Published: June 01, 2011
by Peter van Rood, Corporate Director, Treasury, AkzoNobelReaders of TMI will be very familiar with the treasury transformation project undertaken by AkzoNobel following the series of interviews in 2010 featuring various aspects of the project. One major element of the project was cash management, with an optimisation project starting in Europe and rolling out to other regions. Several months later, we now return to Peter van Rood, Corporate Treasury Director at AkzoNobel who describes the most recent phase in this part of the transformation project, specifically relating to cash management in Asia.
Following a period of rapid growth, Asia has become more important than ever for AkzoNobel, accounting for 21% of 2010 revenues, second only to the company’s traditional home markets in western Europe. Consequently, managing cash effectively in the region is essential to fulfilling both our current objectives and future strategy. Our aim is to double revenues in China, for example, to €3bn p/a in the medium term and expand our footprint in India to achieve revenues of €1bn p/a. We are also constantly challenged to reduce overheads and expand margins. We operate a combination of B2B and B2C models in Asia, with USD the primary currency for imports and exports. With over 130 legal entities, and no holding companies at a country or regional level, together with 22 joint ventures and two listed companies, our legal structure is complex, which is particularly challenging in a diverse regulatory environment
Our legal complexity, rapid growth and largely decentralised structure led to a range of cash management challenges that we were seeking to address. With over 60 banks and 460 bank accounts in the region, cash was fragmented with limited visibility and control at a central treasury level, with only limited in-country cash pooling to centralise cash. Trapped cash was a significant problem, and with a large number of different systems and formats in place we had little opportunity to automate processes and achieve straight-through processing. We were also aware that by negotiating credit terms, conditions and bank charges at a local level, there was a lack of consistency and visibility and we were not able to achieve economies of scale. Furthermore, in an environment where the reliable provision of credit is essential for every treasury, there was often a lack of credit commitment at a local bank level. We have now introduced a regional treasury centre that works seamlessly with group treasury in the Netherlands, with matrix responsibilities at a geographic, functional and business level.[[[PAGE]]]
Following a period of rapid growth, Asia has become more important than ever for AkzoNobel.
Cash management optimisation in Asia is part of a wider transformation project across all elements of our treasury and cash management business. Progress towards achieving AkzoNobel’s global cash management vision (figure 1) is already well under way, with the first phase of the project now complete. The organisational, policy and technology framework is in place and the last technical elements of the project and fulfilment of the last remaining audit requirement were completed at the end of 2010. This included implementation of Guardian compliance monitoring system, which is a significant step forward in compliance, audit, security and risk management. By that time we had also rolled out our payments factory into seven countries, a process that continues through into the second phase of the project.
During the first phase of the project, we have rationalised our bank relationships in Europe and North America and we have now largely completed cash management transformation in these regions. United States and Canada have been incorporated into our payments factory. This brings the number of countries that have gone live to nine, amounting to more than 50% of group revenues.
We had a range of criteria when selecting our banks. For example, we considered each bank’s ability to manage a complex, far-reaching implementation, and to support sophisticated operational processes. We reviewed their in-country capabilities and technology, as well as each bank’s stability and ability to commit credit to the business. We also looked at the bank’s ability to support AkzoNobel’s continuing growth path and awareness of changing regulations. Quarter 4, 2010 witnessed the completion of our RFP for a cash management bank in Asia. Following up from this process, we have now appointed Deutsche Bank in nine countries, including India, Pakistan and Vietnam. For the remaining 60% of our cash management business in Asia, including China, we are working with HSBC. The tender process proved to be extraordinarily competitive, with differences between bank offerings very slight and subtle. As a consequence an important decision factor became the cost of change in key countries such as China and India. The depth of the existing relationships with Deutsche Bank and HSBC in the region therefore played an important role. We recognised that our cash transformation would be easier and quicker to achieve with these banks.
The second phase of the project will be completed by the end of 2013, with the key milestones dominated by the cash management agenda. We are rolling out our cash management vision on a quarter by quarter basis. In Q1, 2011, we completed the implementation of our cash management structures and rolled out our payment factory in North America. During Q2, we aim to complete the implementation of our Latin America bank accounts. In the final quarter of this year, we will materially complete the implementation of our European cash management structures. In Asia, having selected our partner banks, we started the implementation project and have a roll-out schedule in order to engage proactively with the business during 2011, leveraging the experience we have gained in Europe and North America. On the basis of this experience, we anticipate a rapid implementation. We will complete our bank account set-up during the first half of 2012, probably during the first quarter. Once we have opened our accounts in the region, we will then look to migrate from the legacy systems that are currently in place to connect to our banks in Asia. This transition process can take a long time, not only to transfer between systems but then to close accounts. We are working closely with the business to achieve this.
Transforming cash management in Asia is a different proposition from Europe and North America due to the diverse regulatory environment, fiscal and currency controls. We have a range of both solution and process objectives. We are creating new cash pools at both regional and in-country levels that will be managed by treasury, which in some cases involves migrating existing header accounts. This will be our primary mechanism for unlocking trapped cash, both in wholly owned entities and in joint ventures, potentially using proportional pooling or target balancing. We will use SAP’s in-house cash centre to facilitate internal reporting to business units. In China, we will employ ‘just-in-time’ RMB sweeps to reduce the tax cost. We will also leverage RMB offshore settlement opportunities to reduce our local FX exposure and reduce cash levels in China. We are introducing new collection processes including virtual accounts to enable greater automation in reconciliation and account posting, allowing us to reduce customer credit limits without compromising our commercial objectives.
The tender process proved to be extraordinarily competitive, with differences between bank offerings very slight and subtle.
Although we are taking our existing payment factory model as a starting point in each country, we are tailoring the design according to the needs in each country. For example, in most countries which are incorporated into the payment factory, we use the ‘payment on behalf of’ model. To achieve this, we need to separate our goods and services from our invoicing business and therefore in some cases, we need to modify our local entity structures. In some countries, however, we will need to vary this model according to local requirements (figure 2). Crucial to achieving this is to leverage our banks’ expertise and proven IT capabilities to complement our own efforts, and to work within business units’ ERP migration plans as far as possible.
From a process perspective, centralisation, technology rationalisation and process consistency will enable us to enhance automation and efficiency considerably. However, despite significant rationalisation of banks and accounts, we will still need to maintain a complex bank account structure. As it is very important to us to maintain a high level of control over accounts and authorities we introduced an eBAM (electronic bank account management) type of business process workflow so we will have a single process for maintaining accounts. The new flow chart for maintaining account authorities is illustrated in figure 3.[[[PAGE]]]
Once we have completed the second phase of the project, we will have achieved a reduction in cash management banks to fewer than 20 globally (which includes some local banks offering services in some countries such as China) and at least a 50% reduction in the number of bank accounts, from 2,000 to 1,000 (figure 3). Our processes are becoming materially more efficient, and we are paying lower fees as a result of greater economies of scale and greater straight-through processing. Overall, we anticipate a reduction of on average 70% in transaction processing fees. Furthermore, by implementing an auto-sweeping arrangement, we are able to centralise our cash more successfully and optimise liquidity by avoiding isolated pockets of ‘trapped’ or inaccessible cash. As a result of centralisation and increased operational efficiency, including rationalisation of banks, accounts and systems, we anticipate cost savings in Asia of €8m over three years.
Another important outcome is that we are in a better position to enhance our capital structure. For example, we had large cash balances on our balance sheet before embarking on this project, whilst also maintaining a high debt position. As we progress through our treasury and cash management transformation, we are able to reduce levels of both cash and debt as well as reduce the overall borrowing costs incurred.
Based on our experiences so far in other regions, there are a variety of factors that contribute to the success of a project of this nature:
Firstly, the right resources are key. We have extended our treasury team from three to nine FTEs with a variety of skills and expertise that will be essential for the successful delivery of the project.
Secondly, a strong and trusted partnership with the relevant cash management banks is crucial, both with primary banking partners, such as HSBC and Deutsche Bank in our case, but also with those that provide an important support role, such as ICBC in parts of China and Westpac in Australia and New Zealand. Local requirements differ substantially between countries, far more than in other regions, so specific solutions that are designed to conform with local regulatory requirements whilst supporting our overall cash management strategy are critical. For example, in some countries we need to enrich our payment files to achieve the degree of straight-through processing that we require.
Thirdly, developing a relationship between treasury and the business units that is based on transparency and open communication is key to success. In particular, the transformation agenda needs to be clear, with tasks ordered according to priority and the tangible value that they deliver. Key individuals at a local level are then more likely to be convinced of the project benefits and to give their support in prioritising the project. This is particularly difficult in a region such as Asia where there is such a strong emphasis on growth. However, as we have already demonstrated considerable success in treasury transformation in other regions, this helps in establishing the credibility of the project in Asia.
Managing change is not simply about delivering on a project plan, it is about recognising that collaboration both internally and externally is key to success. Every internal and external partner will have its own needs and constraints, and these need to be recognised when planning and delivering a project in which so many different parties are involved. Clear communication based on simple, consistent messages is very important to achieving a collective view of priorities and gauges of success.
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