ING Guide to Financial Supply Chain Optimisation

Creating Opportunities for Competitive Advantage

Section Five:

Joined Up Processing - Creating an Integrated Approach to Financial Processing

Gregory Cronie, ING Wholesale Banking, Payments and Cash Management Sales

In the earlier parts of this special Guide to Financial Supply Chain Optimisation, brought to you by ING, we have explored the elements which comprise the financial supply chain, from order to cash to purchase to pay, including both trade and cash. We have also considered various ways of leveraging financial assets such as purchase orders and receivables. In the final part of the Guide, we consider some of the opportunities to reduce costs and enhance efficiency in the financial supply chain further. Firstly, we review how corporate-to-bank connectivity has evolved in recent years, and how new initiatives, such as SWIFT Corporate Access can augment a financial supply chain strategy. Similarly, with the Single Euro Payments Area (SEPA) now a reality, Sander Cok explains how SEPA migration will support corporate financial supply chain projects.

As we have outlined during the Guide, an optimised financial supply chain requires efficient internal processes, effective collaboration with financial partners, the right liquidity structures and the use of appropriate financing techniques. However, another crucial element in the success of virtually every initiative relating to the financial supply chain is the involvement of a banking partner which is committed to financial supply chain solutions. To illustrate this in more detail, we are delighted to present an interview with Robert Heisterborg, Global Head of Payments and Cash Management at ING.

...another crucial element in the success of virtually every initiative relating to the financial supply chain is the involvement of a banking partner which is commited to financial supply chain solutions.

One of the points Robert illustrates is the problem that in many companies, different departments hold responsibility for each element of the financial supply chain; for example, treasury, trade finance, accounts payable and accounts receivable may be managed separately with different objectives and performance measures. In addition, processes such as invoicing and purchase order management may take place as part of the sales process, as opposed to being part of the finance function. This means that in many cases, optimisation initiatives are restricted to individual elements of the financial supply chain, such as payments or collections projects, without taking a more holistic view. This can reduce the value to the business overall; for example, a collections project may deliver improvements in DSO (days sales outstanding) but unless this is integrated with eInvoicing, dispute resolution and reconciliation may remain problematic.

Companies have taken different approaches to addressing this issue. One solution is for the project to be sponsored by the CFO or Finance Director who has oversight of all of the relevant departments. A project team can then be set up to include representatives from each area who can take responsibility for implementing change in their department and work with other areas to ensure that value is being delivered at a company level, as well as process level. In addition, centralising financial processes can be a catalyst for reviewing the overall effectiveness of the financial supply chain. In particular, a financial shared service centre (SSC) can often create greater synergies between processes. Many larger companies have one or more SSCs already, and increasingly, smaller firms are also seeing the benefit of centralising their financial activities through a SSC. ING has particular expertise in supporting European SSCs, including Central & Eastern Europe (CEE). While there are a variety of factors in determining where a SSC is based, including the location of other business facilities, the availability and cost of business and language skills, time-zones, access to infrastructure and regulatory/taxation issues, many firms have chosen CEE as a base for their European SSC due to its advantages in many of these areas. Furthermore, some firms have chosen to relocate SSCs which were previously based in Asia into CEE as the cost differential becomes narrower and companies increasingly prefer to site their SSCs closer to other business facilities. ING has a significant presence and local expertise across CEE countries and is therefore well-equipped to assist companies in planning and implementing a financial SSC.

---

[[[PAGE]]]

Section Six:

Marten

Bleijenberg

Global Head Product Management, Payment Factory Solutions

Introduction

As we have seen throughout this Guide, effective FSC management requires excellence in internal processes but also external connectivity with suppliers, customers and banks. There are increasingly opportunities for better communications with suppliers and customers using sophisticated purchase-to-pay and order-to-cash solutions but effective, secure and automated connectivity with partner banks is also essential. In this article, we look at some of the challenges and opportunities in bank connectivity to support an optimised financial supply chain.

Evolution of Banking Systems

Proprietary Technology

Until quite recently, connecting to partner banks was limited to installing proprietary banking systems which were developed and maintained individually by each bank. These tools were then used to exchange various types of information with that bank, such as payments, advices to receive, retrieving bank statements etc. Huge investment was required by each bank to develop the necessary functionality and an increasing variety of input screens needed to be supported to accommodate an ever expanding range of corporate requirements. Banks were prepared to put in this investment as the functionality, ease of use and security of their banking solutions were a cornerstone of their competitive advantage and a means of cementing their relationship with their customers.

... effective FSC management requires excellence in internal processes but also external connectivity with suppliers, customers and banks.

The Need for Integration

Increasingly, companies developed greater automation in their internal processes by implementing sophisticated ERP or TMS (treasury management systems). Rather than inputting information, such as payments, directly into the banking system, or retrieving statement information, treasurers and cash managers could generate the information required by the bank automatically for outgoing communications such as payments, and extract statement information for automatic reconciliation and updating of the cash position. Consequently, corporate requirements of their banks changed. Instead of needing new functionality and input screens, corporates needed their banks to facilitate integration between the banking system and internal ERP/TMS to automate the flow of data without the need to input or interact directly with data in the banking system. The challenge for banks was therefore to open up their systems to allow the import and export of data, bearing in mind that their customers’ systems may produce or import files in a wide range of formats, without compromising the quality or security of information.

Emerging Issues

At ING, we have worked very successfully with corporate clients of all types to enable highly automated and secure integration. However, as the sophistication of both banking systems and clients’ internal systems continued to develop, various issues became apparent. For example:

• A great deal of functionality, such as producing payment instructions, applying settlement instructions and approving payments was provided by both the ERP/TMS and the banking system, creating duplication;

• Many companies work with multiple banks, so bilateral interfaces to be set up and maintained for every bank, creating significant resourcing and cost issues;

• Looking across the financial supply chain, there are frequently multiple contact points between a company and its banks, so the problem of multiple interfaces was exacerbated further.

These issues: the duplication of tasks, and the need to establish multiple interfaces meant that for many corporations, some of the potential benefits of their TMS, ERP or payment system, such as standardisation and integration of processes, were being lost. Furthermore, corporates were frequently losing flexibility in their banking relationships, as their banks’ systems, and the interfaces with internal systems, were often firmly entrenched.

This situation was undesirable for all parties:

• Companies were being forced to invest in integration and ancillary systems such as middleware without additional benefit from this investment, as well as lacking bank independence;

• Technology suppliers were investing large amounts to support the various file formats required by their customers’ banks;

• Banks were also investing in integration rather than functionality and the competitive advantage which some banks had created through innovative, functionally rich technology was rapidly being eroded.

[[[PAGE]]]

Addressing the Challenge

So with a “lose lose” situation, there needed to be a new paradigm for connectivity between corporate customers and their banks. A variety of inter-related initiatives gradually arose.

• Banks such as ING developed more open, flexible connectivity tools, such as host-to-host and web-based systems Host-to-host connectivity enables large volumes of data to be transferred in a controlled and automated way, while web-based technology has enhanced the accessibility of banking information;

• Multi-bank connectivity became increasingly popular i.e. a single channel through which files to multiple banks can be routed. Although this has been provided by some banks for a number of years, the potential issue for a corporate perspective was that they did not gain the bank independence that they were seeking. Furthermore, it can be a relatively expensive service. Some third party technology suppliers also provided banking “portal” capabilities but adoption was inevitably limited to customers of their underlying solutions and not all banks were willing for their customers to access their systems in this way.

SWIFT Corporate Access

What was required was an independent third party to provide corporations with connectivity to a wide range of banking partners. The communication channel needed to be acceptable to many banks in order to be a viable alternative to bilateral banking connections, and also to allow different types of information to be exchanged, avoiding the need to set up multiple contact points between bank and corporate. To address this problem, SWIFT Corporate Access has developed.

... corporates were frequently losing flexibility in their banking relationships, as their banks' systems, and the interfaces with internal systems, were often firmly entrenched.

SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a banking co-operative which provides a financial messaging network across 8,000 members in over 200 countries. Its members include banks, broker/dealers and investment managers. Partners exchange a wide variety of financial messages across a common, reliable, secure infrastructure - SWIFTNet. Over recent years, SWIFT has gradually extended the ability for non-financial corporations to communicate with their banking partners through SWIFTNet. There are many advantages for corporates to connect to their banks via SWIFTNet. In particular, it is the network accepted and used by the vast majority of banks worldwide, with unparalleled levels of reliability and security.

There are different access models by which corporates can access SWIFTNet. We will not go into these in detail in this article, as there are specific publications which discuss these in detail, such as the TMI SWIFT Corporate Connectivity Guide published in September 2008 and available to download at www.treasury-management.com. What is important to note, however, is that corporates of all sizes can now access SWIFT, both public and private companies. During the first few years of SWIFT Corporate Access, the cost of accessing SWIFTNet was prohibitive to many firms, but with SWIFT Lite which was launched during 2008, this hurdle has now been lowered considerably. There are also an increasing range of message types, both cash and trade information, which can be exchanged through SWIFTNet, which limits the number of separate access points between bank and corporate that need to be maintained.

Standardisation

Although SWIFT Corporate Access addresses many of the connectivity challenges which corporates, and their banks, were experiencing, what SWIFT access does not address is the problem of different file formats required or provided by banks, and by corporates’ internal systems. To address this problem, banks, suppliers, SWIFT and corporates have increasingly worked together to devise integration standards to standardise the exchange of information. This work has resulted in ISO 20022 financial messaging standards based on XML. It includes a development methodology, a registration process and a central repository, including a data dictionary and business process catalogue, so that different organisations develop financial messages consistently. ISO 20022 is also the basis for payments in the Single Euro Payments Area (SEPA). As adoption of XML messaging continues to extend, it will become increasingly straightforward for companies to connect disparate systems and exchange financial messages in a consistent way, whether communicating through SWIFTNet, multi-bank portals or their banks’ proprietary systems.

Connectivity: a means to an end

ING continues to play an important role in the development and adoption of open communication and financial message standards. We recognise that it is extremely valuable for our clients if we can make it as straightforward as possible for our clients to exchange information with us, and their other banking partners, using whatever mechanism is most appropriate for them, whether through our own systems or through SWIFTNet. Connectivity is not an end in itself, it is simply the mechanism for delivering products and services to our clients, and our competitive advantage is in the depth of service which we are able to provide across the financial supply chain.

The Ongoing Journey

We also realise that the recent progress which has been made in both connectivity and messaging standards is only one step in the journey towards effortless communication between transaction partners, including our clients’ banks, suppliers and customers. In the future, we envisage not only continued developments in the way that corporates communicate with their banks, but the evolution of wider communities, including not only banks, but a company’s suppliers and customers too. These communities are already developing, but in the future, we anticipate far greater synergies in the way that corporates exchange information with counterparties of all sorts. What is remarkable is not simply the potential which exists, but the speed with which this potential is being realised. ING is at the centre of these developments, and we are committed to being a pivotal player in financial supply chain communities.

---

[[[PAGE]]]

Section Seven:

Sander Cok, Senior Advisor, ING Payments & Cash Management

In recent years, one of the major topics covered in the treasury media has been the Single Euro Payments Area (SEPA) and how it would affect corporate treasury, payments and collections. Since the economic crisis struck, with ‘SEPA fatigue’ already in evidence, SEPA has been driven out of the limelight and in some cases, pushed down corporates’ list of priorities. However, SEPA is already a reality, since the launch of SEPA Credit Transfers in January 2008, and SEPA Direct Debits to follow in November 2009. The move towards SEPA will have a significant impact on companies with pan-European payments and/or collections. There are also implications for other elements of the financial supply chain, such as eInvoicing.

Tackling Misunderstandings

A popular misconception is that with the economic crisis sweeping virtually every other issue from the headlines, SEPA may not now happen. This is not the case: SEPA is here now, and it will continue to evolve over the coming years. What is missing at this stage is a deadline for phasing out existing domestic payment products, but these timelines will inevitably be set in due course, which will drive SEPA as a priority for all types of organisation operating in the eurozone.

A popular misconception is that with the economic crisis sweeping virtually every other issue from the headlines, SEPA may not happen.

Another misconception is that SEPA is an undesirable development more rooted in European bureaucracy than genuine advantage for businesses and citizens. Again, this is not the case. With the current disparities between payment products, legal frameworks and payment cultures across eurozone, many of the benefits of the Euro have yet to be realised. It is essential to create synergies in order that innovation can take place and SEPA is the catalyst for achieving this. Just as in the telecoms industry, in which it would be unimaginable to be using the same technology and communications mechanisms as we did twenty years ago, the payments industry is on the brink of the same scale of revolution.

Current Status of SEPA

SEPA Credit Transfers (SCT) are now in effect and transacted by around 4,300 banks across 31 countries. Many banks, such as ING, are preparing to make SEPA Direct Debits (SDD) available in November 2009. All banks operating in the eurozone are now issuing SEPA-compliant cards. SEPA brings both consistent payment instruments but is also based on standardised formats for exchanging payment information between financial counterparties and systems, referred to as ISO 20022. ING and other European banks have been amongst the first to adopt ISO 20022, which presents the opportunity for corporates to communicate in a consistent way with their financial counterparties, avoiding the need to manage different file formats for different banks.

According to recent Atos/Deloitte research, although corporate familiarity with the concept of SEPA is now high, awareness of SEPA payment products, implications and means of taking advantage of the potential benefits is limited. Although 15% of firms have started implementation, 79% have yet to establish a SEPA team. One of the reasons that SEPA is less frequently in the financial headlines today is that although there is still a great deal going on “behind the scenes” to enable the SDD launch and implementation of the Payment Services Directive (PSD - the legal framework to facilitate pan-European payments integration) many people sense a lack of momentum in adoption by corporates and public service bodies. This is largely because there are currently no incentives for SEPA adoption and many organisations are taking a “wait and see” approach. However, companies best-positioned to take advantage of SEPA, and make it as easy as possible for their suppliers and customers to do business with them, will be those who incorporate SEPA as part of their financial supply chain strategy.

SEPA in the financial supply chain

SEPA Credit Transfers

Although SEPA refers to a payments area and payment products, SEPA is not simply about a company’s outgoing payments, it has the potential to impact on a variety of different stages in the financial supply chain. For example, looking first at SCT:

* Outgoing Euro payments will be the same throughout the eurozone based on standard integration formats (ISO 20022). This will make it easier to exchange payment files across internal systems and between internal and external systems. Companies which have adopted a decentralised approach to payments in the eurozone will find it easier to centralise payments and work with a single payments bank.

• By using standard file formats, payments can be more closely integrated with eInvoicing processes, allowing greater automation in the purchase-to-pay process.

• Similarly, collections will be standardised, and with consistent information delivered by the banks, automated reconciliation will become easier. As with payments, it will be easier to centralise collections and work with a single collections bank.

[[[PAGE]]]

SEPA Direct Debits

These benefits apply equally to SDD, with the opportunity to standardise, centralise and rationalise payments and collections processing, including more reliable and reconcilable collections. There has been more controversy about SDD than SCT: although every eurozone country has a credit transfer instrument, the same cannot be said of direct debits. Existing direct debit schemes, and their adoption, vary widely, and there has been significant anxiety about a scheme which potentially allows organisations from across the eurozone to debit an account. In fact, this concern is largely unfounded, and although there are still some issues to resolve, we are confident that the EPC will establish a systematic way of combating organised fraud. They have already proved that significant progress has been made in risk mitigation for SDD.

...companies best positioned to take advantage of SEPA, and make it as easy as possible for their suppliers and customers to do business with them, will be those who incorporate SEPA as part of thier financial supply chain strategy.

In addition to the business-to-consumer direct debits which are familiar in some countries for regular, variable payments such as utility bills, telecoms charges and mortgage payments, the SDD scheme includes business-to-business direct debits which will create considerable efficiencies for debtors and creditors which make or receive regular payments of variable amounts. The SDD scheme will support electronic signatures and e-mandates, creating greater process automation and security; furthermore, SDD can be integrated with eInvoicing services.

eInvoicing

We discussed eInvoicing at some length in the first part of this Guide, but it is important to note the degree to which SEPA is a catalyst for the development of eInvoicing in the eurozone. The cost benefits of eInvoicing are considerable, with recent McKinsey research indicating a potential saving of Û3.00 per business-to-consumer (B2C) invoice and Û7.50 savings for a business-to-business (B2B) invoice. Increasing numbers of businesses and consumers are recognising the benefits of eInvoicing, but for multinational corporations with different payment and collection products in their eurozone locations, there are significant obstacles when integrating eInvoicing, payment and reconciliation processes.

SEPA is not simply creating the payments landscape which would facilitate eInvoicing, but there are active initiatives on the part of governments and regulators, as well as suppliers and buyers, to develop eInvoicing. For ING, in addition to our work in supporting SCT, SDD and SEPA Cards, we are investing substantially in eInvoicing, in recognition of the benefits it presents to our clients. For example, in November 2008, ING announced that it has become 100% shareholder in specialist eInvoicing provider Billington, which provides comprehensive B2B and B2C invoicing services, including INGIS, an eInvoicing platform for business users on which suppliers can place bills, which can be seen by the customer in a closed environment.

Wait and See or Act Today?

SEPA is a catalyst for optimising eInvoicing, payments and collections and therefore the financial supply chain as a whole. Similarly, with growing adoption of ISO 20022, the integration of information between systems will become easier. However, although SEPA exists today, the SDD scheme has still to be launched and there has not yet been widespread migration to SCT. Companies looking to optimise one or more elements of their financial supply chain would do well to look at the opportunities which SEPA provides. In many cases, it may be more efficient to migrate to SEPA as part of a wider project, and for some firms, there may be “early mover” benefits.

However, for most firms, discussing what “will” be possible does not solve corporate demands today to improve the financial supply chain, including payments, collections and eInvoicing. This is why ING has already invested heavily in these areas alongside our SEPA investment, so that corporates can gain rapid advantage of improved processes, without having to wait for SEPA or the initiatives which are associated with it. For example, looking at eInvoicing, ING supports a wide range of formats through INGIS. However, while projects should anticipate SEPA, companies should be taking the financial supply chain opportunities which are available today, rather than losing competitive advantage.

---

[[[PAGE]]]

Section Eight:

Interview with Robert Heisterborg, Global Head of Payments and Cash Management, ING

Optimising the processes which comp-rise the financial supply chain can enable companies to reduce both cost and risk, and increase their financial flexibility. One of the key considerations in a financial supply chain strategy is the choice of banking partner. While in the past, treasurers have selected their banking partner based primarily on their cash management services, there are a range of additional factors to take into account when taking a wider view of the financial supply chain. In this section, we interview Robert Heisterborg, Global Head of Payments and Cash Management at ING to understand some of the key issues involved when selecting a banking partner.

A substantial element of any financial supply chain optimisation project, whether focusing on a specific element or looking from end-to-end, is enhancing internal processes and systems. Why should a company review its key banking partners as part of such a project?

At the beginning and the end of the financial supply chain is a cash flow, either a payment or receipt. Effective financial supply chain management includes optimising the timing and transparency of these cash flows. Consequently, the right banking partner has a significant role to play not only in automating these transactions, but also providing the information which fuels the processes in between.

For example, companies have invested significantly in their own technology to automate internal processes, such as reconciliation. The success of these initiatives relies on comprehensive, accurate information, presented at the right time and in the right format. Banks can help to enhance this process and minimise exceptions by providing detailed account information and the tools with which to integrate the bank software with a company’s back office systems. Another example is the outgoing payment process. To ensure that payments are as automated and controlled as possible, internal processes and systems need to be integrated closely with the banking channels or payment software. There are also a range of additional services which key banks are increasingly providing to facilitate different stages of the financial supply chain, which companies will want to take into account when making a decision over its banking partners.

To summarise, what is important to remember when determining the choice of banking partner is that the bank’s cash management and financial supply chain capabilities are as critical to achieving a company’s efficiency and working capital objectives as its own internal processes and systems.

Some of the ways in which a bank can support a financial supply chain optimisation project may seem relatively obvious, such as providing trade finance services and asset-based financing such as receivables financing. What other services should companies seek from their banks to support the financial supply chain?

Every company will, of course, need something different from their bank depending on their industry and business model. In some cases, trade finance tools will be important and in the current climate, we are seeing an uplift in demand for letters of credit for example. Banks such as ING recognise the role we can play in unlocking value and reducing costs in the financial supply chain, and are developing a range of services to achieve this. In addition to the traditional cash management services, newer banking services are now more closely integrated with a company’s own processes and systems. For example, eInvoicing is an area in which some banks can increasingly add value to their corporate customers. Until relatively recently, this was primarily the domain of the largest corporations, but today, working with a bank such as ING, the benefits of eInvoicing are available to a far wider spectrum of companies. Organisations which issue large volumes of invoices, or where the invoice detail can be quite complex should discuss eInvoicing with their potential banking partners to understand the opportunities which exist.

... the right banking partner has a significant role to play not only in automating these transactions, but also the information which fuels the processes in between.

Another area which companies should discuss is a bank’s ability to support centralised payments and/or collections on a pan-regional basis, such as a pan-European payment or collections factory. The banks best-positioned to facilitate the benefits of centralised payments and collections are those with a pan-European network and ability to manage the local payment requirements in each country. For example, ING’s network spans 22 countries across Europe, enabling domestic and cross-border payments to be made across the whole network through a single channel. Over time, it will be important that partner banks have strong SEPA capabilities as SEPA payment products replace domestic payment and collection products in the coming years.

As companies increasingly look to alternative forms of financing to maintain liquidity, factoring and receivables financing are becoming more important, including to firms which may not have considered these opportunities in the past. With credit becoming a more valuable, and often expensive commodity, using a company’s assets, such as receivables can be a very useful way of increasing the predictability of receivables and creating liquidity without impacting on existing covenants. Even if this is not a form of financing you are using today, alternative financing may be an area for discussion with potential banking partners to review the options for your business. [[[PAGE]]]

Commercial cards are an increasingly important area for our customers. The increase in control over supplier and travel and entertainment (T&E) payments, transparency and the potential for savings through rebates have made cards attractive to companies of all sizes.

One of the concerns which many companies have during the current economic crisis is concentration risk when working with one, or a small panel of banks. How would you suggest companies deal with this issue when looking at their financial supply chain?

Events over recent months have emphasised the importance of risk management, not least in a company’s choice of banking partners. In this climate, it is essential that you place your business, and your trust, in the bank(s) which are stable and have the strongest future prospects, as well as delivering the products and services which are beneficial to your business.

A bank is a strategic supplier, and assessing risk is an important element when selecting any supplier to whom you are entrusting business-critical functions.

One of the criticisms that corporate treasurers have had of their banks in recent years is that they are “tied” to them through the use of proprietary technology which is deeply embedded in their business. Today, this no longer needs to be the case due to the availability of bank-independent platforms and connectivity solutions, such as SWIFT Corporate Access. Consequently, companies can make their banking decisions independent of technology. Furthermore, if your banking needs change, or you expand your business into new regions, it is easier to add or change banking providers if necessary.

A bank is a strategic supplier, and assessing risk is an important element when selecting any supplier to whom you are entrusting business-critical functions. As with any other supplier, you should go through a risk assessment process and determine how you will manage these risks, in the same way as you would for a supplier such as an IT company or outsourcing company.

What considerations should a company make when selecting a banking partner, and how have these changed over recent years?

Companies have always applied a range of criteria to their choice of banking partners, but generally these have been based around cash management services, such as price, range of products/services and geographic scope. While these criteria are still valid, companies now need to take into account a wider range of considerations. This will, of course, include the financial stability of the bank and its lending capacity. In addition, companies need to take a broader view of the bank’s products and services, looking not only at cash management but also the services which a bank can provide to optimise, and unlock cash from the financial supply chain. To what extent is a bank in a position to partner the company in optimising the financial supply chain and how committed are senior management to investing in the range of services which this entails?

Another factor which has grown in importance is technology. While in the past, technology decisions have centred around the proprietary system which the bank provides, this now extends to the bank’s broader commitment to technology. This could include its support of bank-independent connectivity channels, such as SWIFT Corporate Access, its adoption of technical standards such as ISO 20022 which will become increasingly important, and the tools it provides to help integrate its own systems with clients’ internal systems. Part of this also includes the strategic partnerships with technology providers that the bank has established to help deliver innovative services to its customers.

As the financial supply chain comprises a series of interconnected steps, a holistic approach to financial processes will frequently bring the greatest benefits. As this will impact on the way in which a company works with its banking partners, what would your advice be on how to manage the banking relationship?

One of the difficulties with financial supply chain optimisation is that the steps within it frequently span different departments within the company. We would suggest appointing a single person or group to be responsible for financial supply chain management with oversight of all the departments involved. You should create a single vision which can be shared amongst the departments, and develop a plan to achieve this vision, to which each of the relevant areas should subscribe.

In parallel, you should share your financial supply chain vision and objectives with your bank and ask them to contribute and participate in delivering on the various steps in the project plan. This should also involve the bank forming a multidisciplinary team to help realise the plan. As with your internal structure, make sure there is one contact person at the bank who has overall responsibility for the implementation and oversight over every activity.

Increasingly, treasurers are being tasked to take a greater role in the financial supply chain and to take responsibility for the banking relationship. In the past, different areas of the business may have had more interaction with the bank, which may cause some internal issues as roles change. What would your advice be to treasurers to ensure that the needs of all the business areas involved in the financial supply chain are satisfied?

As I mentioned before, a financial supply chain optimisation project frequently involves various departments. Tensions can inevitably arise if an individual or department feels that their responsibilities are being curbed or they are not involved in decisions that affect them. Having a common vision and plan, to which all the relevant parties contribute, helps to provide transparency and buy-in to the project. Furthermore, managers from each of the relevant areas should be incentivised to work together and play their part in achieving the overall project objectives. The project needs to be managed closely, including making dependencies clear so that it is immediately apparent if a delay in completing one step will impact on others.

In reality, financial supply chain optimisation initiatives should bring benefits across the business, and depending on the nature of the project undertaken, managers in each area have the opportunity to reduce costs, increase efficiency and improve performance. The issue is primarily therefore to communicate the potential advantages and develop a common approach to achieving them.

---

[[[PAGE]]]

Section Nine:

Gregory Cronie, ING Wholesale Banking, Payments and Cash Management Sales

Having read this Guide, many readers will recognise that while they may have achieved significant efficiencies in one or more areas of the financial supply chain, there remain areas which would benefit from greater attention. In this interview, Helen Sanders, Editor TMI, speaks to Gregory Cronie to seek ING’s advice on how a company should approach a financial supply chain optimisation project and what developments we are likely to see in the future.

Although there are benefits to a holistic approach to financial supply chain optimisation, most companies need to prioritise their resources and will focus on one or more elements initially. Where would you suggest that companies direct their efforts?

While some companies will aim to optimise the whole financial supply chain as a single project, most will adopt a phased approach or tackle one area at a time. The starting point for any such project will depend largely on who takes the initiative. For example, treasury will generally start by reviewing the liquidity structures which are in place, financial control is more likely to begin with accounts receivable. Ideally, with limited resource, it is best to start with the area in which the greatest benefits to the business as a whole can be achieved. For example, we suggested in the first part of this Guide that while a CFO is unlikely to spend sleepless nights worrying about most payments going out on time, worrying about collections coming in are another matter, and it is in this area that most companies will see the quickest wins.

What should also be taken into account is the dependency between different elements of the financial supply chain. For example, if the treasurer’s objective is to optimise liquidity, this is impossible unless cash flow forecasting is as accurate and timely as possible, which requires transparency and efficient processes in payables and receivables.

What should the objectives of a financial supply chain project be?

The obvious response is that a primary objective should be to reduce costs. However, if operational cost reduction is the sole objective, the benefits are likely to be short term and/or tactical. In reality, the greater advantages are long term and strategic, based on working capital improvements and a more robust financial supply chain. Any significant improvement in the purchase-to-pay or order-to-cash process will bring working capital advantages, and when taken together, alongside eInvoicing, supply chain financing and liquidity management, these can be considerable.

How would you identify potential improvements as part of a financial supply chain project?

Once again, it is worth focusing on the “quick wins” i.e. where the greatest value can be derived most rapidly. For example, in a collections project, it is first worth looking at payment terms to see where there could be negotiation with the customer to improve on these. For example, where standard terms are 30 days, these could be reduced to 14 days, immediately gaining 16 days of additional value. Alternatively, or in addition, you should look at the discounting curve i.e. identify where discounts can be offered, and over what period in order that there is both cash flow advantage to the business and incentive for the customer. Payment methods may also be reviewed; for example, direct debits and electronic payment add to the predictability of payment and ease of reconciliation. With SEPA direct debits due to be launched in November 2009, including business-to-business direct debits, new payment products could benefit the collections process substantially.

The process for collecting cash should also be reviewed, including payment due date and overdue reminders, the management of bad debts and dispute resolution. The outcome of this review could include a change in payment terms or discounting arrangements, new processes or new technology. If collections have not already been centralised, this is often a valuable way of improving control and transparency, although it needs to be managed carefully, both internally and externally, to ensure that both sales teams and customers remain supportive.

It is generally a little easier when it comes to the payments process as you have greater control over when and how you pay. Look at incentives for early payment and work out whether these are advantageous. If there is no penalty for late payment, you may even decide to pay a little later than the due date, so long as this will not create relationship issues with the supplier. Again, processes need to be streamlined and ideally centralised as far as possible, to ensure that control, automation, bank connectivity and cost management are optimal.

With a good handle on payments and collections, the company can then look at how to incorporate financing structures to improve liquidity and increase predictability of cash flow. [[[PAGE]]]

Financial supply chain optimisation is still a relatively new concept. To what extent are corporates driving financial supply chain initiatives or is it still the domain of early adopters?

While many corporates have made significant advances in addressing individual elements of the financial supply chain, such as centralising collections or payments, implementing SWIFT connectivity, or working on eInvoicing initiatives, few have yet sought to optimise the financial supply chain from end to end and fully leverage the financing opportunities which this presents. Companies which are in a position to consider the financial supply chain holistically can therefore gain competitive advantage by reducing costs and enhancing working capital to a greater degree than its peer companies.

We anticipate that during a prolonged period of financial uncertainty, during which time companies are focusing more on liquidity, an increasing number of firms will look to financial supply chain optimisation as a way of unlocking working capital and increasing the stability of the supply chain.

Why have ING focused on this area?

We know that financial supply chain optimisation, from payment through to collection, including trade finance and financing structures, has the potential to add substantial value to the business, by reducing costs, releasing working capital and leveraging financial assets to enhance liquidity. Consequently, we have developed a comprehensive range of products and expertise across the financial supply chain, such as becoming 100% shareholder of specialist eInvoicing company Billington. In addition, ING is a pioneer in some of the industry initiatives which have the potential to add significant value to our corporate customers, such as SEPA and SWIFT Corporate Access.

How do you see financial supply chain management developing in the future?

As companies seek to unlock value from their financial supply chain, the services available to support these efforts, such as those offered by ING, will be in greater demand. We also envisage that technology will continue to act as a catalyst for further improvements, such as the evolution of collaborative platforms and alongside this, standardisation of file formats. Every transaction involves two partners who are looking at the same information from different perspectives. In a traditional transaction model, there is a great deal of duplication of effort. For example, a simple transaction today could include the following steps:

• A purchase order is produced by the customer;

• A purchase order is received by the supplier and an invoice is raised;

• The customer reconciles the invoice against the purchase order;

• The customer uses the verified invoice to raise a payment;

• The payment is received by the supplier and reconciled with the invoice.

The purchase-to-pay or order-to-cash process could be streamlined if a single set of data could be set up by one party, verified by the other and the remaining processes automated based on a central repository of information. Both parties would have a common view of the transaction which can then be reflected in their internal systems. The development of web technology and security, increasing industry recognition of the benefits of standardisation and successes in collaborative initiatives so far, such as eInvoicing, suggests that the industry is now ready to embrace collaborative platforms.

Who is in a position to develop these collaborative platforms?

Inevitably, there will be a variety of different parties who seek to develop a financial supply chain collaboration platform; indeed, some companies have already made some progress in this area, usually starting with one area such as eInvoicing. While a range of organisations, such as banks and technology partners, will seek to develop a sophisticated platform with a large critical mass of corporate users, the likelihood is that the most successful platforms will be bank-independent. Ideally, this would be corporate-led, initiated by suppliers and customers seeking to collaborate more closely, but in reality, it is likely that technology vendors with expertise in financial supply chain optimisation will take the lead in this area.

Another possible way in which collaborative platforms will evolve is the expansion of services offered by the credit card industry. In theory, card providers are well-positioned to facilitate financial supply chain collaboration and optimisation using the infrastructure already in place.

The potential benefits of greater collaboration across the financial supply chain are substantial for corporations of all types. As part of its ongoing commitment to supporting financial supply chain optimisation, ING is actively supportive of collaborative initiatives which enhance automation, efficiency and common understanding between suppliers and customers, and preserve corporate liquidity.