Leveraging Centralisation

by Jonathon Traer-Clark, Treasury Practitioner Executive, Global Transaction Services EMEA, Bank of America Merrill Lynch and Bruce Meuli, Global Business Solutions Engagement Executive, Global Transaction Services EMEA, Bank of America Merrill Lynch

Over the past decade, many large corporates have concentrated functions, such as foreign exchange (FX), risk management, and corporate finance, or created structures such as an in-house bank, in order to improve visibility, control and efficiency. Often these developments have been eased or triggered by corresponding innovation in the banking sector, broader improvements in connectivity such as SWIFT, and common standards, such as ISO 20022.

Once established, many companies have further considered how their strategy should evolve in the future and how the visibility, control and efficiency established by centralisation can be effectively leveraged. As treasury becomes more strategic, it is increasingly called on not only to manage cash but also to oversee and govern broader capital sources – such as working capital – across the organisation. Furthermore, while treasury retains responsibility for day-to-day financial operations, corporates increasingly rely on its financial acumen to help determine the most effective deployment of capital.

An appropriate aspiration

All corporates can aspire to leveraging the capabilities and knowledge of treasury more widely across the organisation because of the risk management, efficiency and other benefits it can deliver. However, not all companies wish to extend the remit of treasury: finance may have ownership of working capital and capital deployment and the company may be satisfied with these arrangements.

Not all companies may be ready for treasury to take on a broader role. In some cases a broader centralisation of functions, implementation of global processes and policies and rationalisation of banking partners (and associated technology) may be a necessary first step. This does not mean treasury has to reach a specific maturity before taking on a more strategic role: the ‘tipping point’ will be different for each corporate. Traditional linear maturity models do not reflect reality for most companies, who tend to be multi-dimensional in nature.

A company may have challenges regarding visibility into some bank accounts – seemingly a basic requirement – but has already embarked on sophisticated strategies to use working capital more efficiently. This apparent contradiction in maturity reflects the reality of most organisations: different functions (and country entities) will be at different stages of development in terms of achieving best practice. Often the most advanced areas of the company will be the most important to the business: organisations evolve capabilities as circumstances and the business dictate.

In the technology, media and telecommunications sector, there is a history of rapid mergers and acquisitions (M&A) activity; as a result these companies typically have highly advanced internal M&A capabilities. Similarly, oil and gas companies often have well developed expertise in debt capital markets and hedging because of the nature of their business. Ultimately, best practice must be determined by whatever is appropriate for that company, its competitive environment and the sector in which it operates.

Issues to consider

The extent to which the role of treasury can expand into strategy depends on a number of factors. As mentioned above, some corporates may have a strong finance function that is unwilling to relinquish control. To some extent, expansion of treasury’s role may depend on the personality of the treasurer and whether they take an active or passive approach to their remit. The company’s recent experiences can also have a bearing on future direction and associated prioritisation. It is not unknown for a corporate to experience a temporary shortfall in liquidity and only then realise the importance of working capital management.[[[PAGE]]]

More generally, the status of treasury within a corporation gives a good indication of the potential opportunities for it to expand its responsibilities within the company. If treasury is already perceived to have a seat at the ‘top table’ its role may be ripe for expansion. Equally, a treasury that is aligned with tax and legal strategy is better prepared for additional responsibilities. Again, none of these are essential preconditions for all companies – there is no single scenario that presages a broadening of treasury’s reach across an organisation.

What is important in determining whether treasury expands its role is the corporate view of the role of treasury. Some believe that treasury is defined by its core functions of cash management, investment and risk management: it should simply concentrate on performing them as efficiently and cheaply as possible. However, this view is increasingly rare. Many companies now recognise that treasury can create value by using its financial acumen and applying it to capital management more broadly.

Moreover, some companies are choosing to view treasury as a profit centre rather than a cost centre: an in-house bank has the potential to add huge value - for example by obtaining improved FX spreads as a consequence of flow concentration and aggregation. The broadening of treasury’s role towards more value-add activities does not have to take place in a single implementation. Typically, once companies reach a certain level of process maturity (and have defined their risk appetite), they can then take incremental decisions, such as whether to seek additional yield from their investments and how to balance this with their risk appetite.

A flexible definition of centralisation

While a certain level of centralisation and process standardisation is a prerequisite for expanding treasury’s role into strategic areas, how centralisation is defined can be flexible. Centralisation is not about geographically locating all functions in a single location. Instead, multiple functions for a cluster of countries might be centralised; alternatively, distinct processes, such as cash application, might be grouped for the entire organisation. Where these processes take place is less important than central functional control, a common platform and standard processes and policies.

Despite the prevalence of ‘one company’ policies at many corporates, standardisation does not necessarily have to mean the use of identical processes and practices across the entire company. In a country that represents a major part of a company’s business, standardisation is essential. In contrast, it may not make sense for a newly-formed operation in an emerging market country to implement the same policies and standards – for example daily reporting– given its small scale and limited complexity. Nevertheless, there must be some commonality between each country in a given region; a hybrid model, which is underpinned by the same policies, could be employed.

For treasury to play a more strategic role in a company, the granularity of standardisation should be increased. Larger volumes of data should be collated and made accessible, finely-tuned service-level agreements should be put in place, dashboards, performance metrics and control charts established and workflow should be further standardised. The end goal is to create a process that is aligned with the business and is therefore able to respond to its needs.

Many companies find that centralisation creates a momentum that encourages further efficiencies. Establishing multiple clusters with standardised processes to manage specific processes for different entities creates opportunities for contingency management: treasury can route cash or tasks to different centres of excellence as circumstances dictate. To ensure the efficient management of such an arrangement requires a global process owner, which treasury – as owner of cash – is best placed for.

An extended enterprise perspective

Like all transformational initiatives, consideration should be given to the extended enterprise. Actions that at first glance benefit the corporate can have negative effects on other stakeholders and could ultimately be detrimental to the company itself. Changing terms in order to improve working capital can put pressure on distributors or suppliers and impact sales. Similarly, banks – as providers of products and services – should be seen as part of the extended enterprise: the lowest cost provider will not necessarily offer the greatest long-term benefit.

In taking such a holistic view, solutions such as supply chain finance or purchasing cards could be implemented, delivering optimal value for all parties. More generally, an extended enterprise perspective can act as a spur for corporates to re-think existing practices, including sales strategies, for the benefit of all stakeholders. By considering the expectations of shareholders, for example, it may be possible to improve efficiency and tighten the corporate strategic focus: as a key manager of capital, treasury must be ready to respond to such demands.

Conclusion

Regardless of the operating model a company employs, efficiency and effectiveness require a high level of centralisation and standardisation. Treasury can control policy, governance, standards and execution and should be its own process owner – whether processes are undertaken by different parts of the company or by outsourcing firms.

The strategic treasury acts as an aggregator of capital flows for the entire business. It must also act as an aggregator and distributor of knowledge by ensuring that centralisation does not result in the loss of local and regional business and financial knowledge, critical to the company’s success. Working closely with the company’s tax and legal teams, and using its skills and capabilities, treasury can offer advice on a wide range of corporate areas, including investments. Moreover, by quantifying risk and helping to determine risk appetite, treasury can use the next phase of centralisation to play a valuable role in the company’s future.