Published: May 01, 2013
Elkem has a long and illustrious history as an industrial corporation in Norway. Prior to the company’s acquisition by Norwegian conglomerate Orkla Group in 2005, we had a well-established treasury function, which was then consolidated into Orkla’s Group Treasury function. Over time, the strategic focus of the Orkla Group changed, with less of an emphasis on industrial manufacturing and more on consumer brand products. Consequently, Elkem was divested and acquired by Chinese company China National Bluestar (Bluestar) in 2011.
Elkem was already a sizeable group in its own right before the acquisition, with multiple subsidiaries internationally. Consequently, the group had diverse, complex cash and treasury management requirements including financing, intercompany funding, hedging and cash and liquidity management. It was therefore important that the company developed an independent treasury function quickly following the divestment. In parallel, the acquiring business Bluestar was developing its international profile. As a result, its cash and treasury management needs were becoming more sophisticated, and although the company already had a treasury function in China, it was important for the group to develop an international treasury presence. We have therefore developed Elkem’s new treasury function in a way that anticipates developing its role in co-operation with Bluestar in the future.
Following the divestment of Elkem from Orkla Group, we recruited a new treasury team, which now comprises four people including back-office functions (and nine people including credit management tasks), and formed an agreement with Orkla that they would continue to support Elkem’s cash and treasury management activities during an interim period while the new function was developed. The new team was tasked with a comprehensive range of cash, treasury and risk management responsibilities, including responsibility for some activities that are typically less common in treasury, such as credit management, collections and credit insurance. Our requirements across cash and treasury management were reasonably diverse and complex, as Elkem has substantial revenues, the majority of which are generated outside of Norway, while most of our cost base, including production, is within Norway. The group is capital-intensive, with a cyclical cash flow profile, so managing liquidity and FX risk are particular challenges.
Our new treasury function operates largely independently from our Chinese parent company, not least due to the diverse finance markets and regulatory requirements that exist in China. Consequently, we take full day-to-day responsibility for treasury activities, but report regularly to senior management in China, who also approve revisions to treasury policy. Furthermore, it is often advantageous to adopt a global approach to financing.[[[PAGE]]]
In addition to appointing a new treasury team and defining appropriate policies for managing international cash and treasury requirements, we needed a treasury management system (TMS) to underpin our activities. It was essential that a new TMS was user-friendly, with a broad, consistent range of functionality to support the diverse spectrum of treasury’s activities. We also needed the system to be flexible and scalable to accommodate future growth, such as integrating new entities onto the system in the future. Finally, the system needed to be cost-effective with a compelling return on investment.
A considerable challenge we experienced when selecting and implementing the TMS was the tight time schedule with a tentatively hard deadline. We formed the transition agreement with Orkla in April 2011 which was for 18 months, but as the new Elkem treasury team was not in place until January 2012, we needed to put a new system in place quickly. This was complicated further by the fact that the new team did not yet have detailed knowledge of Elkem’s treasury business. We knew, however, that the TMS used by Orkla, IT2 (now part of Wallstreet Systems) was capable of handling our treasury requirements, as it was already used for the purpose, so we talked with Orkla about their experiences of using the system. We also held discussions with IT2, with whom we had an existing relationship as Elkem had been an early adopter of IT2 in Norway before its acquisition by Orkla, and sought references from other users. While this was not a conventional TMS selection process, in that we did not issue a request for proposal or review alternative solutions in depth, we recognised that such a process would not be realistic or useful bearing in mind that we did not have full visibility over our treasury needs by that time. We were however very focused on ensuring that the new system would meet Elkem’s requirements going forward.
We recruited a new individual in May 2012 who would be responsible for implementing the TMS, but we had already made advanced plans for a new TMS, market information provider and dealing platform by that time, so we were able to start quickly in late May 2012. The project then progressed rapidly, despite the inevitable loss of momentum over the summer break, with the aim of being live on the systems in September 2012. To facilitate this ambitious timescale, we held regular meetings with IT2 both in person and via video conferencing to maintain an active dialogue and deal with issues promptly as they arose. We found this approach to be very effective, and an efficient means of utilising resources. By doing as much of the implementation work as possible internally, we developed a deep knowledge of the system and engaged in all the relevant set-up decisions. This was not always easy in practice, but ultimately we achieved a better result.
We have now been using the system in live operation since October 2012; in hindsight, this may have been a little too early, but we have managed to complete a year end process and satisfy our audit requirements, although these required a great deal of work. In reality, however, we would not have been able to manage treasury without a functional, efficient solution to underpin our processes, and we now use IT2 for all of our transactions, including bank account management, daily liquidity reporting and long term liquidity forecasting. We have full visibility over our hedging transactions, and can monitor regularly our activities compared with our hedging policy.
Looking ahead, we will continue to refine and improve our use of the system and rationalise our processes wherever possible. We are changing our ERP across Elkem, so we will need to integrate our TMS into the ERP, following the successful integration of IT2 with our electronic funds transfer system to automate our bank communication. We also envisage implementing additional options functionality to manage currencies that are not fully convertible using non-deliverable forwards, for which we will require the options module. From a wider treasury perspective, cash management is a priority, such as refining our account structures and ensuring improved visibility to cash throughout the group. An important target for our cash management processes is also to combine functionality needed for central treasury and the needs that operating units have for relevant services locally.
Based on the experiences we have had to date of setting up a new treasury function, we would emphasise the importance of people and planning. The right people are essential to make the project work, while every aspect of scope, tasks, policies, internal and external expectations need to be explored in detail. The right systems are essential as a basis for an efficient treasury, as are high quality internal and external relationships, such as with key partner banks, to gain the benefit of their advice and experience. When selecting a system, obtaining references is very important, not least as existing users can share insights which help to make the project plan more pragmatic and achievable. Realistic timelines are essential, together with effective resource planning. This includes both internal resources, such as treasury and IT personnel, but also the vendor’s resourcing, to ensure that the relevant individuals are available at the appropriate stage of the project. The process of ‘go live’ can be daunting, and it may be tempting to put it off and focus instead on resolving outstanding issues, but there are benefits to adopting a TMS as soon as possible to streamline processes and procedures. In addition, some of the problems you may experience when you ‘go live’ would anyway be unexpected and the only way to find out is actually to ‘go live’.
The development of a new treasury function, with a new team, policy, processes and systems has been challenging but highly rewarding, supported by the right internal and external partners. As a representative for Bluestar’s overseas treasury, we are prepared for managing the treasury requirements for other Bluestar entities outside China. As the company engages in further M&A activities, there may be good opportunities to extend treasury’s remit further in the future. By building flexibility and scalability in our external structures and internal processes from the start, we will be able to meet the changing needs of the business and provide value-added services to the group.
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