects of our cashflow forecasting and reporting. We implemented our TMS a couple of years ago, and more recently, we migrated some of our dealing activities and communications to other business units to web-based tools, but these are still largely standalone applications and we are now working to integrate the various components of our treasury technology infrastructure.
In addition to integrating our treasury activities, we are also seeking to simplify and reduce the cost of transaction processing. This involves not only achieving straight through processing within Treasury but beyond Treasury into the broader area of Payments. Consequently, a key part of our strategy is to implement a payments factory, or ‘Payment Hub’, a centralized solution for managing our inbound and outbound payments traffic, together with statement feeds from our primary banks.
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Inevitably, there were always going to be challenges when implementing our vision:
Treasury has embarked on a three phase project to ensure that our central systems, external and internal relationships and connectivity are aligned, with the necessary system security, availability of data for reporting purposes and automation through the transaction process.
Phase 1: Banking Relationships
As the business has expanded, we have acquired a number of banking relationships as overseas offices and business units have had control over the banks they work with. The first step of our project was therefore to rationalize our banking relationships globally, taking account of our needs in each region in which we operate, as well as looking at our requirements from a head office point of view. This phase of our project has now been largely completed and we have rolled out the new banking relationships.
Phase 2: Payment Hub
Like many companies with a centralized Treasury department, Virgin Atlantic has historically processed payments locally, together with some accounting functions and banking relationships. This approach can lead to higher internal transaction costs, with staff and technology required in each location, often with varying degrees of manual processing leading to errors and inconsistencies in control mechanisms. Banking fees are also higher as transaction volumes are low and it is not possible to leverage wider banking relationships.
The heart of the Payment Hub is a technology solution to manage payments processing across the group.
Efficient bank connectivity as well as improvements in internal integration provides us with the foundations for concentrating our payment activities across the group into a centralized payments factory or ‘Payment Hub’. The heart of the Payment Hub is a technology solution to manage payments processing across the group and connects to all of the internal systems from which payments are originated, many of which will produce payment files in different formats. Therefore, the solution needs to translate files into a common format for transmission to the banks, which could be through a single channel, such as SWIFT, or to a number of different banks. We also needed the system to provide workflow management and approval tools, together with lowest-cost routing of payments.
By implementing a central Payment Hub, we achieve a stronger negotiating position with our banks, better visibility into the company’s liquidity and funding needs, and control over payment timing and working capital. The biggest difficulty we envisage is not necessarily the process of establishing centralized technology and processes, but encouraging business units away from existing payment methods such as cheques and from their legacy banks. [[[PAGE]]]
Phase 3: Bank Connectivity
Having rationalized our banking relationships, we need to change our ERP and TMS banking interfaces. The decision of what technical route is taken to connect to our banks is less a technology-related decision than a business decision: what connectivity option provides the best route to visibility and control over our liquidity and free cashflow? A key factor was to integrate cashflow information from our ERP systems and TMS closely with banking information, making data available in one place for all users to increase the certainty and accuracy of our forecasts. Consequently, rather than replacing one point-to-point connection with another, this was a good opportunity to implement a bank independent solution to give us greater flexibility in the future. We wanted to reach a point where we are able to send all payments, irrespective of payment type, bank or country, through a single channel in a common format. [[[PAGE]]]
We gradually came to the decision that SWIFTNet was the most appropriate single payment gateway and best supported our objectives. In particular, it gave us the ability to:
– Banks, formats, connectivity
– Functional roll-out
– Geographical roll-out
However, in the early stages of our analysis, the perceived complexity and cost of implementation of a direct SWIFTNet connection, together with the lack of comparable companies already adopting SWIFTNet almost ruled this option out, as the benefits did not seem to justify the setup costs. The launch of a new corporate SWIFT connectivity model over the past year (SCORE) last year, together with the advantages of using a SWIFT service bureau, the business case began to make better commercial sense for us.
We are now nearing the final decisions and implementation of phases 2 and 3 of our Treasury Technology Vision, specifically the Payment Hub and SWIFT. Virgin Atlantic’s business, and the technology which underpins it, do not stand still, and there will inevitably be variations in the implementation of our treasury technology vision since we designed it. We need to maintain a constant view of our objectives that will form the basis of our decisions now and going forward:
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