Published: October 01, 2014
The role and responsibilities of treasury beyond the departmental wall have been transformed since the financial crisis. The crisis gave textbook concepts like counterparty, systemic and liquidity risk a real face and put them – and therefore the critical role of treasury – into the spotlight.
The direct crisis management actions that treasurers took in the months after the crisis have now been replaced with a focus on long-term solutions, transforming the treasurers’ role further.
Treasurers are taking on more responsibility through effective business partnering outside their department, and many now have a role in working capital management, operational payment processing and commodity risk management. We now see treasurers exploring their expanding role in core business, both centrally and regionally, and thinking about its implications.
This summer, we conducted an in-depth survey with 110 treasury teams around the world. The results show a sharp contrast to our last survey in 2010 and clearly illustrate the impact of the aftermath of the 2008 financial crisis and how it has changed treasury for years to come. While our survey in 2010 highlighted that many treasurers were still dealing with the crisis itself, we now see treasurers working on sustainable solutions emerging from the stepped up demands and constraints set directly or indirectly by internal and external stakeholders (Figure 1).
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Arguably, the biggest claim on today’s treasury agenda is made by senior management. We live in a more risky and volatile world and senior management is held more accountable than ever by shareholders and society for the profitability, ethics and sustainability of their companies. As a result, they demand more frequent, detailed, flexible and accurate information on cash, cash-flow and financial exposures from treasury to support decision making and stakeholder management. This places pressure on the treasurer to free up resource, build capabilities and use systems to enable efficient processing.
Senior management is also pruning the company’s business portfolios and requires treasury to be able to easily integrate new business and carve out existing business. As a result, treasury teams need to be agile and adapt to new demands, often in new or unknown markets.
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C-level typically has a relative higher priority on non-traditional treasury topics than treasurers (Figure 2). Tax issues, working capital management and commodities rank higher with the CFO than with the treasurer but may point to specific roles and responsibilities.[[[PAGE]]]
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This discrepancy in prioritisation may indicate that the C-level is happy to accept that departmental processes are up and running, but believe that treasury does not exist in isolation. Funding constraints and increased funding costs make a more efficient use of cash generation by core business a viable alternative that requires further exploration. It may also signal that CFOs believe that tax and commodity related exposures are less well understood and that working capital across organisations is less effectively managed, leading boards wanting treasurers and other related functions to become more engaged.
Typically, there is no readily available implementation roadmap attached to the increased demands and priorities of C-level. Treasurers may see this discrepancy in prioritisation as an encouragement to develop a revised target operating model that best addresses these concerns and complements the business agenda.
Another pressure point on treasury originates in banking relationships. Since the financial crisis, banks have become more risk averse and regulations (such as Basel III and Mifid2) have restricted the lending capacity of banks and increased the cost of traditional bank lending. This changed the mindset of bankers, creating a new dynamic and dependency between lending and fee earning flow business, with banks adopting separate client strategies. Today, the two banking product groups are closely linked with reciprocity more prominent in relationship discussions with clients. The principle of reciprocity is generally accepted by both bankers and treasurers.
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Corporate treasurers are using balanced score cards and benchmarking reports for evaluating bank performances, albeit only on an ad-hoc basis (Figure 4). Our survey suggests that there is a variety of methods used and many treasurers have difficulties benchmarking fees and performance.
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Apart from the decision on allocation of banking business, treasurers who have to secure access to funding will need to demonstrate the ability to allocate fee business flexibly to their banking partners of choice. Agile, multibank technology controlled centrally is pivotal to such strategy. Figure 5 demonstrates that participation in lending is generally seen as a ticket to fee earning (ancillary) business. Our survey suggests that treasurers are aware of the reciprocity game and use cash management, FX and other fee product requirements as a bargaining chip in negotiations on loans and concentrated to the extent feasible with primary banks. However, this trend does not appear to be the case for cash management business. Our results show that organisations have, on average, 19 secondary banks including local banking partners that fill the local service voids in the footprint of primary banks. Treasurers also highlight that closing out obsolete local bank accounts at secondary levels is easier said than done.
Treasurers respond by redefining treasury as an enterprise-wide process as opposed to a department at head office. In response to the pressure from senior management and the tighter funding markets, treasury is increasingly reaching out to the operations to establish effective business partnerships in an attempt to get a grip on cash, cash-flow and financial risks in order to meet the reporting requirements of C-level.[[[PAGE]]]
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Our results indicate that the main priorities for the treasurer are no different than in 2010 (Figure 6). However, the one notable difference is the more prominent focus on cash-flow forecasting (in 2010 fewer than 10% mentioned it and ranked it in 8th place). The cash management agenda is no longer driven by liquidity concerns alone. Treasurers are now coming to grips with a multi-bank reality, and are working on structural and efficient solutions aimed at improving treasury.
Implementing sustainable solutions is now the main focus. Treasurers have, on average, secured a substantially larger budget to increase the size of their teams and improve operational performance in areas such as funding, control, technology and reporting.
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Treasury’s involvement in working capital management can be explained by the need for 100% cash visibility and optimising cash-flow. However, attempts to implement supply chain finance solutions as an alternative source of funding are equally important. Supply chain finance solutions typically require additional discipline of financial operations and shared services in order to be effective. The operational issues encountered may partly explain why the use of collateralised alternative funding such as vendor financing and commodity finance solutions may have doubled since 2010, but is still low at 20% of all respondents (Figure 8). Banks are increasingly establishing and rolling out new products in this space, to meet the demand of organisations to improve working capital
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Sustainable solutions that treasurers are working on can be characterised by flexible integration of business systems and standardised integration with external (business) partners. While treasurers are assuming responsibilities beyond the department’s walls, they are still facing challenges in establishing their influence and authority in areas such as working capital, operational risk management and commodity risk management.[[[PAGE]]]
This expansion of responsibilities brings the treasurer in conflict with other business and finance functions. No matter how obvious the involvement of treasury in working capital, commodity risk and supply chain risk management may seem, the involvement - not to say primacy - of treasury is not clearly established. In all these areas, other functions (finance, business and procurement) are equally, if not more, involved (see Figure 9).
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The implementation of an in-house bank and payment factory is a less invasive strategy to obtaining 100% cash visibility and grip on cash-flow. Figure 10 shows the increased popularity of centralised structures with a view to achieving this objective.
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By doing so, treasury creates a bank communication hub that can be the bridge head for deeper involvement in working capital management. Whilst these solutions have been around for some time, and treasury is the obvious beneficiary, quite a few treasurers challenge the need for these operational functions to be part of their department. Outsourcing the IHB operations to a shared service centre is on the agenda of most treasury run in-house banks.
The increased involvement of treasury in processes beyond the department’s wall inevitably causes friction with other business functions. Revision of existing operating models is a necessity for which treasurers would need executive sponsorship. Any new operating model should be based on the principle that treasury is an enterprise wide process rather than a department at head office. It requires a fresh look at responsibilities and accountability for the processes involved to establish an agile model, which can adapt quickly to the changing business environment. An update of responsibilities may also trigger changes in functional profiles of the functions affected. At the same time KPIs and incentives need to be updated and reallocated.
This new operating model makes the treasurer first and foremost a process director instead of a departmental manager. Their prime objectives are to optimise cash-flow and manage the financial impact of conducting core business. Treasurers should organise payment processes, collection and funding flows efficiently and mine cash-flow and exposure data from source systems to create the treasury reporting that both they and C-level requires.
The definition of treasury as an enterprise wide process also has implications for treasury technology. As treasury integrates into key business processes such as payments, collections and (procurement of) commodities, its systems will be part of the IT ecosystem strategy. This implies that treasurers must partner with corporate IT. Consequently the procurement of treasury solutions will be that of a key IT solution and vendors will be challenged more on vendor sustainability, their product roadmap and transparency of their development agenda.[[[PAGE]]]
It’s clear that the transformation of treasury isn’t over yet. Treasurers proved their worth during the financial crisis and the years of uncertainty following it, showing the many opportunities to add value. As a result, ‘traditional’ treasury responsibilities have been embedded at all levels of the organisation. This has diverted treasury’s focus away from the department itself. Today, we see a corporate treasury profession that’s maturing and consolidating its role as the custodian of financial and liquidity risk management. The hunger by senior executives for more accurate and timely information means that treasurers now have a stronger voice and are seen as crucial partners to the business – and key players in its future success.
Find out more about PwC's global corporate treasury survey here >>
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