Published: September 01, 2012
GlaxoSmithKline (GSK) is one of the most respected corporations globally, combining innovation and excellence in pharmaceuticals, vaccines and consumer brands to improve the quality of life for people in every country. An essential way in which GSK is able to maximise its investment in research and development and continue pursuing its aim to eliminate malaria, is to be able to channel surplus cash from around the world to the parts of the group where it is needed the most, driving down the costs to end consumers by reducing the cost and overall levels of borrowing. In 2011, Group Treasury embarked on a cash and treasury optimisation project with very specific cost, risk and efficiency objectives. Initially, the project is focused on Europe, but this will ultimately be rolled out globally.
At GSK, we have a dynamic approach to cash and treasury management, and flex our business organisation according to the changing needs of the business. In the past, we had two treasury centres in London and Philadelphia. Since the appointment of a new CEO, and more recently CFO in April 2011, there has been a strong organisational focus on expanding the scope of treasury to centralise skills into a single centre of excellence, and optimising cash and risk management. We have now centralised our treasury activities in London, with five key areas of expertise: corporate finance; group treasury; cash management; pensions; and insurance.
Over the past few years, we have adopted a policy of one bank relationship per country, in order to avoid the proliferation of accounts and fragmented liquidity that often results from mergers and acquisitions. We had cash consolidation structures in place to provide treasury with visibility and daily control over liquidity in the UK, USA, Canada and Puerto Rico; however, we did not have physical or notional pooling arrangements in place in other regions and we relied on local management transferring cash to Treasury at the end of each day. Taking a more strategic approach to cash and liquidity management had been a treasury ambition for some years, but it was not until we had a change in senior management that there was sufficient motivation across the business to implement a more regional and ultimately global approach to cash management. Since this time, the project has developed significant momentum and progressed rapidly.
We identified a series of key objectives:
Based on the objectives we had identified, we received approval to appoint a specific project team that would enable us to implement our cash optimisation project more quickly without impacting on day-to-day operations. We decided to implement the project region by region, starting with Europe, building on the visibility and control of cash that we had already achieved in the UK.[[[PAGE]]]
The first step was to appoint a regional banking partner. Although we had identified a series of selection criteria within treasury, it was essential that we gained support from business units to appoint an alternative bank and to change the way that cash management was conducted.
We issued a request for proposal (RFP) for a European cash management and banking solution to several banks, and applied rigorous procurement techniques to scoring each bank’s capabilities and satisfaction of the criteria we had identified. We gave priority both to issues such as geographic coverage and scope of capability, and to the bank’s experience in delivering comparable projects for other corporates.
We made the decision to appoint Deutsche Bank as our European cash management bank based on the bank’s ability to meet our criteria.
Having selected a partner bank, we were able to embark on the project quite quickly as we had negotiated fees and legal documentation as part of the tender process. This was important for us as we knew that misunderstandings can frequently occur between the sales process and negotiation, so we were able to prevent this occurring and avoid unnecessary delays.
The project was started in late 2010/ early 2011, and we are now working with Deutsche Bank in all parts of Western Europe, with the exception of Ireland which will be completed this year. An overlay cash pool will be implemented in Central and Eastern Europe (CEE) by the end of 2012, to be followed by Asia Pacific and other regions. We now have a euro-denominated cash pool with Deutsche Bank, with a header account in London, with balances swept at the end of each day. This means that we do not hold euros outside the UK overnight, which is important to us from a risk mitigation perspective. We expect that implementing an overlay cash pool in CEE will represent a ‘quick win’, in that we will be able to manage liquidity more efficiently without initially changing the underlying account structures.
In parallel with our cash management project, we are undertaking a global ERP rollout to standardise processes, data and reporting across the business and enable a centralised view of information. Although having multiple projects taking place simultaneously resulted in some resourcing challenges and project dependencies, we were able to develop our in-house banking solution, including templates for intercompany funding and foreign exchange requests, as part of our ERP project.
We decided to rationalise our bank connectivity using SWIFTNet, of which GSK is a corporate member, connecting through a service bureau. This enabled us to standardise connectivity across the business, leveraging the same platform across multiple banks.
There are inevitably challenges encountered in every complex project. For example, it is not always easy to move subsidiaries from a point-to-point connection with their banks to a multi-bank channel such as SWIFT. Although connectivity may be standardised, the formats required are not. Consequently, we had to adapt existing ERP templates for each local payment instrument, which was often time-consuming and costly.
Another difficulty is convincing the business to participate in the in-house bank and use the ERP templates. This took some education and regular communication to demonstrate the cost and administrative benefits of cash pooling and in-house banking, and to maintain motivation for the project.
Finally, one of the difficult areas of a cash management project is to make sure that legacy bank accounts are closed. Failing to do this results in security and administration loopholes and means that the project will not fully achieve its objectives. This can be a hard graft at the end of the project, particularly if these accounts have been used for a particular purpose, such as tax payments, but it is an essential stage.
While a banking partner needs the right geographic reach and depth of solutions, there are other factors that contribute to a successful relationship, as we have found with Deutsche Bank. For example, the bank has provided excellent technical support to assist with bank connectivity and our ERP templates for the in-house bank, based on their experience with previous clients. The quality of the implementation manager is essential, as s/he acts as the interface between the bank and the company. We have been fortunate in having a very competent implementation manager, who has ensured that the project remains a priority for both teams.[[[PAGE]]]
Based on the project progress so far, we have automated our euro and multi-currency cash pooling, and centralised liquidity with a single bank in most countries in Europe. Our risk reduction objectives were very important, and we have successfully achieved these by achieving control over cash, and centralising cash outside the Eurozone.
We now have standard file formats that we are able to roll out globally, and the in-house bank is now live in four countries, reducing the number of external transactions for group funding and enabling us to manage our FX requirements more effectively. We are also moving further towards our ultimate goal of having one account per currency across GSK in the future.
We identified very specific cost saving targets when we embarked on this project, which we have achieved by reducing both our overall borrowing levels and bank charges. As we roll out our cash and liquidity management project globally, we anticipate total cost savings of £10m per year, which we are on course to achieving.[[[PAGE]]]
A project of this scale and diversity takes time and requires buy-in from a variety of different parties, so it is important to be realistic about how quickly results will be achieved. It is difficult to implement change in a large, multinational corporation such as GSK without dedicated resources, so the ability to appoint a specific team to this project has been a major success factor. It has also been useful to introduce templates for in-house banking activities to our business units, to facilitate the transition to in-house banking more easily. Although we have been a little later in introducing an optimised cash and liquidity management framework than some other companies, we benefit from the combined experience of previous implementations of similar projects, enabling us to reduce project risk, leverage technology expertise and accelerate our achievements.
In the future, we intend to incorporate all entities in the in-house bank to greatly simplify our FX management processes. By rolling out a global solution, we will also further simplify our bank account structures and reduce the total number of accounts. This will enable greater visibility and control over cash, and enhanced credit risk management.
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