Published: May 01, 2009
Standardised and simplified operations are essential for any corporate treasury that wants to improve its operational efficiency and help contribute to the organisation’s wider strategic goals.
There is unprecedented pressure on corporate treasuries today to improve their operational efficiency and optimise liquidity. Many treasurers are therefore focusing on standardising and simplifying their operations to achieve these goals. Shell Treasury is one of them. Its operations strategy is linked to its overall finance strategy, which was set in 2006 when Peter Voser, Shell’s Chief Financial Officer, launched his vision for World Class Finance 2010. The main objective of this strategy is to achieve top quartile performance across the entire finance organisation. The vision is underpinned by the Finance Functional Plan, which aims to bring the various elements of the company’s finance organisation into one, including finance in the business, functional finance activities (controllers, tax and treasury) and finance operations (shared service centres, process standardisation and continuous improvement).
There are three core elements of World Class Finance 2010:
Looking first at process standardisation, for example, Shell identified a number of finance processes on which to focus globally, including Requisition-to-Pay, Order-to-Cash, Travel and Entertainment Expenses and Cash Management. A Process Executive (PE) was appointed for each process, with the objective of standardising each process across the Group. Although each of the company’s key businesses has its own process standardisation programme, the global programme ensures that best practices are embedded into each one.
The PEs are supported by Process Owners (POs) who work together via a Process Executive Council to ensure that processes are truly integrated and work end-to-end. The process standardisation programme is supported by a global ERP roll-out based on SAP, with the objective that most of the processes will be performed by SSCs in the Finance Operations division. [[[PAGE]]]
Shell Treasury Operations has been rolling out a standard model since 2001, well before World Class Finance 2010 was launched for the wider finance organisation. As one of the largest companies in the world, with 102,000 staff operating in 100 countries, a diverse range of energy businesses and customers ranging from individual consumers to very large corporations and governments, treasury has a clear need to be focused on operational efficiency.
In 2007, Shell Treasury handled trillions of US$ of treasury deals and processed 15 million payments and collections via its global banking hub. It has four treasury centres around the world managing this cash flow, with the global centre in London and hubs in Houston, Rio de Janeiro and Singapore. The centres’ objectives are to manage cash and risk for the group, and act as the single interface to the financial markets, global cash management and centralised treasury activities for all Shell businesses.
The treasury operations strategy has three core themes:
To show how this strategy is being implemented, it is instructive to look at it from a cash management perspective, which sits in the middle of the majority of finance processes, including core treasury activities such as cash forecasting, bank account management and investments, as well as integrating with sales and purchasing processes (order-to-cash, requisition-to-pay) to manage the large cash inflows and outflows.
Part of the process of cash management standardisation has been bank rationalisation, including appointing primary banks in each region:
JPM is Shell’s global USD bank and Nordea is the regional Primary Bank for the Nordics.
The standard model covers all transaction types, including electronic payments, direct debits, cash and cheques. By 2010, the model will have been rolled out to 65 countries, processing 1.5 million transactions per month worth tens of billions of US$, including linking 40 ERP systems to BCS, Shell’s global banking hub, connected to six primary banks and 2,000 users.
[[[PAGE]]]
Process standardisation has had a positive impact on operational excellence, because well-designed processes with high levels of automation and systems integration result in improved controls, documentation, and ultimately fewer errors.
Another way Shell improved its operations was to rationalise its hundreds of bank relationships and systems using the ESSA model (eliminate, simplify, standardise and automate). Consequently, as Figure 1 illustrates, Shell’s cash management model is now a great deal simpler, and a straight-through processing rate of 99.59% of transactions has been achieved.
Shell Treasury has a history of pioneering the latest technological advances to improve further its standard models and operational efficiency. This philosophy is continued today. It is almost impossible to keep up with the huge number of market initiatives which are going on at any one time. Consequently, Shell has identified six focus areas: SEPA, global liquidity, SCORE, XML, getting more from its global ERP platform, and eBAM.
Part of the process of cash management standardisation has been bank rationalisation, including appointing primary banks in each region.
Looking specifically at eBAM (electronic bank account management), the company first embarked on this initiative two years ago. Shell has about 3,500 bank accounts and it is difficult to benchmark whether this is the right number of accounts or whether this could be reduced. Considering that Shell operates in 130 countries with more than 1,600 legal entities, however, it seems to be an appropriate number.
Managing this number of bank accounts requires a lot of effort, due to the number of paper-based activities and large amount of manual processing, so it was decided to improve the process using the ESSA model, resulting in the eBAM initiative. The first step was to implement a bank mandate system – including a database and an embedded workflow engine – to give better visibility and control of bank accounts and a more efficient internal/external workflow process.
The next step, in pilot during first quarter, 2009, is to implement the exchange of electronic documents and messages for actions on bank accounts, signed with digital certificates. The benefits include improved control and reduced errors, better customer service, standardisation for banks and companies, and improved STP, resulting in faster cycle times and lower costs. [[[PAGE]]]
This continued focus on process standardisation and increased operational efficiency, harnessing the latest technology, means that Shell Treasury is aligned with the group’s finance strategy and well-placed to help achieve the goal of world class finance by 2010.
Citi is playing a major role in enabling corporate treasuries to improve their operational efficiency, by helping them free funds from working capital, improving their earnings per share and return on equity. Liquidity management has assumed immense importance in the last couple of years, as credit has become more difficult and expensive to access. In addition, credit rating agencies today are placing more significance on a company’s liquidity when assigning ratings.
Liquidity management has assumed immense importance in the last couple of years, as credit has become more difficult and expensive to access.
A global survey of 373 executives, half of whom were CFOs, conducted by the Economist Intelligence Unit in 2008, found that increasing operational efficiency was regarded as the most important way of improving return on equity over the next three years (see Figure 2).
Focusing on operational efficiency can produce substantial financial benefits and competitive advantage. Using a hypothetical example of a company in the petroleum refining industry with $50bn in revenue, figure 3 illustrates the potential impact of improving each of four financial metrics by 1% based on first-year cash flow. Reducing total operating expenses by 1% contributes the greatest cash flow benefit - US$450m in this example. Improving the cash operating cycle can potentially make the second biggest difference to cash. Accelerating the time taken to acquire goods and services and convert them to cash (specifically, improving Days Payable Outstanding and Days Sales Outstanding) adds over US$200m to cash flow.
From its observations globally, Citi has seen four distinct areas on which corporate treasurers have been focusing to improve operational efficiency:
1. Techniques for further optimising global cash
2. Extracting liquidity from working capital
3. Process standardisation and automation
4. Next generation platforms
[[[PAGE]]]
Many treasurers have implemented global liquidity structures to enable non-restricted currencies to be concentrated into global or regional centres of excellence so that funds can be used by companies more effectively. However, according to a survey conducted in 2007, by Citi, of over 50 global treasurers, only 4% could see their global cash in real-time, 42% could see it within 24 or 36 hours, and over half said it took three or more days.
So, although treasurers have made substantial progress in optimising global cash management, there is still more that can be done. Consequently, more treasurers are seeking to achieve real-time balance sheet management, increase the speed at which goods and services are converted to cash (by, for example, more efficient collection and receivable processes), free cash trapped in the balance sheet, and reduce local buffer balances earning low rates of interest by instructing their banks to conduct Same-Day Against-The-Sun Sweeps.
2. Extracting liquidity from working capitalTreasurers are increasing the efficiency of the financial supply chain to extract funds from working capital. One way they are doing this is through supplier finance, also known as reverse factoring. Supplier finance involves a creditworthy multinational company working with its bank to offer preferential borrowing to its lower-rated smaller suppliers, lent against the invoices that will be paid to the suppliers. Under such an arrangement, the suppliers borrow at more attractive rates and the buyer, in return for arranging the finance, can negotiate longer payment terms or a lower price. There are of course other techniques on the buyer side that can improve Days Sales Outstanding (DSO) and help with risk mitigation.
As we have already mentioned, treasurers are introducing greater levels of standardisation and automation in their processes to achieve operational efficiencies. To achieve standardisation, they are expanding the scope of financial shared service centres (SSCs). Many companies used SSCs initially as payment factories, but they are now taking on additional financial processes such as receivables and financial supply chain management.
Focusing on operational efficiency can produce substantial financial benefits and competitive advantage.
Treasurers are also continuing to rationalise the number of banks they use to gain economies of scale and reduce operational, counterparty, financial and other risks. In addition, they are standardising and simplifying their non-operational spending by, for example, using prepaid cards to streamline the processes of making safety award payments to employees.
To achieve automation, companies are taking a number of steps, including rationalising both internal and external connectivity to reduce the number of interfaces, and standardising formats for the exchange of information between systems. This poses considerable challenges, not least because there are frequently multiple ERPs in a company using different formats for holding and exchanging information. To overcome these challenges, more companies are adopting a corporate-wide standard for communication which they can extend to all of their bank relationships.
Again, as we have already seen, treasurers are embracing new technology, assisted by banks which have been making significant investments in next generation platforms. In the past, banking platforms were typically bank-specific, proprietary systems, allowing only a single user view and static reporting. Today, they have evolved to incorporate data from other banks, provide customisable views of different components and enable reports to be exported easily to other applications such as the ERP or Treasury Management System (TMS).
Looking ahead, banking platforms are being designed to meet the treasurer’s need for real-time visibility, control, optimisation and actionable analytics. They will use open architecture to allow the seamless integration between clients’, banks’, vendors’ and third parties’ applications. [[[PAGE]]]
The renewed interest in liquidity – from shareholders, suppliers, customers and rating agencies – means that corporate treasurers need to place greater emphasis on the visibility and accessibility of cash flow. In particular, they have to address the differences that arise between the accounting definition of cash versus the amount of useable cash, due to inefficient cash management or working capital practices and structures.
Treasurers should also be implementing robust treasury processes and systems, on top of efficient cash management structures, to move towards real-time visibility of cash, leading to better cash forecasting, liquidity modelling/planning and risk management.
Whilst there is no, one-size-fits-all, solution, we are seeing treasurers increasingly looking to achieve their objectives to standardise and simplify treasury operations in the ways outlined in this article. By achieving operational excellence, they will be well on the way to generating a greater return on equity for the company and higher earnings per share.
This article is based on an updated version of a joint presentation by Darsh Johal and Peter Langshaw at the EuroFinance Conference in Barcelona, October 2008.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
