Published: January 01, 2000
It wasn’t all that long ago that the thought of outsourcing something as important as the treasury function of a large multinational organisation contradicted conventional wisdom. Why would a company decide to relinquish control of vital treasury functions, including tracking and directing the flow of precious capital through the organisation? After all, cash flow and liquidity, properly managed, are core to the financial well-being of an enterprise.
But times have changed. Today, companies operating in many locations and under different jurisdictions need access to a greater degree of local expertise. Regulatory pressures, scrutiny from boards and increased counterparty risk put even more pressure on treasury. This is the new normal. In this environment, treasury outsourcing may not only be the answer, but it may also be the fastest way to achieve treasury optimisation.
Business Process Outsourcing first appeared in the form of payment factories and the centralisation of accounts payable to take advantage of economies of scale and tap into best practices. It was easy to see how these functions could be automated and streamlined by a specialist without sacrificing control and the decision to move transaction-based activities to an external provider could be justified by cost savings that were easy to sell internally.
Today companies operating in many locations and under different jurisdictions need access to a greater degree of local expertise.
The debate, too, around treasury outsourcing has evolved. Now it encompasses benefits like operational control, cash optimisation and ‘best-practice’ risk management. The emergence of this dialogue is a reflection of the growing relevance of the treasury function and its increased responsibility with regard to corporate finance. This has been driven, in large part, by the continuing trend toward globalisation.
Adolfo Jimenez, Manager of International Finance with Campbell Soup Company, explains that his company has been outsourcing its day-to-day European treasury and cash management activities for years. Jimenez confirms that the initial driver of this strategy was all about cost reduction, particularly as they were operating in an environment where it was essential to continually add efficiency to the system. Now, however, Jimenez and Campbell’s have implemented new forms of outsourcing for additional advantage.
Processing efficiency is a very narrow benefit which a company can gain by outsourcing its treasury function. Jimenez, and others like him, are increasingly leading their organisations in the discussion on what can be outsourced and when.
Considering the extent to which treasury administration can be outsourced requires an open mind. The first thought is often to focus on the back-office components and operational items, but this misses the strategic picture and limits the realisable benefits of outsourcing. It pays to think more broadly. Treasurers should ask themselves: how can treasury align itself to the overall objectives of the company or will our growth strategy overburden our current treasury infrastructure and expertise rather than toiling with the administrative headaches of day-to-day execution?
A company’s decision to outsource begins with an open dialogue about these and other strategic questions. During that discussion it will become clear how the interplay between all the various treasury and corporate finance functions calls for a broader approach. Cash and liquidity management strategies, for example, also impact FX exposure. Repatriating capital could also impact how a company decides to fund an intercompany loan or expansion into a new market. [[[PAGE]]]
There are many different types of providers in the treasury outsourcing space – everything from generic Business Process Outsourcing to treasury specialists. Choosing to outsource a vital function such as treasury to a bank seems natural – banks by their nature are experts at managing confidential relationships and process treasury transactions in volumes daily; however, the true value of a bank provider will be its ability to integrate the client’s cash management structure with its outsource treasury expertise.
The ability to outsource the treasury function to a trusted and capable banking provider enables a company to take advantage of the integrated framework – innovative technologies, global footprint, local market expertise –without creating the integrated end-to-end solution and expertise in-house. This allows the company to concentrate on its core competencies and tap into the economies of scale and best practices afforded by an established fully integrated global bank.
So, what functions should large corporates seeking to achieve treasury optimisation consider outsourcing?
In the case of Campbell Soup Company, to ensure that it was employing the most effective treasury strategy to address its current treasury challenges, Jimenez led the evaluation of just such a holistic approach and conducted a thorough review of its complete treasury outsourcing arrangements.
For others that are selecting a provider, Jimenez recommends looking for a partner with the comprehensive global expertise and a treasury platform to deliver best practices across the board. “The relationship with the team is critical,” explains Jimenez, “and the more proactive and collaborative the relationship between the outsourcing provider and the corporation the more positive the experience.”
Outsourcing the treasury function is a significant decision not to be taken lightly, and there are traps and pitfalls to be avoided. For one, cost should not be the only driver in selecting a service provider. Yes, it’s important, but it’s better to choose a legitimate expert in the field that can do more than just automate transaction processes.
Another common error is setting out to replicate what is already in place. It’s better to step back and evaluate the overall goals and relationship between functions, and then implement best practices, not replicate existing practices.
Today's corporate treasurer is facing numerous new challenges that no one could have anticipated even a few short years ago.
Do not underestimate the degree of communication required between all the moving parts and all impacted stakeholders, especially when implementing large-scale changes and reconfiguring processes. An outsourcing provider that leverages the best technologies and offers web-based solutions to connect all parties to view and understand activity achieves ownership of the new model.
Finally, it can be a mistake to outsource to a provider who organises strictly along functional lines, such as liquidity, FX trading, or netting. This makes it difficult to bring about the richer benefits achieved when the outsourcing team is more closely aligned with the overall treasury strategy. [[[PAGE]]]
Today’s corporate treasurer is facing numerous new challenges that no one could have anticipated even a few short years ago. The last three years have illustrated acutely the need to manage liquidity and counterparty risk effectively. Increased currency volatility wreaks havoc with quarterly results, and a host of other challenges like the funding of subsidiary companies underscores the need to optimise internal treasury processes.
In the end, it’s best to take a more holistic approach to treasury outsourcing as opposed to parceling out singular processes. Although that might push you away from your immediate comfort zone, considering the wider spectrum of services from a provider with a comprehensive treasury platform will also open the door to a greater array of long-lasting benefits.
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