Published: September 01, 2011
Treasury remains a relatively new profession, with distinct departments dedicated to managing liquidity and risk first emerging in the 1970s in response to increasing interest rate and FX volatility and the growing emphasis on international business. In 1979, the first major treasury association, the Association of Corporate Treasurers, was founded. Since that time, many aspects of treasury have changed unrecognisably, not only because of advances in technology, but also due to significant developments in the way that treasury’s role in the business has been recognised and extended. What has remained constant, however, is an unrelenting focus on delivering value to the business.
Treasuries of the 1980s and early ‘90s were characterised by telex machines, a smattering of mobile phones the size of bungalows, proprietary trading but above all, people. Multinational corporates often had tens or even hundreds of people engaged in manual treasury processes, often organised in a similar way to a bank’s trading operation. At that time, value was often determined in terms of the return that treasury was able to earn by trading surplus cash, arbitraging interest rate differentials and exploiting FX risk. Indeed, a number of companies generated a significant proportion of their corporate profits in this way. This activity was supported by an army of people recording transactions, producing reports, confirming deals and sending payment instructions, occasionally making use of huge, self-built mainframe systems but more often than not with little automation or technology support.
Treasury in many companies was therefore enclosed in its own little world, leading to the perception, and often the reality, that treasurers were in an ‘ivory tower’, almost entirely separate from the company’s core activities, and with virtually no reference to it. During the 1990s and early 2000s, all this changed. Proprietary trading is volatile by nature, which became increasingly unpopular with CEOs, CFOs and shareholders as equity markets evolved and stable earnings and reliable forecasts became more important. Companies that produced surprise results were severely punished by analysts and shareholders, so proprietary trading became more of a liability than an advantage. High profile events such as the collapse of Barings, Enron et al also had an impact. Stakeholders demanded greater transparency and questioned the business justification for an energy, manufacturing, pharmaceuticals or retailing company profiting from non-core activities.
However, in addition to the change in attitude prompted by major events, there were quieter changes taking place in all industries. Globalisation was taking a greater hold with an expanding geographic reach of suppliers and customers and an increasing focus on leveraging manufacturing and services in low-cost economies. Acquisitions and strategic investments in new markets led to businesses taking a different shape with new and unfamiliar requirements.
Right from its early beginnings, the treasury function was focused on delivering value, and as stakeholder expectations, market conditions, technology innovation and the needs of the business evolved, so too has the way in which treasurers achieve this. Increasingly, the concept of value has shifted from direct profitability in treasury to the way in which it supports the company in performing its core activities. This has had a variety of implications. The core principles of treasury that were first established: liquidity, risk and corporate finance, remain the same, but the global nature of business, technology innovation and new expectations of the role that treasury can play in enhancing the business have changed.
Treasurers need to be far more 'tech savvy' than their predecessors, a trend that is likely to continue in the future.
Firstly, the door of the ivory tower is now open, and treasurers are to be found working with local finance managers across the globe on liquidity and risk issues right through to new business enablers such as customer financing and prepaid cards for customer incentives. The most effective treasurers today have a truly global vision, not derived from the perspective of a single global treasury centre, but with an appreciation of in-country regulatory, fiscal, cultural and business organisation issues, resulting in regional treasury centres or distributed treasury staff located in business unit finance teams.
Secondly, the concept of communication and information flows has changed dramatically. Treasurers’ increasing demand for information, and huge technological advances, have resulted in sophisticated systems for monitoring global liquidity and risk positions, integrating information across systems and communicating with internal and external counterparties in a secure and transparent way. Multi-bank connectivity such as SWIFT Corporate Access, standardisation and new communication tools such as mobile technology and social media are making their mark, and will continue to do so.
Thirdly, the scope of treasury activities has expanded as its global influence has increased and the benefits of shared services have become more apparent. For example, payment factories, bank communication, back-office processing centres and areas such as collection factories are increasingly falling within treasurers’ remit or sphere of influence. [[[PAGE]]]
The trend towards a global approach to liquidity and risk, and senior management appreciation of treasurers’ importance in managing these areas, was accentuated during the financial crisis. Liquidity became the watchword of many corporations globally as credit lines shrunk and the cost increased while sales fell sharply and quickly. The importance of many of the risk-related issues that treasurers had been emphasising for a long time, such as counterparty risk, was finally recognised and suddenly, treasurers had a place at the top table.
Along with greater recognition treasurers now have a growing range of responsibilities. To achieve global visibility and control over cash, but also processes, means that treasurers are taking a wider role in establishing a cost-efficient, transparent global infrastructure. This builds on many of the activities in which treasurers were already engaged, such as payment factories, and extends them further across the financial supply chain. With working capital becoming a priority for many companies, many treasurers are now able to leverage their more prominent role in the company to have an impact on the elements that contribute to an efficient financial supply chain and enable working capital levels to be reduced. Order-to-cash and purchase-to-pay, which were formerly on the edges of treasury’s horizon, primarily as a source of cash position and forecast data, are now within treasurers’ sphere of influence.
This leads to the question of what treasury really is in today’s environment. During the early days of the profession, treasurers’ role was clearly defined and was generally similar across companies. While treasury is still concerned with risk and liquidity, today’s treasury function has a far greater resemblance to the company whose needs it serves. Consequently, trade finance, eInvoicing, commercial payments, customer credit and collections, supplier, customer or distributor financing etc. will vary in importance for treasurers depending on the nature of the business. Whatever specific functions treasurers are engaged with, there are some trends in terms of how today’s treasurers operate, and the skills that are expected of them, compared with treasury 20 or 30 years ago.
Firstly, technology continues to play a major role in enabling today’s global treasury. From automating the tasks that used to be performed by an army of back office staff, to providing timely and accurate visibility over cash balances around the world, and communicating securely and instantaneously with bank counterparties, technology innovation has been a catalyst and essential component of treasurers’ ability to fulfil their role. The result is that treasurers need to be far more ‘tech savvy’ than their predecessors, a trend that is likely to continue in the future.
Secondly, while technology, connectivity, integration and global infrastructure projects offer substantial opportunities for achieving global liquidity and risk objectives, treasury needs the skills in managing large infrastructure projects, which it may have not had to develop in the past.
Thirdly, with treasurers now working more closely with the business, ‘people skills’ including negotiation, persuasion, presentation, understanding and working through differing concerns and priorities, are all increasingly important. Treasury cannot be seen as a ‘numbers’ profession, but very much a ‘people’ profession. This important development is still not recognised in treasury and finance qualifications, which are typically still concerned with ‘the numbers’ so treasurers need to consider how they will develop these skills both themselves and among their team members.
Finally, some finance activities are under treasurers’ direct control, such as cash management, FX risk management and financing, while others such as customer credit and collections or structured trade may be influenced by treasurers but not directly controlled by them. This has a significant impact on behaviour and the way that issues are communicated, with diplomacy and collaboration becoming essential skills for today’s treasurers.
These skills are likely to become ever more important as pressures on the financial supply chain continue to increase. For example, with emerging markets becoming increasingly important for sourcing suppliers and as new customer markets, the physical and financial supply chains are becoming increasingly stretched. Customer and supplier credit becomes more important, leading to a further increase in customer credit analysis and trade finance tools, and working capital is affected as shipping times and payment terms extend. Treasurers therefore need to focus on building efficient end-to-end processes on a global scale, releasing working capital and managing risk. Some of these elements will be under treasurers’ direct control, others will not, but CFOs are increasingly recognising the holistic nature of the financial supply chain and the need to co-ordinate activities at each stage.
The future holds other challenges too for treasurers. Regulatory changes such as Basel III are likely to increase the cost of capital and funding, and access to bank balance sheets may also be constrained. Consequently, treasurers need to look at finding new sources of liquidity, and leverage financial assets in the most efficient way possible. For the first time, we are seeing a price put on liquidity, which highlights the need for, and value of access to, global liquidity, as well as opening up opportunities for cash-rich companies, such as investing in their own supplier finance programmes to leverage higher investment rates than money market instruments may be able to offer. These new developments bring both challenge and opportunity. The most successful treasurers will be those who foster new technology and skill sets within their department, and take a holistic view of the financial supply chain, identifying and exploiting value at each stage to enhance the company’s liquidity and risk management objectives.
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