On the Road to Treasury Transformation: How Far Have We Travelled?

by Jiro Okochi, Chief Executive Officer and Co-Founder, Reval

It’s now been three years since once mighty companies tumbled without cash, credit or liquidity. Today, a company should no longer be without its global cash position first thing in the morning. Bank and supplier credit risk should never again go unmonitored. Market exposures must be efficiently and accurately gathered with hedging strategies properly deployed. Liquidity forecasting should no longer be witchcraft, but an exact science. But as we face down the barrel of a European debt crisis, an uncertain global economic environment and geo political risk, it is worth examining how far companies have come in fulfilling the transformation of treasury that CFOs have called for, which will at long last make treasury the strategic linchpin to the business and health of the company.

Companies have certainly followed through with the natural reaction to hoard cash. According to Capital IQ data from 376 nonfinancial S&P 500 companies, or about 91% of the nonfinancial companies in the S&P 500, aggregate cash and short-term investment balances totaled $1.023 trillion by the end of Q1 2011. The Federal Reserve’s Flow of Funds report of September of 2011 shows $2.047 trillion cash being hoarded. One way to save cash is to squeeze out every penny profit by increasing productivity and efficiency. This did trigger a new buying cycle in treasury technology as companies are striving to improve business process in treasury with new technology, seeking better tools to gain better visibility into their cash and liquidity positions. In the U.S. and other progressive countries, treasury departments are turning to Software-as-a-Service solutions to gain the benefit of outsourced software and technology. So yes, some treasury departments have initiated change through system replacement, but many had antiquated systems to begin with and now had a budget to replace their old client server TMS.

In the U.S. and other progressive countries, treasury departments are turning to Software-as-a-Service solutions to gain the benefit of outsourced software and technology.

There are more reasons than the standard turn-over in treasury management systems to consider heading further down the road to full treasury transformation. The market volatilities in FX rates across the globe and the rollercoaster ride of commodities prices put the spotlight on companies who did not have the proper hedging strategies or, as in many instances around commodities were not hedging at all. Basic rolling hedging strategies were tested to the max as both exposures and hedges did not behave as expected. In times when stock prices soar and profits flow, hedging performance can be a rounding error. But in times of slim margins, every penny per share counts; yet, overall, there did not appear to be any noticeable new trends in hedging approach for 2011.

Certainly, the slew of regulatory changes in the market should be another driver for change in treasury. FAS 133/IAS 39 sparked systems purchases and hiring back in the early to mid-2000s. Dodd-Frank will do the same in the U.S. but in a more indirect way with non-financial corporations. Business conduct rules and margin requirements for un-cleared swaps will require companies to have better documentation (ISDAs, CSAs), confirmation processes, mark-to-market reconciliation and collateral management systems. Some of these changes should start making their way into regulation by the end of 2012, but overall seem low on the radar of many corporations.

While much of treasury transformation can be pegged to changes in systems and approaches to date, and can typically be measured by investment, one area that seems to still be lacking is investment in human capital. A 2010 AFP survey found that on average there were only 0.8 full time employees per $1 billion of revenue. While some of this can be offset by investment in improved treasury systems and automation, it’s still hard to understand how this can be so low. Most treasury departments do not have key redundancies in positions, and expertise in risk management is found in relatively few people, given the risk at stake.[[[PAGE]]]

My guess is that if we weren’t facing the current concerns in Europe and the global economic uncertainty, demonstrating that crises are ongoing and can hit at any time, companies would have gone back to their old ways. CFOs and treasurers who have not initiated any transformation or who met prior resistance now have an opportunity to push forward again. Unfortunately fear and uncertainty are big drivers for change, especially at the board level, and right now there are plenty of both to go around.

Jiro Okochi
Chief Executive Officer and Co-Founder, Reval

Jiro Okochi is CEO of Reval, a company he co-founded in 1999 to bring an Internet technology solution to the underserved market of corporate derivative end-users. Under his leadership, Reval introduced a true Software-as-a-Service solution, which has since evolved from a best-of-breed financial risk management offering to a next generation, all-in-one SaaS for enterprise treasury and risk management.

Bringing 25 years of experience to bear on vision to transform the way companies manage treasury and risk, Mr. Okochi led Reval through two market-changing acquisitions. While Reval’s SaaS has been recognized with several industry awards, Mr. Okochi himself was a 2010 Ernst & Young Metro New York Entrepreneur of the Year finalist and was named one of the 100 Most Influential People in Finance by Treasury & Risk magazine for a fourth time since 2003. His well-rounded perspective of corporate needs comes from his days serving the end-user community at major global banks, such as West LB, Deutsche Bank, DKB Financial Products (now part of Mizuho), and Security Pacific Bank (now part of Bank of America).

Today, he continues to help companies solve complex business issues, as a technology innovator, an advocating member on the U.S. Commodity Futures Trading Commission’s Global Markets Advisory Committee, and as an international author and speaker. His thought leadership extends across treasury management to derivative reform and accounting regulations under both FASB and IASB. In 2009 he testified on behalf of corporate derivative users before the U.S. Senate Agriculture Committee, and regularly participates in conferences for the Association of Financial Professionals, Association of Corporate Treasurers, International Association of Corporate Treasurers (China), Association of Corporate Treasurers (Singapore) and Acumen, among others, and at events with Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP.

Extending his advocacy beyond the corporate environment to the communities they serve, Mr. Okochi leads his company’s corporate responsibility program, Reval Cares, and sits on the boards of the non-profit organizations, Little Kids Rock and Be The Match®, a National Marrow Donor Program®. He is a graduate of the University of California at Berkeley, where he earned a Bachelor of Science in Genetics.