Published: September 01, 2013
The concept, role and profile of treasury have evolved immeasurably over recent years, and many treasurers have transformed their profile from a relatively isolated function within the business to a leading role in devising and delivering on the company’s strategic plans. Centralisation of treasury activities has often been key to this transformation. Many large multinational corporations centralised core functions such as liquidity and risk management some years ago, and are now looking at new ways of adding value. Others, particularly smaller companies, have embarked on centralisation initiatives more recently.
While the financial crisis has been a trigger for more recent centralisation projects, centralisation has been a trend for a number of years. Furthermore, the drivers and objectives of centralisation are often complex and multifaceted, as the participants in our Executive Panel in this Guide discuss.
Achieving visibility and control over liquidity and risk are typically treasurers’ primary centralisation objectives. Without a single, consistent view over balances, flows, exposures and future financial obligations, it is impossible for treasurers to manage the company’s liquidity requirements and mitigate risk exposures effectively.
Centralisation can also bring cost savings. If treasury is undertaken locally by each business unit, bank relationships, technology and expertise need to be established locally. By centralising treasury, multiple systems can be replaced with a single treasury technology infrastructure, reducing costs and maintenance requirements. Skills can be rationalised, with a greater emphasis on specialist treasury expertise as opposed to transaction processing, enabling treasury to contribute more proactively to business strategy. By centralising and streamlining bank relationships, greater economies of scale can be achieved, potentially reducing bank charges, bank connectivity can be simplified and the cost of managing bank relationships lowered.
Control and compliance is considerably easier as by centralising the treasury function, processes can be standardised across the business, allowing for more consistent controls and greater efficiency.
Championed by the initial ‘early adopters’, typically large multinational corporations, treasury centralisation is now a proven means of enhancing both financial and operational efficiency, adopted by a wide spectrum of companies across all industries, as Sandvik, Metsä, Grundfos and Paros’ experiences illustrate in this Guide. The trend has not stopped at liquidity and risk management, however, nor at large multinationals.
Firstly, treasurers and finance managers who have already demonstrated the benefits of centralisation are now seeking to extend these advantages to financial activities such as payables and receivables in order to optimise working capital, as our Executive Panel discussion in this Guide demonstrates.
Secondly, smaller companies’ treasury needs are becoming more complex as they expand their geographic footprint through organic growth, mergers and acquisitions. In many cases, the speed and nature of this growth has resulted in a fragmented approach to cash and treasury management. Consequently, these companies are now seeking to centralise liquidity and risk in order to leverage the same benefits as their larger peers.
Technology is a vital enabler, both for companies seeking to centralise cash, treasury and risk management activities for the first time, and those that are seeking to extend the benefits of centralisation further. The challenge for smaller companies embarking on a centralisation journey is that the technology tools on which larger companies have relied are often out of reach, with lower budgets and access to fewer resources. Consequently, there is growing demand for lower-cost, more convenient delivery mechanisms to facilitate centralisation and greater visibility and efficiency in cash, treasury and risk management. Newer technology, such as cloud-based architecture, is leading to the growth of ‘plug and play’ and self-service models are instrumental in achieving this, and we see considerable achievements already being made in these areas, with significant potential still to come.
It is not only smaller companies that are benefitting from these emerging technologies. Treasurers of all sizes of company that are extending centralisation into working capital functions such as payables and receivables are also seeking to do so more easily and cost-effectively. While in the past, many centralised treasury functions had to maintain considerable expertise in IT, technology innovation and simplified deployment models mean that treasurers are able to focus on managing business-critical financial decision-making rather than the processes and transactions that underpin them.[[[PAGE]]]
Although technology is evolving rapidly to meet a new generation of cash, treasury and risk management requirements, centralisation is not an easy process and there are no short cuts: once again, the experience of the treasurers represented on our Executive Panel discussion contained in this Guide reflects this. Different stakeholders will have varying objectives and constraints, and will often be concerned about a loss of autonomy, influence or resources. This complexity and diversity becomes even more apparent as centralisation projects extend further into the working capital cycle. For example, while payment factories have become prevalent amongst larger multinationals in particular, centralising collections is more challenging. In the past, technical and legal issues have hindered centralisation efforts, but in Europe these have been largely addressed through the introduction of the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD) that underpins it through a harmonised legal framework for payments and collections. Looking more broadly, closer alignment of clearing systems and formats, such as ISO 20022, are also helping to create synergies regionally and globally. However, internal issues often still remain, particularly commercial sensitivities about customer engagement and relationships, which need to be navigated carefully. Anneli Wallott, Global Head of Cash Flow Management at Sandvik discusses how the company has engaged in a highly effective centralisation campaign, and how both internal and external challenges have been overcome.
One of the primary outcomes of Sandvik’s project, and indeed many of the projects in which we have been engaged in recent years, is that treasury’s role has been transformed into a trusted business partner for the group, and a key contributor and enabler of business strategy. At Nordea, we are highly experienced in supporting this transformation, through the first steps towards treasury centralisation through to mature, highly experienced treasuries that are extending their influence into the working capital cycle. We also work closely with treasury technology providers that are at the forefront of a new era of solutions and services delivery. By doing so, our customers can leverage the benefits of centralisation both in treasury and beyond, achieve visibility and control over cash and risk, and deliver on strategic financial and operational efficiency objectives.
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