Published: May 01, 2011
The chemicals sector has focused heavily on cash management, cost control and increased efficiency since the financial crisis to preserve margins and maximise working capital. Over the past year, the sector has experienced a significant recovery, not least due to growing demand from China and emerging markets. The focus on efficiency, control and effective use of cash has stood the industry in good stead to respond to this increased demand, and has enabled companies to invest in expansion and innovation. Furthermore, companies that have focused most on productivity have seen not only a significant growth in sales, but also a leap in profitability.
In 2008, world leading gases and engineering company Linde started to implement a high performance organisation (HPO) across the business, an integrated concept for sustainable process optimisation and increased productivity. This approach has already had a significant, measurable positive impact on the business, with a substantial increase in both sales and profitability. During 2010, the group achieved sales of EUR €12.87bn, an increase of 14.8%, with a 22.6% growth in net profits, largely due to the HPO initiative. The HPO concept remains pivotal to Linde’s culture across all its business functions, including finance and treasury, and also has a considerable influence on the company’s expectations of its business partners. In 2009, Linde mandated Citi as its cash management banking partner in Asia, a relationship which has since been extended to Europe, based on the bank’s ability to complement and contribute to its HPO ambitions.
In the following Q&A, Matthias Brinkschmidt, Head of Cash Management & Treasury Controlling, and Binod Patwari, Head of Finance & Control, South and South East Asia, Linde describe their experiences of implementing a new, enhanced cash management and banking organisation.
Although the HPO initiative was initiated at a group level, we recognised its value as a framework for simplification, rationalisation, standardisation, process efficiency and cost control in our cash and treasury management operations. In particular, we realised that we would ultimately be able to address the needs of our internal and external customer base more effectively. Since it was first introduced, the HPO concept has become integral to the DNA of the Linde Group and informs our priorities and decision-making.
Our project initially started in Asia, where we were conscious that our cash and treasury management strategy had become fragmented. In particular, we had different processes and technology in each country, with multiple bank relationships and a proliferation of bank accounts. In some respects, the origins of this multi-bank, multi-solution model had been the right one for Linde, as gas cannot be transported economically over long distances, so the business is effectively made up of a number of local markets. We also work with a wide spectrum of different customers in a variety of ways, from long-term contracts with large multinationals through to ad hoc sales to smaller businesses and consumers for goods such as gas cylinders and medical gases.
However, we recognised that while we needed to maintain a banking framework that would allow us to satisfy our banking and customer needs in each country, there were some processes, technology and banking synergies that could be achieved. Fee structures and documentation were different for each bank, and we lacked the ability to negotiate economies of scale. With disparate processes, technology and banking providers, we also lacked full visibility and control over cash. While the distinct regulatory conditions that exist in each country, particularly in emerging markets, cause some difficulty in accessing cash, we wanted a clear view of our cash position and funding priorities.[[[PAGE]]]
To address these challenges, we embarked on a project to rationalise, standardise and optimise our banking and cash management strategy, with a variety of key objectives:
We reviewed the banks with which we had an existing relationship, focusing on the core banks that are part of our loan syndicate. We considered a variety of factors including: the quality of our relationship; track record; references from comparable corporations; geographic coverage; local services to support the retail elements of our business in particular; competitiveness of pricing; willingness to grant sufficient working capital facilities, and ability to support the diversified business organisation at Linde. In addition to these credentials, we had to be confident in the quality and expertise of the team who would support us, not simply in the early days of the relationship, but in the long term.
We established target cost-savings in each country, including both external fees and internal processing costs.
Citi clearly met our criteria, but in addition, the team from Citi also recognised our HPO vision, demonstrated a commitment to our success and volunteered forward-looking technology solutions that would help us to meet our objectives. For example, we pioneered flexible XML-based interfaces between our electronic banking system and ERP, which has proved significant in enabling us to increase the efficiency of processes managed by our shared service centre in Manila. Furthermore, senior management from both Linde and Citi were actively engaged in the project which gave us comfort that the right resources from both sides would be available.
Essentially, it was key for us to be confident in a cash management bank that understood and was able to deliver on our objectives, and would be a valuable long- term partner to us. Our initial requirement was to support our cash management and banking needs across 10 countries in Asia, which we divided between our two chosen partner banks. This included both cross-border and local solutions, such as cheque collections in India, that Citi was able to provide.
The next stage in our HPO implementation from a cash management and banking perspective was to rationalise our banking infrastructure in central and eastern Europe (CEE). Based on our positive experiences with Citi in Asia, we reviewed the bank’s capabilities in the region and made the decision to extend the relationship into CEE.
It was important that we were able to measure our progress using objective means, so we established target cost-savings in each country, including both external fees and internal processing costs. We have achieved these targets in every country, and created considerable efficiency improvements.
For example, the interface between our electronic banking system and our ERP systems is now more efficient and supports a rich exchange of information, which has in turn proved to be an enabler for moving processes that were conducted locally into our shared service centre. We now have far greater visibility and control over cash and we are in a strong position to manage our working capital effectively.
We have been able to harmonise our bank documentation and fee structures across both banks that we mandated, with consistent service standards. As we needed to take into account local requirements in each country, we achieved this by establishing a framework agreement, with schedules for specific in-country requirements as necessary. Before this, many of these agreements had been conducted locally, with little central oversight, creating significant compliance issues.
While there was initially some resistance to the changes at a local level, conducting the project within the HPO framework was helpful in communicating why the changes were important and how they contributed to the overall success of the group. Furthermore, as we were able to demonstrate cost and efficiency improvements for each country, each local business unit could identify its own specific benefit.
The banking and cash management project has proved highly successful, and positions our business in Asia, and latterly in CEE, as best-in-class, with the highest standards in control, working capital management and process efficiency.[[[PAGE]]]
We need to spend time internally determining what our priorities should be, based on a realistic assessment of the potential improvements that could be achieved. Having done this, we will work with the relevant local finance teams to demonstrate the potential benefits are for them, as well as at a group level. At this stage, it is likely that our next focus region will be Latin America, as well as reviewing our structures in continental Europe to see how we can leverage new opportunities such as SEPA and SWIFT Corporate Access. We are currently setting up a shared service centre in Europe, so based on our experiences in Asia, there will be a variety of financial processes that we will seek to centralise.
There are a variety of factors that have contributed to the success of this project so far:
Firstly, we were fortunate that we could conduct our project within the HPO framework, as we have been able to secure senior management support and a commitment to providing the necessary resources to achieve our objectives. It has been equally important to be able to rely on a similar level of management commitment from Citi.
Communication is critical at all stages of the project, both within the business as well as with our external banking partners. To obtain people’s buy-in and enthusiasm, there needs to be honesty and openness about what we are trying to achieve, the reasons for it, and what the implications will be. There is inevitably resistance to change, so we took the time early on to identify where this was most likely to occur and focused our attentions there. This approach proved successful and we enjoyed a strong and beneficial collaboration with the local businesses. Group treasury is often a long way from the business in terms of geography, knowledge of the business needs, culture and regulatory environment, so it has been very positive for us to be able to establish a dialogue to ensure that both local and group-level needs are met. To achieve this, we appointed a local project co-ordinator to bridge the gaps and act as a positive catalyst between the local business and corporate treasury which proved very successful.
A project of this scale and complexity, with a variety of players with their own priorities, needs to be managed in a disciplined way. We defined individual responsibilities clearly, and outlined implementation steps at a detailed level. Strong leadership at both local and group levels was essential, promoting a culture of excellence and commitment to timely execution. We had regular steering committee meetings to monitor progress and remove roadblocks.
A large organisation brings together a wealth of experience and expertise, and it is important to foster, encourage and leverage this knowledge, and connect the relevant resources to benefit the project. This encourages project commitment, momentum, facilitates skills transfer and makes the best use of resources.Our banks are truly our partners in success, not simply suppliers of banking services. This is an important distinction to make, as it informs the way that we conduct our relationships. We are demanding but fair, not only to the banks that we mandated, but also those who we did not. Once we had completed the RFP process, we took the time to give detailed feedback to the banks that had been unsuccessful to explain our reasons. By doing so, the quality of banking services overall will ultimately benefit.
Finally, a project of this nature is not successful simply as a result of putting technology or processes into place. It was important for us to create an environment where we were encouraging people to share their experiences and expertise to help to shape the project, and the ongoing business processes that would ultimately contribute to a successful future.
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