Published: September 01, 2013
Global industrial group Sandvik has undergone significant change in its treasury function over recent years, with major improvements to its financial and operational efficiency. From a centralised funding and currency management centre with relatively little profile within the group, treasury has embarked on a journey to take centralisation to another level, becoming a highly efficient department with automated processes that acts as a trusted business partner for the group. This article outlines some of the recent initiatives that treasury has undertaken to achieve this.
In 2011, with new senior management in place, Sandvik embarked on a strategic transformation process to centralise, streamline and optimise group functions, in order to serve the needs of the group as effectively as possible. Treasury had already achieved a certain degree of centralisation, but this renewed management focus acted as a driver for further improvements.
Our treasury department comprises 24 treasury professionals at our headquarters in Stockholm. This year, three regional treasurers with responsibility for the Americas, Asia Pacific and EMEA have been engaged. Regional treasurers provide an interface between group companies and treasury to align local and group objectives, and manage bank relationships in the respective region. In addition to the core treasury team, one member of the finance team in each country takes responsibility for ensuring that cash and treasury management activities comply with local regulations.
Centralisation is a major challenge for a company such as Sandvik that has operations in more than 130 countries. Rationalising banking relationships is a valuable means of centralising cash, but is often easier in theory than in practice. Currently we have around 120 banks, of which 16 are our core banks. We work with our core banks for cash management wherever possible, but not all of these banks provide extensive cash management services, or in the regions that we require, so we often need to work with an alternative bank. There may also be regulatory obligations to work with specific local banks in certain regions.
An essential first step, however, has been to centralise liquidity so that treasury has visibility and control over group cash. During the mid-2000s, we started to centralise liquidity in core European countries, using cash pools, which we subsequently extended to 22 countries. The USA is our biggest single market, so managing USD is an essential requirement. We have a very positive relationship with Nordea which covers our USD activities in USA, Canada and Mexico, and we have recently gone live with USD cash pools in US and Sweden and CAD cash pool in Canada following a successful implementation. Consequently, we now have control over a large part of group liquidity, but we continue to increase the number of countries that are included in our liquidity management framework.
By proving the benefits of centralisation, whilst also ensuring that local needs continue to be managed effectively, we have been able to expand treasury’s influence and control over a wider range of activities. Key to the success of centralisation initiatives is to develop trust and open communication with business units. Consequently, over the past three years we have been very proactive in visiting group companies and forming relationships. We seek to understand their cash and treasury management requirements and constraints, explain what we do and how we can contribute to their business. We pay particular attention to describing the reasons for centralising treasury management across the group and the consequences if we remain decentralised. Furthermore, having engaged regional treasurers who can maintain greater geographic and cultural proximity with group companies, it is easier to maintain these relationships over the longer term and engage in ongoing dialogue.
Building group communications requires considerable personal attention to develop confidence and trust, but there is also an important technology dimension. While we have had a treasury management system (TMS) in place for some years, it was not sufficiently flexible to manage cash pool information effectively. Therefore, we selected and implemented a new liquidity management system (OpusCapita) to complement our TMS. We now use OpusCapita to collate balance and transaction information on cash pool accounts each day from our banks and report on our global liquidity position. Not only has this approach been effective in facilitating decision-making but it also supports internal reporting and accounting. We ask our banks to provide balance and rate information on the first day of each month giving the previous day’s value. This means that our month-end close is now completed very rapidly, and we can send accurate and timely balance information for each company to our consolidation system. Furthermore, the number of queries we receive from group companies has reduced substantially, which improves trust and credibility.
Implementing a liquidity management tool has also been instrumental in allowing us to mobilise our cash more effectively. As a result of better visibility over cash balances across our 140 banks, we identified around SEK 3bn (USD 440m) in ‘trapped’ cash i.e. cash that is held in bank accounts that are not included in cash pools and/ or is inaccessible for regulatory or other reasons. During 2013, we embarked on a project known as ‘Cash Hunt’ with the aim of reducing trapped cash by at least SEK 1bn (USD 146m) which would add demonstrable value to the group. We analysed each cash balance systematically and distinguished between those accounts where cash is truly trapped, and those in which cash may not be readily accessible, but which could be unlocked in some way. For example, in some cases we could adapt our organisational structure, pay a dividend or include an account in a notional or physical cash pool. Consequently, each balance, country and currency needed to be analysed individually and a specific solution found, an approach that has proved extremely successful.
Our Cash Hunt project has not simply been a ‘one off’ initiative, we also wanted to find ways of avoiding the build up of cash in accounts not included in cash pools over time. We have therefore worked with our business units to enhance the reporting and cash transfer mechanism for accounts held by business units. Although we already received monthly reports, these were often provided in different formats, so it was time-consuming to collate information in a consistent format. We have now streamlined and standardised the reporting process for business units, to ensure improved visibility over non-treasury accounts. Surplus funds are also transferred to treasury more systematically. Once we have completed this process, while it is unavoidable that some cash will remain trapped, we will at least have visibility over it, with a mechanism in place to avoid the build up of idle balances in the future.[[[PAGE]]]
As well as working towards cash and liquidity management objectives, we have a variety of both operational and strategic initiatives underway or finalised. For example, two years ago, we started a treasury process development project to highlight opportunities for greater efficiency and ensure processes were well-documented for compliance and staff continuity purposes. We first identified and documented our original processes, and then analysed and refined each one, looking both at individual processes and how they were integrated. This was a highly successful undertaking that has clarified individuals’ roles and responsibilities and improved efficiency. Some processes now take significantly less time than previously, saving hours or even days in some cases. We now review and update our processes and documentation regularly, and produce a new version every year, which provides considerable transparency over our activities for audit compliance purposes.
One aspect of this process development project was to standardise the reporting we provide to group companies. In the past, we often produced bespoke information or formats, which required considerable manual effort. We are now producing consistent information in a more automated way for all group companies, which is ultimately positive for the group as a whole, although we appreciate that it may be less convenient for individual business units in some cases.
Prior to the process development project, we had outsourced our treasury operations to an in-house shared service centre. We recognised that this approach had its limitations, with processes and information flows becoming dislocated, particularly as treasury and the SSC were geographically remote, and ownership of each activity was ambiguous. As a treasury with complex global activities, we needed treasury operations to be conducted by treasury professionals as opposed to becoming integrated into the wider accounting function with different priorities. Consequently, we made the decision to insource treasury operations back into treasury. This has proved highly successful, with better process cohesion, clearer responsibilities, greater transparency, and a stronger treasury identity.
While optimising treasury processes brings considerable value, we have also extended our horizons into processes that influence working capital such as days sales outstanding (DSO). While collections are not part of treasury’s core responsibilities, it was essential that treasury was involved in the project to reduce overdue customer collections, not only due to the working capital implications, but as it could otherwise conflict with our Cash Hunt initiative. For example, it is not ultimately our intention to increase cash on the balance sheet and cash needs to be channelled into accounts to which treasury has access wherever possible.
From a payments perspective, treasury has overall responsibility for the payments infrastructure at a group level, even though we do not manage the payments process itself. Early in 2013, we started to work with IT to review our payments infrastructure and the processes adopted in each country. We found that not only were different payment methods in use, such as cheques, electronic payments etc. which may be necessary for local cultural or infrastructure purposes, but business units also had disparate payment authorisation processes and controls in place. We therefore recognised the need to define a standard working practice that was bank-independent, had global applicability but which could be adapted to meet local standards if necessary.
With over 100 ERP systems in place, plus a variety of legacy systems, it was not feasible to expect business units to produce the same format of payment file. We have therefore developed a single, streamlined and secure process that enables business units to send files in any format into our central payments system, a cloud-based middleware application, which converts files into a standard format for transmission to the banks. Similarly, files received from the bank are converted and sent to the relevant business unit for upload into their local systems. This has been an important development in standardising and automating our payments process without the need to adapt multiple systems.[[[PAGE]]]
Our focus on standardising, streamlining and centralising our activities has brought multiple benefits, in that we are now more efficient, information is more readily available and trustworthy, and we are able to deliver better services to the group. To achieve this, our banking partnerships with key banks such as Nordea, and building trust and regular dialogue with our business units have been essential. The initiatives we have embarked upon over the past few years are part of our ongoing efforts to refine and optimise our activities, a process that will continue as the needs of the group evolve. Delivering individual projects without changing the longer term culture is counterproductive, so our commitment is to be a reliable and trustworthy partner to our business units in a similar way to the relationship we expect from our banks.
We have also been careful to complete the projects on which we have started rather than leaving loose ends or partial outcomes. This ensures that projects achieve their objectives, but there are also some advantages that we had not originally anticipated. In September 2011, senior management made the decision to relocate our company headquarters to Stockholm, which included treasury. This was a major undertaking, particularly as many team members had worked for the company for a long time. The result was that we experienced a complete turnover of staff, so we lost considerable experience and expertise that had been developed over many years. Nevertheless, as we had already undertaken our treasury process development project, with simplified and well-documented processes, new members of staff were able to take on their new responsibilities quickly without interruption to the business. Our ability to achieve this, and the success of our operational and financial efficiency initiatives, has been testimony to the efforts and commitment of our treasury teams, both new and old, that have made Sandvik’s treasury such a dynamic and positive business function.
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