Published: March 01, 2012
At the start of 2011, Merck embarked on a project to rationalise its banking partners and streamline its cash management activities. Despite ambitious targets and an aggressive timeline, Merck’s treasury has achieved impressive results within nine months of embarking on the initial planning stages. This article, based on Jörg Bermüller’s presentation at BNP Paribas’ Cash Management University 2011, outlines how this was realised.
Merck Financial Services GmbH, which is managed by Merck’s Group Treasury, acts as an in-house bank on behalf of all 242 of the group’s legal entities in 69 countries. In treasury, we process 650,000 external payments each year with a value of €71.5bn. We manage 1,180 intercompany accounts in 33 currencies, and over half a million internal invoices. From an external cash management perspective, we operate 16 cash pools in 14 currencies, which include 150 legal entities in 35 countries.
Our Cash Management function for the in-house bank comprises only 10 professionals, so in order to manage our complex, high-volume cash and risk management activities effectively, our sophisticated technology infrastructure based on SunGard’s AvantGard Quantum is crucial. This is integrated with Siemens’ payment tool finavigate® as well as our banks’ cash management systems for backup purposes. We also integrate Quantum with 360T for online trading, Misys for confirmation matching and our ERP environment for accounting and group reporting.
Merck has embarked on a number of strategic mergers, acquisitions and partnerships in recent years, including acquiring Serono shares in 2006 and the purchase of Millipore in 2010. Today, the Merck Group is a chemical and pharmaceutical company based in Darmstadt, organised in four divisions: Merck Serono, Consumer Health Care, Merck Millipore and Performance Materials, which together employ more than 40,000 people. As a result of these mergers and acquisitions, we were left with a complex and fragmented cash and treasury management environment, with too many cash pools and disparate treasury processes, reducing efficiency from a cash and risk management, and operational perspective. Consequently, we launched a project to enhance cash management efficiency at Merck, not simply by putting in place an overlay or new cash pools, but by redesigning our banking and cash management strategy.
Four currencies: EUR; GBP; USD and CHF account for around 70% of our business, so we decided to focus on these currencies initially. Our objectives were as follows:
We wanted to implement zero-balancing cash pools for each currency, as opposed to notional and/or cross-currency solutions, so we could then manage each currency balance ourselves. Our aim was to appoint one banking partner per currency at a global level, with local payment capabilities as appropriate.[[[PAGE]]]
Having defined the project, we put in place an aggressive timescale for realising our objectives (figure 1) that involved six months of planning and three months of implementation, with a further short period for closing legacy accounts. Our banks were surprised not only by the speed with which we were planning to implement the project, but also by the ‘big bang’ approach that we decided to take. Many companies choose to implement a project of this nature currency by currency or region by region; however, we wanted to create rapid synergies and use our resources as efficiently as possible, so we decided it was better to implement the project in its entirety.
Project implementation
To achieve our business objectives within our aggressive timeline, we divided the project into a series of phases, some of which were inevitably more challenging than others.
Data collection
The first phase was to collate all the data from our subsidiaries in order that we had everything we needed to compile the request for proposal (RFP). We sent standard forms to each entity covering a wide range of information from account information, systems and integration, and payment requirements. By using standard forms, we could ensure that we had a consistent level of detail across every entity. We then chased proactively in order to meet our timetable. This process demonstrated to us firstly that you can never be detailed enough in the level of information that is pulled together; secondly all the data had to be validated to ensure that we were starting the project with complete and accurate information. Having collated the information we required from across the business, we were able to issue an RFP to the relevant banks.
Jörg Konrath, Merck’s Global Cash Management Relationship Manager at BNP Paribas, emphasises, “We worked with Merck to validate payment specificities in detail for each country to ensure completeness and accuracy and a common understanding. This is particularly important in countries such as France and Italy where local payment specificities such as LCR and RIBA exist.”
Request for proposal (RFP)
We were very specific about our needs, and focused on the specificities of the business as opposed to seeking the ‘best’ bank per currency, which may not necessarily be the same. We found that the success of this step was based on requesting a comprehensive level of detail, which amounted to 18 pages and 150 questions! Even then, inevitably there was still some additional information that was outstanding.
We were stringent in the way that we asked banks to respond to our RFP. We gave clear guidance on the way that responses should be structured, in order to be able to compare banks easily. We did not accept vague answers such as ‘in some circumstances’ or ‘sometimes’ and stipulated that banks should request more information if they were uncertain how to respond. In situations where we received indistinct responses, we marked them with a zero score. We also made it clear to potential banks that an important criterion was the ability to achieve our project deadlines, assuming of course that Merck also provided the resources and completed tasks that were required of us.
Jörg Konrath emphasises, “BNP Paribas has an experienced team of RFP managers in order to reply to detailed questions in requests for proposals. The precision of our answers is key to avoid any misunderstanding or time-consuming inquiries. Furthermore, in order to achieve Merck’s project deadlines, BNP Paribas’ flexible and strong implementation team was able to reserve capacities for the ambitious time schedule even before Merck had confirmed its selection of banking partners”.
Having received the RFP responses, these needed to be reviewed and validated in detail. For example, while one bank might respond ‘yes’ to a requirement, another might say that it is not permitted by law. In these cases, we needed to research the correct position and score the responses accordingly.[[[PAGE]]]
Long- and short-listing banks
We invited 10 banks to participate in the RFP process, which represented the ‘champions’ league’ of the banking community. Two banks opted not to respond, so we had eight responses to review. We charted and weighted each requirement depending on the degree of importance (figure 2): for example, it was essential that MT940 messages (bank statement information) were received by 6:00 a.m. every day, as our shared service centre opens at that time. Similarly, issues such as the ability to support bank transaction codes for automatic reconciliation, the interface to finavigate and competitive payment cut off times were all considered critical. While issues such as pricing were important, we recognised that inefficient processes or ‘workarounds’ can lead to higher costs than the difference in external bank charges.
Click to view a larger version of Figure 2
Jörg Konrath points out that these factors are important capabilities offered by BNP Paribas, “Merck wanted to make sure from the beginning that its shared service centre would receive bank statements when it opens at 6:00 a.m. As a global bank, BNP Paribas was in a position to meet Merck’s expectations including delivering tailor-made solutions.”
In each category, we graded each bank as compliant, semi-compliant or non-compliant, and determined which banks to include in the beauty parade according to the total score.
Beauty contest
Based on the scorecard process, we invited three banks per currency to participate in a beauty contest. The USD beauty contest took place in the United States, while banks were invited to Germany for the remaining currencies. This involved a further 40 questions, 10 case studies and between eight and ten hours of meetings within a period of one week. The best banks were those that engaged the right cash management experts in the process so that questions could be answered straight away. It was also important to meet the implementation team so that we could be confident in the bank’s ability to meet our objectives within our timeline.
Jörg Konrath explains the bank’s approach: “BNP Paribas has significant implementation resources with a long-standing track record of setting up customer-specific, global cash management solutions, as in the case of Merck. As we were able to draw on these resources and experience, we were able to respond to Merck’s questions throughout the process, including during the beauty contest.”
Mandating a bank
Our final decision combined both objective criteria, such as the detailed conditions in our scorecards (figure 2) and ‘soft’ issues such as service levels, our past experience with the bank and dealing rates we had received in the past. We contacted reference customers, which was a very helpful part of the process as these companies were honest and realistic, even though we recognised that these may be ‘favoured’ clients. Our impression of the people we had met was also important, as a lack of confidence in the early stages was unlikely to translate into a positive working relationship later.
We made the decision to appoint three banks in total, across our four selected currencies. For USD, we divided United States and the rest of the world between two banks. We also appointed two banks for EUR. We were able to do so as we had asked for RFP responses on a country by country basis, and we recognised that banks had competitive advantages in particular countries from which we could benefit. We were very pleased to be able to appoint BNP Paribas as one of our two EUR banks, and as our primary CHF bank.
Jörg Konrath confirms, “BNP Paribas has expended considerable effort on developing its global reach and depth of capability in each country, which Merck recognised when selecting its cash management banking partners. The project has been a great success, because both BNP Paribas and Merck approached it as a true partnership, with open communication and a flexible approach to designing customised solutions to meet Merck’s needs precisely.”[[[PAGE]]]
As we were implementing three banks and four currencies simultaneously on a global basis, a disciplined approach to project management and co-ordination was critical. We had weekly (and at some points during the project, daily) calls across the team, including senior management, which were quickly documented with clear follow-up actions. We also agreed a system for immediate escalation if deadlines were not met, either by Merck or by the bank. This meant that there was detailed accountability and any bottlenecks that could have affected our ability to achieve our project timelines were resolved promptly.
Jörg Konrath, BNP Paribas agrees on the value of this approach, “Both teams worked hand in hand to achieve an ambitious three-month implementation. Call reports were produced within 24 hours of each weekly call to ensure that we shared common expectations.”
An additional step we took to facilitate our timetable was to use power of attorney authorities so treasury was able to sign legal documents on our subsidiaries’ behalf for a limited period. This led to a more rapid conclusion of the legal aspects of the project.
Having completed the implementation of all four currencies, we are now closing the remaining legacy accounts. This is never as easy as initially expected, particularly as there is frequently push-back from subsidiaries. However, we recognise that an efficient and streamlined bank account structure is essential for operational efficiency, control and transparency. We therefore expect that this process will be completed during the first quarter of 2012.
Following the implementation, we have now rationalised our banking partners from six banks to three, and reduced our cash pools from eleven to six (two for EUR and USD, and one each for CHF and GBP). We have also significantly reduced the total number of accounts, whilst increasing the number of Merck entities that are included in the cash pool. The project has therefore enabled us to increase our cash management efficiency considerably by concentrating larger cash balances, reducing cash fragmentation and ensuring that we can manage our credit risk effectively. Our operational processes have also been streamlined as we are working with fewer banking partners.
Going forward, we will be issuing RFPs for banking partners in our secondary regions such as Canada and Mexico where the volumes are lower. We will also investigate opportunities such as SWIFT Corporate Access, eBAM (electronic bank account management) and TWIST standards for bank services billing. These types of initiative will help us to enhance our operational efficiency even further, including improving transparency and control over bank connectivity, signatory management, and our ability to reconcile bank charges in a consistent fashion.[[[PAGE]]]
Jörg Konrath concludes, “BNP Paribas is proud to have participated in such an ambitious project with Merck over such a short timescale. We look forward to further developing our relationship to embrace initiatives such as eBAM and TWIST where BNP Paribas are pioneers, recognising the considerable interest amongst our corporate clients.”
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
