Lufthansa’s Flight to Payments Quality

 

by Carlos Scheeren, Project Head Payment Factory, Group Finance, Deutsche Lufthansa AG

Key Points In 2011 Lufthansa, which had a large number of bank accounts and a centralised payment processing function which was unable to meet the needs of the wider group, carried out a preliminary study into the feasibility of implementing a payment factory After evaluating different solutions, the company chose Hanse Orga as its payment factory systems provider, with the object of building a bank-independent hub connecting its in-house systems with its banks and centralising processes for outgoing vendor payments The author describes the implementation of the project with co-operation between Lufthansa, Hanse Orga and the airline’s banking partners, and how it is being rolled out to Lufthansa’s worldwide operations. While the project is still in progress, it has already achieved considerable success including the migration to automated, controlled and consistent payment processes and to SEPA payments

At the start of 2014, Lufthansa Group embarked on an ambitious project to achieve visibility and control over group liquidity across its 540 global entities, and centralise, harmonise and standardise payment processing. In this article, Carlos Scheeren, project manager of the project, describes some of the background, progress and achievements so far.

Project background

The Lufthansa group has around 1,500 bank accounts, nearly 50% of which are held with our primary cash management banks, Citi and Deutsche Bank. Before embarking on our payment factory project, we used banks’ electronic banking systems, CitiDirect and db-direct respectively for payment approval and execution, both at a headquarters level and across the group. Given the nature of our business, we also need to work with local banks, so we have around 800 accounts which, until this project, have been held with more than 100 banks across 107 countries. We used numerous local electronic banking solutions with which to communicate with these banks. Given the different levels of functionality, diversity of formats and varying opportunities for process automation, the use of multiple systems resulted in fragmented processes for retrieving bank statements, approving and executing payments, user administration etc.

As well as fragmented processes from a banking perspective, we also recognised that our internal processes were often heterogeneous and manual. Although we use SAP, we have different instances and releases across the group, while smaller business units often have other ERPs in place. Consequently, with diverse internal systems, electronic banking systems, processes and file formats, we did not have a consistent view of data and therefore lacked visibility of group liquidity.

Most business units conducted payments locally, but we had a central payment processing hub that supported nearly 30 group companies, all of which used SAP. Our headquarters executed payments in EUR, GBP and USD on behalf of these companies from Deutsche Lufthansa AG accounts and debited intercompany accounts accordingly. However, although this centralised approach to payment processing had proved successful, we recognised that the solution was not scalable to meet the needs of the wider group.

Addressing the challenge

In 2011, we put together a multi-disciplinary team including payments, cash management and information management (SAP support) to conduct a preliminary study into the feasibility and cost benefit of a payment factory. We were aware that payment factories were becoming more popular, and from events such as Schwabe, Ley & Greiner’s Finanzsymposium, and visits to other DAX companies, we could see the advantages. As a result of this evaluation, it became clear that our banking structure, namely having only a limited number of primary cash management banks, would be a distinct advantage. We put together the business case, and by the end of 2012, our senior management board had authorised us to issue a request for proposal (RFP) and embark on a formal process to select a provider.

Evaluation and decision

We had already issued a request for information (RFI) in late 2012 as part of our business case definition, to which we had received nine responses. We analysed these responses systematically and as a result, shortlisted three providers, two of which responded to our RFP. During the third quarter of 2013, we conducted evaluation workshops with both companies to understand their solutions, refine the scope of services and clarify the costings. On the basis of this evaluation, we selected Hanse Orga as our payment factory system provider, and completed negotiations by the end of 2013.

There was a variety of reasons for selecting Hanse Orga. One of them was the company’s performance during the workshops, as well as the commitment of the designated project manager to whom we had already been introduced. The software was highly flexible, and had a rule-based mechanism to map different incoming file formats into a meta format, from which the outgoing XML ISO 20022 (CGI) format is created. This was important as we were using iDOC, XML and a variety of local formats. We are using three modules of the solution at this stage: payment management; treasury management (in-house banking and limits) and some features of the cash & liquidity management module.

 

[[[PAGE]]]

Project objectives

In partnership with Hanse Orga, our objective was to build a bank-independent hub that would connect our in-house systems on one side, and our banks on the other for the two-way flow of transactions and information. By doing so, we aimed to automate bank statement retrieval to allow central visibility over liquidity, whilst enabling group companies to access information on the relevant accounts. We also sought to centralise and harmonise processes for outgoing vendor payments, and channel these through a single hub to replace existing electronic banking systems. Achieving our objectives in these two key areas would improve control over cash and processes, and ensure group compliance with security and KYC requirements.

In addition to our payment and cash visibility objectives, we aimed to replace our existing short-term cash forecast process using Hanse Orga's cash management module, and enhance our electronic bank account management (eBAM) capabilities.

Project timelines and delivery

The payment factory implementation was scheduled to extend from January 2014 to June 2017 involving three full-time project staff and up to two FTE equivalent across cash management, accounting and information management (SAP). Hanse Orga also dedicated up to four project staff, in addition to specialist resourcing as required. Within this project timescale, we expected to centralise and automate bank account retrieval of at least 90% of accounts, connect all of our affiliated group companies (c. 300), centralise and harmonise at least 75% of outgoing vendor payments, and enhance our cash management and forecast reporting.

As the project would involve integrating all affiliated companies into the payment factory, we took the opportunity to harmonise our bank landscape, migrating additional accounts to Citi and Deutsche Bank wherever possible. We issued an RFP for the 19 countries that fall outside these banks’ footprint, and as a result, appointed HSBC, Societe Generale and Standard Chartered as additional cash management banks. The project included building host-to-host connections with our partner banks and exchanging information and transactions in XML ISO 20022 (CGI) format. Where our internal systems did not produce this format, files would be converted automatically during the rule based payment optimisation process of the payment factory. In addition, we connected to our remaining third-party banks for account statement retrieval using SWIFT, via FIDES as a service bureau.

In addition to building the technology and external communications infrastructure, it was equally important to communicate internally and build support for the payment factory from group companies. The project was sponsored by our CFO, which was instrumental in ensuring support from local finance teams. We established a process of early, regular communication with internal stakeholders, and involved them in major decisions, which was also very important in encouraging confidence.

We adopted a structured, phased approach to implementation, which allowed us to build a robust, secure technology framework and efficient, automated processes with rigorous controls. As a result of these early project phases, we successfully went live on our pilot project with a small subsidiary in August 2015 for euro SEPA payments, which we then extended to domestic USD and GBP payments as well as international transfers in EUR and USD. The pilot project enabled us to test rules and processes, and based on its success, we were then able to migrate the nearly 30 subsidiaries of the central payment processing hub solution to the payment factory in September.

The next step was to roll out the solution to our subsidiaries Eurowings and Germanwings, which generated a large number of payments outside our core system, and used XML rather than SAP iDOC. At the start of 2016, we started to roll out the payment factory to the worldwide field organisations of Deutsche Lufthansa AG and Lufthansa Cargo AG following a phased approach, migrating our three shared service centres in Krakow, Bangkok and Mexico, which we plan to complete by August/September. This will mean that around 90%  of the relevant countries will be connected to the payment factory before we complete the roll-out to the rest of the group.

We have also enhanced our use of eBAM as part of our project. There are two elements to this. The first is the electronic maintenance of accounts, such as account opening, amending authorities etc. We had already developed our own SAP-based solution for this, some time before BAM solutions became widely recognised, as bank account management is a major pain point for us. The second element is to control and audit bank fees. We are now using a proprietary add-on tool for this, so we are now able to monitor and reconcile fees at an account level.

 

[[[PAGE]]]

Outcomes

Although our project is still in progress, we have already achieved considerable successes, not least the development of, and migration to, more automated, controlled and consistent payment processes. We were fortunate in the timing of our project, in that the introduction of SEPA meant that we had to migrate from iDOC to XML-based formats for SEPA payments. This would have been very difficult to achieve in our previous system, but by integrating our SEPA migration into our payment factory project, we were able to eliminate the additional cost and resource implications.

We are also gradually realising the benefits of reducing the number of electronic banking systems that we need to maintain. By centralising account statement retrieval in a standardised format, and avoiding the need to log in to multiple systems, we are able to automate processes such as payment authorisation and account reconciliation.

Lessons learned

One of the most time-consuming parts of the project is completing the associated documentation, particularly with the banks: for example, it took around six months to create the contractual framework with one of our banks. It is also important to allow sufficient time to complete internal documentation. Although having a mandate from our CFO was instrumental in bringing larger subsidiaries on board, we needed to spend time educating and convincing smaller, more remote business units on the value of the payment factory and the implications for their business. Finally, we have been fortunate in enjoying an excellent relationship with Hanse Orga. In addition to the established software, which was of excellent quality, a large amount of time was needed to test new developments, which inevitably have more issues than established solutions.

The project has been an exceptional example of a highly effective partnership between Lufthansa, Hanse Orga and our banks, which has delivered significant value to the business within an ambitious timescale. We have also received excellent internal support, both from our information management team that manages our SAP infrastructure, and from our senior management, which has enabled us to overcome organisational obstacles and co-ordinate internal stakeholders. While there are still a number of steps to complete before completing the project, we have made considerable progress already, and are well on the way to positioning Lufthansa as a global leader in centralised payment processing, cash visibility and account management.   

 

Carlos Scheeren Project Head Payment Factory, Group Finance,  Deutsche Lufthansa AG Carlos Scheeren has been with Lufthansa’s Group Finance department  since 2006, when he joined the airline as Manager for Liquidity and Risk Management. In 2009 he was appointed Head of Payments and Back Office, and took on his current responsibilities as Payments Factory Project Head in 2014. Carlos has a BA in Economics and Business Administration from Berufsakademie Stuttgart.

 

Lufthansa Group The Lufthansa Group is a global aviation group with a total of 540 subsidiaries and equity investments, organised into the Passenger Airline Group, Logistics, MRO, Catering and Other business segments. Each segment occupies a leading position in its respective market. In 2015, the Lufthansa Group generated revenue of EUR 32.1bn and employed an average of 119,559 staff.