by Helen Sanders, Editor
January is a time to look back over the past year and look forward to the next, to consider what lessons can be learnt, how things can be improved, and what new opportunities might exist. It is therefore an ideal time to review the experiences of some of the high achieving treasuries that we featured in TMI during 2012, to help inform how corporate treasurers and finance managers deal with the issues and challenges that they are likely to experience in the coming year. In this article, therefore, we are delighted to feature the winners of the TMI 2012 Editor’s Awards for Innovation and Excellence.
Award winners are selected from case studies published during the course of 2012. Unlike other award programmes, we do not routinely award winners in every possible category, preferring instead to recognise specific achievements of outstanding companies. During 2012, corporate case studies featured in TMI showcased achievements across the corporate treasury community, particularly in cash management. Not only do award winners demonstrate innovation and excellence in the way that they have addressed their own business challenges, but by sharing their experiences frankly and openly, they are also deepening the treasury knowledge base as a whole.
Cash Management: GlaxoSmithKline plc (edition 208, September 2012)
Sarah-Jane Chilver-Stainer, Senior Vice President and Group Treasurer
The Award for Cash Management was very competitive this year with a variety of excellent contributions to TMI over 2012. Finally, we selected GlaxoSmithKline (GSK), one of the most respected corporations globally providing pharmaceuticals, vaccines and consumer brands that improve the quality of life for people in every country. An essential way in which GSK is able to maximise its investment in research and development and continue pursuing its aim to eliminate malaria, is to be able to channel surplus cash from around the world to the parts of the group where it is needed most, and driving down the costs to end consumers by reducing the cost and overall levels of borrowing. To achieve this, treasury embarked on a cash and treasury optimisation project. Initially, the project focused on Europe, alongside banking partner Deutsche Bank, but ultimately it will be rolled out globally.
GSK has centralised its treasury activities into a centre of excellence in London, with five key areas of expertise: corporate finance; group treasury; cash management; pensions and insurance. This made it easier to implement its cash management project, with the following objectives:
- Optimise return on cash by consolidating balances across the group
- Minimise local overdraft fees
- Create economies of scale by negotiating bank charges at a regional level
- Standardise bank connectivity
- Implement an in-house bank based on the new ERP platform.
The first step was to appoint a regional banking partner. In the past, treasury had a policy of one bank relationship per country, but realised that a regional, and ultimately global approach to cash management would enable the company to achieve its cash and liquidity management objectives more successfully. Conducting the selection process in the right way was very important, as Sarah-Jane Chilver-Stainer explains,
“Although we had identified a series of selection criteria in treasury, it was essential that we gained support from business units to appoint an alternative bank and to change the way that cash management was conducted.”
Having made the decision to appoint Deutsche Bank, based on the bank’s ability to meet its criteria, the project proceeded quickly, as the negotiation of fees and legal documentation had been done as part of the selection process. GSK has migrated to Deutsche Bank in most parts of Europe, and a single bank model will also be rolled out in Asia Pacific and other regions. A euro-denominated cash pool into which balances are swept daily is in place, so that euros are not held outside the UK, which has been particularly important during a period of extreme market uncertainty. An overlay cash pool is also in place in Central & Eastern Europe.[[[PAGE]]]
GSK’s cash management objectives have been supported with standardisation of processes and rollout of a global ERP, together with SWIFT for bank connectivity. Sarah-Jane Chilver-Stainer continues,
“Although having multiple projects taking place simultaneously resulted in some resourcing challenges and project dependencies, we were able to develop our in-house banking solution, including templates for intercompany funding and foreign exchange request, as part of our ERP project.”
The project inevitably brought challenges, which were similar to those encountered by many large multinationals when reducing local autonomy and centralising treasury activities. In particular, educating and communicating with local businesses on the benefits of centralised cash management, in-house banking and central bank communication can be challenging. It is also a complex task to standardise formats whilst taking into account the requirements for each payment instrument and country. Furthermore, Sarah-Jane Chilver-Stainer warns,
“One of the difficult areas of a cash management project is to make sure that legacy bank accounts are closed. Failing to do this results in security and administration loopholes and means that the project will not fully achieve its objectives.”
GSK has achieved significant automation, visibility and control over cash management in Europe with a robust framework to which other regions can be added. When the article was published in TMI in September 2012, GSK was already on course to achieving its cost saving objectives of £10m per annum, with further tangible and intangible advantages to be gained in the future.
Many of GSK’s objectives, challenges and achievements are common to a large proportion of multinational corporations. However, what marked this project was the enormous shift in organisational focus on cash and treasury management from 2011 onwards, prompted by a new CEO and CFO. It is difficult for companies of the scale and complexity of GSK to achieve a major transformation in their treasury function, but GSK’s treasury has proved what can be achieved through clear objectives, management commitment, transparent dialogue with business units and a strong banking partnership.
SEPA: Deutsche Post AG Renten Service (ICM 2012)
Stefan Scheidgen, Head of Cash Management & Accounting
Any major finance transformation project in Europe involves migration to SEPA (Single Euro Payments Area) payment and collection instruments, but every company operating in the Eurozone needs to conduct a migration project before the February 2014 end date for domestic payment instruments. Deutsche Post Renten (Pension) Service (DPR) is a major pension management outsourcing company based in Germany. DPR was an early adopter of SEPA, with the objective of migrating its huge payment volume to SEPA credit transfers through the Bundesbank clearing system. The advantages of early migration were clear to the company, as Stefan Scheidgen discusses,
“Cross-border payments would be reduced, and in some cases, payments could even be processed same-day. In addition, legacy payment applications could be phased out, reducing the cost and resourcing required to maintain the IT infrastructure.”
DPR worked with its bank UniCredit to construct a detailed migration plan. Preparation and proof of concept were vital elements of the plan, so the migration process itself was very rapid. By March 2012, just before the case study was published in TMI, DPR was making around 23 million SEPA Credit Transfers each month.
DPR found that banks were at different stages of SEPA migration, but with barely a year to go until the lights go off on domestic payment instruments, this should no longer be the case. In addition to achieving compliance, there are often additional advantages to be derived from migration in areas such as bank connectivity and process efficiency, as Stefan Scheidgen continues,
“Using EBICS has enabled DPR to reduce data transmission costs…. In addition, the company has been able to implement new processes for continuity management. Using SEPA Credit Transfers has accelerated payment processing, reduced cross-border payment fees and enabled greater standardisation. DPR has rationalised its payment systems, reducing maintenance effort and cost.”
Every company operating in the Eurozone is now obliged to migrate to SEPA. Although the migration deadline is approaching rapidly, DPR’s experiences illustrate the importance of detailed and structured planning prior to migration, which can accelerate the process considerably, and the need for experienced, committed banking and technology partners.
Payments/ Collections (US): Union Pacific Railroad (edition 205, May 2012)
Julie A. Phillips, General Director – Revenue Accounting & Analysis
While Europe races to implement SEPA payment instruments, other regions of the world are dealing with quite different payment challenges. In the United States, for example, the shift from cheques to electronic payments has not happened as quickly as some envisaged, and cheques remain an essential element of the payments and collections landscape. While some companies, particularly those operating in the B2B space, have made significant progress towards ACH payments, this is more difficult in the B2C space and for companies with a large number of customers of different sizes and profiles. This was the experience of Union Pacific Corporation, one of the United States’ leading transportation companies, and its principal operating company, Union Pacific Railroad, is North America’s premier railroad franchise, covering 23 US states.
With 25,000 customers, including steamship lines, vehicle manufacturers, agricultural companies, utilities, intermodal companies and chemical manufacturers, Union Pacific processes a very large volume of collections via cheque. Historically, the company had outsourced cheque processing to its bank, but this was costly and there was a vast array of different remittance formats, resulting in issues with accuracy and timeliness of processing. Any delays or errors in cheque processing can be highly detrimental to a business, resulting in inaccurate cash positioning and liquidity issues; furthermore, as amounts may not be posted to customer accounts promptly, sales may be affected as credit limits are utilised.[[[PAGE]]]
Union Pacific made the decision to build an in-house solution for cheque processing and imaging that could be tailored specifically to meet its needs. While building an in-house finance application is not the preferred solution for the majority of companies, Union Pacific has a large in-house IT department to provide the programming, implementation and maintenance for the new application. In most situations, companies will opt for a third party provider as they lack the in-house IT support and wish to leverage the economies of scale achieved by working with a vendor with multiple clients.
Whether or not an application is built in-house or licensed from a third party, the factors for success are similar, as Union Pacific’s experiences highlight:
- It is essential to build trust and confidence amongst users, which Union Pacific achieved through rigorous testing and a phased rollout approach;
- Support from senior management is paramount to ensuring that the project maintains the correct degree of focus and priority;
- Integration and collaboration is an important consideration for most finance projects so it is important to build trust between the relevant departments, which often have little experience of working closely together: in this case, the project involved IT and Accounting;
- Internal training has been a primary factor in maintaining team morale, familiarity with the solution and optimising the benefit of the solution;
- Continuity of personnel helped to ensure consistency and momentum
Finally, the focus of the project was on delivering additional value and process enhancements, as opposed to simply transferring and replicating existing processes. The ability to create value was more motivating for staff and encouraged a sense of ownership and accountability.
As a result of implementing a new, bespoke cheque imaging and processing solution, cash application processes are less resource-intensive, freeing up resources for other tasks. Accuracy has been increased substantially as templates can be customised based on customer remittance detail, an ongoing process as these are further refined. Costs have been reduced, as cheque imaging and processing services are no longer outsourced; however, Union Pacific’s relationship with its bank, Bank of America Merrill Lynch, has been enhanced as the focus is on strategic activities as opposed to routine daily tasks.
As Julie Phillips outlines,
“Building a solution is not an easy decision to make, and will not always be the best solution in every situation. The easiest option, typically, is to maintain the status quo and therefore do nothing.”
This project strongly demonstrates Union Pacific’s commitment to innovation and excellence. Not only did Julie and her team take the bold decision to build a solution in-house, but prioritising collections is an essential means of optimising working capital and contributing to the liquidity objectives of the company.
Risk Management: ABB (edition 207, July/ August 2012)
Constantinos Tsolakas, Head of Group Treasury Risk Management
While liquidity is an essential priority for every treasury function, the other key priority is risk management, accentuated by the global financial crisis. As an engineering company, risk management is an integral element of all aspects of ABB’s business. However, as Constantinos Tsolakas summarises,
“Although treasury departments typically focus on financial risks such as credit, interest rate, FX and liquidity risk, we recognised that treasury was a natural owner of risk management in a wider sense. Over time, therefore, we have been able to leverage our proximity to the business, and our robust centralised systems infrastructure to develop a more holistic approach to risk, combining business (e.g., project), market and operational (control) risks.”
The feasibility of centralising risk in treasury on an enterprise-wide basis will depend on the industry, organisation, culture, treasury profile and technology in each company, but enterprise risk management (ERM) centred in treasury is becoming more prevalent. ABB’s experiences demonstrate the importance of a senior management mandate for treasury to take an enterprise-wide role, which is largely built on trust, credibility and proven track record. Furthermore, treasury needs visibility across the business and the confidence of local management. ABB’s treasury had already established a relationship with subsidiaries and central departments, as well as possessing the relevant skills and systems.
ABB adopted a highly structured approach to identifying risks through a ‘risk catalogue’ outlining more than 200 risks, and working in consultation with business units, divisions and central departments to prioritise these risks according to likelihood and potential impact. While each business unit, function or department remained responsible for managing risk locally, Treasury was devised a central group-wide risk strategy and reporting framework to enable a holistic view of risk. Key to the success of this was simplicity and transparency to avoid overloading risk owners and senior managers with information and bureaucracy.
Constantinos Tsokalas concludes,
“We have learnt a number of important lessons through our experiences of developing an ERM framework at ABB. The first is the importance of a simple process, to which the business can easily relate. The second, related issue is to be realistic in the number of deliverables. Having proved the concept and generated trust amongst business managers across the group, we were then able to expand the scope of the ERM framework.”
While many treasury departments lack the proximity to the business or organisational framework that would permit ownership of ERM, ABB’s experiences demonstrate some important lessons for managing risk, whether financial risk or enterprise-wide risk. The systematic approach to cataloguing risk, and then prioritising each risk according to its likelihood and potential impact is a vital first step in developing a risk management strategy, by creating a focus on the most important risks to the business. Developing trust and visibility across the business is also important so that treasury continues to understand and respond to the risk profile of the business, and find new ways of adding value. Finally, simplicity and transparency is key to an effective risk management strategy to ensure that all stakeholders have clarity over the company’s risks, their implications, and how they are managed.[[[PAGE]]]
Payments/ Collections (Global): Grupa Žywiec (edition 209, October 2012)
Karolina Tarnawska, Treasury & Credit Risk Director
The use of cash remains prevalent in many countries globally, leading to considerable risks and challenges for treasurers and finance managers in ensuring the security of funds and efficiency of processing. Grupa Žywiec is part of the Heineken Group, representing the Group’s interests in Poland. As a result of a largely cash-based payments culture in the country, the company collects around half of its revenues in cash. Unlike some of its competitors, Grupa Žywiec has a direct sales model as opposed to selling through wholesalers. Consequently, the company has around 60,000 retail and catering customers across Poland.
With such a considerable customer base of varying sizes and levels of financial sophistications, Grupa Žywiec needed an efficient means of collecting cash. Prior to implementing the new solution, cash was collected by Grupa Žywiec’s sales representatives who then passed it on to a cashier at the depot. Once counted and reconciled, cash was then transported to the bank. Sales representatives were therefore being diverted from their core responsibilities, and often had to wait a long time for cash to be counted. It was difficult to enforce customer payment terms, and there was a delay between customer payment and posting on the bank account.
Grupa Žywiec therefore decided to introduce new cash collection processes, with the following objectives: cash posting on account before physical delivery and bank responsibility for cash, and immediate reconciliation and posting of cash on payment by customer. This was not easy to achieve and a number of banks that Grupa Žywiec approached were unable or unwilling to meet their needs. However, as Karolina Tarnawska highlights,
“We found that ING was far more responsive and flexible, and committed time and resources to exploring our needs and devising an appropriate solution.”
The new cash collection process involves customers inserting cash into barcoded envelopes that are scanned by delivery drivers for remote posting and reconciliation. Drivers do not need to wait for cash counting, which ensures that time is used more efficiently, and sales representatives no longer need to be involved in the process. Cash is booked at least two days earlier, the resourcing requirement has been reduced, credit risk is better managed and the company is able to provide an enhanced service to customers.
While people are often resistant to change, transparent communication, senior management support, expert assistance from the bank and collaboration across different business functions and local teams ensured widespread support and a professional implementation. Karolina Tarnawska concludes,
“This has been a pioneering project in Poland, leveraging technology to enhance efficiency, risk management, and customer service, whilst respecting the way in which our customers wish to operate. The initiative has also been very valuable in demonstrating the benefit of collaboration across different parts of the business…. We have also been very fortunate in being able to leverage ING’s experience, expertise and innovation, and the project would not have been possible without [the bank’s] ‘can do’ attitude.”
FX: Brown Forman (edition 208, September 2012)
Mark Stegeman, Vice President and Assistant Treasurer, and Robert Waddell, Global Treasury Manager, Brown-Forman Corporation
Managing risk, specifically FX risk, was also the priority for Brown-Forman Corporation, fuelled by the growing international popularity of brands such as Jack Daniel’s, Southern Comfort and Finlandia Vodka, to name a few. In 2002, around 23% of revenues were generated outside of the United States; in 2012, this had risen to 58% with growing market share in Europe and other regions. Target growth regions include UK, Australia, Germany, France, Spain, Poland, Mexico, Russia, China, Brazil and India, each of which bring distinct opportunities but also risks. Consequently, to facilitate this continued expansion and avoid the negative effects of increased exposure to foreign currency volatility, Brown-Forman put in place an efficient and robust forecasting and FX hedging process.
Unlike many companies that use an ERP in treasury, Brown-Forman has not had to contend with multiple instances and different ERP systems in each business unit. Although the company has grown through a combination of M&A and organic expansion, it has maintained a highly centralised infrastructure, including a single instance of SAP globally, which ensures the completeness and consistency of forecast information. This has helped the forecasting process significantly, as has the ability to record transactions and perform hedge accounting in the same system.
Much of Brown-Forman’s production takes place in the United States. Costs are therefore relatively low in other regions so there are few natural hedges. In the past, treasury hedged its exposures annually against the budget rate, with hedging instruments maturing at a similar time, resulting in a ‘cliff’ effect. Mark Stegeman and Robert Waddell outline,
“We therefore wanted to find a way to protect the business against future volatility within an acceptable risk tolerance and cost of hedging.”
With the help of relationship bank Barclays, treasury formulated a new hedging approach based on cash flow hedging. The tenor of hedge instruments was extended with a 50% hedge for exposures up to 1 year, based on a 12 month rolling cash flow forecast, and 20% between 1 and 2 years. Intercompany funding is hedged at 100%. FX forwards are typically used for hedging, although other instruments can also be used, such as zero-cost collars. Hedges are reviewed twice each month, so the company can be more responsive to market events. Before implementing the new hedging strategy, Barclays helped to back-test the policy against historic data. This helped to validated the approach and build confidence internally.[[[PAGE]]]
Implementing a new hedging strategy has reduced the impact of FX volatility year-on-year, and smoothed the company’s risk profile. Mark Stegeman and Robert Waddell recommended the following to other treasurers based on their experiences:
- Establish a detailed understanding of the company’s risk profile and risk tolerance
- Ensure the appropriate technology and information is available to capture global exposures and produce meaningful reporting
- Use this global view to identify natural hedges where appropriate
- Extend the tenor of hedges to reduce year-on-year volatility (although it may be increased within the year)
- Where appropriate, ensure compliance with hedge accounting rules to reduce earnings-per-share volatility.
Technology: Astra Zeneca plc (edition 208, September 2012)
Patricia Greenfield, Head of Treasury Operations, Astra Zeneca and Andrew Marshall, Director, Treasury Solutions, SLG Consultants
Astra Zeneca’s treasury has quite a different approach to many others featured in this article. Activities identified as non-core, such as treasury back office processing and interface management is outsourced to Bank of America Merrill Lynch and SunGard respectively, so treasury is focused exclusively on activities that deliver direct value to Astra Zeneca.
Astra Zeneca’s project which won this Award is in many respects a very familiar one: to implement a treasury management system (TMS). However, the background to Astra Zeneca’s project was a little different. Most TMS case studies are produced by companies that are implementing a TMS for the first time, their business has evolved such that a legacy TMS no longer meets their needs, or the system has become obsolete. In Astra Zeneca’s case, they had simply bought the wrong system. It was not well-implemented, the system was not well-understood by the team, the relationship with the vendor had broken down and there was a lack of confidence in the information produced by the system. In these situations, as Julie Phillips, Union Pacific noted earlier, “the easiest option, typically, is to maintain the status quo and therefore do nothing.” There are few treasurers who have been in the profession for a number of years who have not simply added on spreadsheets and peripheral ‘gadgets’ to a failing or inadequate systems infrastructure.
Astra Zeneca took a bolder decision and decided to appoint a new vendor. As Patricia Greenfield and Andrew Marshall comment,
“We were very clear about our selection criteria. While it was very important that the solution was integrated, user-friendly and provided a high level of functionality, the long-term credibility of the vendor was a key priority. In particular, the vendor needed to have the financial capability, expertise and commitment to developing the system and ongoing basis, with a strong organisation to avoid over-reliance on key individuals. We were also seeking a hosted solution to ensure that the ongoing management of the system was conducted on a professional and cohesive basis.”
Having evaluated a variety of solutions, Astra Zeneca selected SunGard’s AvantGard Quantum solution. This was implemented very rapidly, which was a major achievement bearing in mind the small team and exacting requirements. Unlike many projects that implement functionality in a number of phases, Astra Zeneca implemented all of its key deliverables during the project.
There has been no cause for regret for the decision to start again with a new TMS. Patricia Greenfield and Andrew Marshall continue,
“In reality, our objective had not been to save costs or reduce headcount, but to de-risk our treasury operations and decision-making. Not only were we successful in achieving this, but we also calculated savings of more than 300 days per year through more efficient daily and monthly processes… This has allowed us to reallocate our treasury professionals to tasks that deliver greater value to the organisation.”
In addition, as the TMS is managed by SunGard,
“We now have the confidence that our treasury infrastructure is being maintained according to industry best practice.”
The experiences shared by Astra Zeneca illustrate that acquiring and implementing a TMS is not a ‘one off’ project, it is the start of an ongoing relationship and investment. For example, the case study describes the importance of maintaining an ongoing dialogue with the vendor, resolving concerns upfront, and managing change in structured fashion. Furthermore, there needs to be an annual investment in ongoing upgrades and proactive planning for implementing new functionality. Patricia Greenfield and Andrew Marshall conclude,
“This will in turn enable us to gain further advantage to using the new TMS and manage change effectively as our treasury organisation evolves in the future.”
As these experiences demonstrate, treasuries and finance departments globally are brimming with new ideas and solutions for overcoming challenges and finding new ways to deliver value. Whether implementing new policies, procedures or systems, or expanding into new territories, all of the award winning case studies illustrate the importance of collaboration and transparency, both internally and externally, a flexible approach and a clear mandate from senior management. Added to these, a large dose of humour, and a great deal of determination. Our congratulations to each and every one of the 2012 Editor’s Award winners.
If you would like to be considered for an Award in 2013, and are happy for a case study to be published in TMI (which we can write on your behalf if necessary), please contact me at [email protected]. Banks and vendors are welcome to nominate their customers.