Published: August 01, 2010
In this interview with AkzoNobel, we complete the series in which we have explored various aspects of the treasury transformation project that has been inspired and guided by Group Treasurer, Peter van Rood. In this edition, Peter van Rood and Gerrit Willem Gramser describe how they have rationalised their transaction banking infrastructure and set the framework for enhancing the company’s financial efficiency.
Historically, AkzoNobel’s management and governance model has been largely decentralised. In addition, the company has been active in acquisition and dispersal or assets. This combination of a decentralised business culture and active portfolio management resulted in a largely unplanned bank account infrastructure, with little central design or optimisation. Consequently, by 2007 we had around 130 cash management banks in 84 countries, with over 2,000 bank accounts and around 20 cash pools, with more than one per country in some cases, even in open economies where cash can be readily centralised.
There were two key factors that inspired us to rationalise our cash management infrastructure. Firstly, when we initiated the treasury transformation project in 2007, we recognised that the transaction banking infrastructure would be one of the basic building blocks of a successful strategy. Secondly, the ICI acquisition in 2008 brought a large number of new bank accounts and bank relatonships into the group.
We had three key objectives:
Firstly, to increase the visibility of our cash;
Secondly, to improve our control over our cash; and
Thirdly, to enhance the efficiency of our cash management infrastructure.
We aimed to realise these objectives through a regional approach; as AkzoNobel has a significant retail element to its business, with small outlets selling products, we needed our banks to have a strong local presence in the countries in which we operate. While a global bank may have the capacity and technology, we needed also banks that were close to the local communities in which we operate, and could manage local payment instruments, including manual payments. Our intention was therefore to rationalise our cash management banks to a regional partner in each key market, which would increase the professionalism of execution, enable greater visibility and control over our cash, and be more cost-effective, as we would be in a position to negotiate better pricing based on volumes offered. We would also need an overlay structure to pool cash to the centre and improve our liquidity management.
[[[PAGE]]]
From L to R: Carey Lewandowski (TBI USA/Canada), Jessie Li (TBI China), Sophia Porcelli (TBI Asia), Gerrit Willem Gramser (Global), Lex Mulder (TBI Europe), Jose Eduardo Boe (TBI Latam)
We divided our global business into four regions: Europe; Latin America; North America and Asia. We decided to implement each region in turn, but following a similar approach in each case. The first step was to analyse our business requirements. It was vitally important to understand local processes and requirements in each country, the constraints and opportunities. These insights also formed the basis of our business case. This business case itself matured during the process, but at this stage, it already helped to focus the process on the relevant value drivers for the region at hand. Based on this analysis, we issued a regional specific Request For Proposal (RFP) to potential regional banks. This was followed by a ‘beauty parade’ where each shortlisted candidate showcased its capabilities and we could conduct initial pricing discussions. The final review also considered items such as balance sheet support and fit with our global bank relationship strategy and was validated with reference calls. This was a very important step in understanding the culture and business practices of the banks, in addition to their products and services. And it all resulted in the selection of a preferred bank.
It has become clear during our project that the motivation and attitude of the bank team (as well as the internal team) is paramount to success.
Few companies conduct an RFP process regularly, and therefore the in-house resources and experience to conduct this process with the discipline and rigour that it requires are often scarce. Consequently, we decided to work with PricewaterhouseCoopers’ specialist treasury team to ensure that the different projects use the same approach and benefit from the relevant external market experiences. This relationship has proved very successful. Not only have we gained considerably from their insights both at a global and regional level, but it has often been useful to gain an external perspective on the challenges and opportunities facing the company.
As a result of this process, we have appointed ING as our regional bank in Europe, Santander in Latin America, Bank of America in the USA and TD Bank in Canada. Where ING and TD Bank had extensive relationships with AkzoNobel prior to being rewarded the mandate, Santander and Bank of America did not. That the latter were nevertheless selected testifies to the fact that we were really after the best fit for our requirements and are prepared to make the change. We will shortly be announcing our bank provider in Asia as well, which will complete the selection of our bank partners for our global business.
We have four implementation teams of dedicated resources, one for each region, which involve other business functions as appropriate. This approach is already proving worthwhile, with the first two regions being implemented and two at the selection stage. We have a steering committee in each case, involving treasury, the business and the bank.
To accelerate the documentation process, we established an umbrella agreement with the primary legal arrangements, into which local agreements can then be inserted. This also enabled key terms to be standardised whilst then accommodating regional requirements. In some cases, our regional banks are working with partners to support individual countries, so these partner banks operate under the same conditions.
We have set quite aggressive timescales for our transaction banking infrastructure project. We are now live in Europe with ING and our payment factory in four countries, and have most entities in Europe linked to an overlay structure. This has been a major initiative, with more than 20% of group transactions flowing through these new systems and bank accounts. On going live, initial difficulties were quickly remedied and we now have a stable environment with excellent performance.
Inevitably the products, services and geographic coverage offered by the bank are important. In our case for example, ING has a partnership with SEB to cover the Nordic region, which proves to be successful. In addition, our overlay structure is provided by Bank Mendes Gans (BMG), a fully-owned subsidiary of ING. This combined offering has given us the ability to achieve our objectives, with different elements of the solution delivered in a highly integrated way.
It has become clear during our project that the motivation and attitude of the bank team (as well as the internal team) is paramount to success. The bank is a critical party between AkzoNobel and our suppliers and customers and therefore contributes significantly to our success, in addition to enabling us to realise our specific cash management objectives. The bank team also typically has more experience in delivering this type of project than its customers, so it is important that the right people are engaged, who can share their experiences and deliver additional value. The team from ING, and its partners SEB and BMG, have demonstrated this commitment and enthusiasm throughout the project so far, and we are very satisfied with the approach that they have taken. While the choice of bank may be important, it is individuals who ultimately deliver a project, and this has worked very well.[[[PAGE]]]
We are still in the midst of our transition process, but by 2011, we anticipate that we will have achieved a reduction in cash management banks from over 130 to fewer than 20 (which includes some local banks offering services in some countries, particularly closed economies) and a 50% reduction in the number of bank accounts. We expect this figure to be lower still in the future. Combined with our central payment factory in SAP (see TMI issue 185), this will bring significant process, control and visibility improvements.
The direct benefits are very appealing as well. In some coutries, we were able to save up to 70% on direct bank charges. And these are clean prices, as we did not fancy the cross-subsidy structures that some other banks offered, e.g., ‘If you give us all of your FX, you get the cash management for free...’.
The same is true for liquidity management. By implementing an auto-sweeping arrangement, we are able to centralise our cash more successfully and optimise liquidity by avoiding isolated pockets of ‘trapped’ or inaccessible cash.
The result of these improvements is that we will be able to enhance our capital structure. For example, we have large cash balances on our balance sheet today, whilst also maintaining a high debt position. In the future, we expect to be able to reduce levels of both cash and debt.
All in all, the direct and indirect savings on a global scale bring in millions of euros per year, which makes the business case smell like roses.
There are five key areas in which it may be useful to share our experiences:
1. It is important to understand the business fully before trying to define the requirements or consider potential solutions. While it is useful to understand the experiences of other corporates, their needs, constraints and opportunities may be different from your own.
2. While a partner bank needs to have the right product capabilities and geographic coverage, it is equally important that the bank team brings the necessary enthusiasm and commitment to the project. Consequently, when determining the right bank for cash management needs, you should consider the bank’s culture and how well the bank’s team works with the internal team.
3. A project of this nature requires sufficient internal resources to be successful, which may require appointing temporary or contract staff to free up employees for the project. While the bank or consultants can supplement internal resourcing, it is important that your own treasury people drive the project to ensure that your objectives are achieved and that you retain the experience gained.
4. It is important to understand not simply what business you do, but also where this business takes place. For example, the cash management needs, opportunities and constraints will differ in closed economies compared with those that permit a freer movement of cash.
5. You should not under-estimate entrenched local practices, not only regulatory constraints imposed externally, but perhaps more significantly, within the business. For example, a business unit may maintain a large number of banking relationships or accounts, and it can be difficult to convince them to make the changes required. Furthermore, inefficient business practices such as using faxes to make payments, or expensive local payment instruments to settle intercompany business, may be uneconomical but business units may be reluctant to change the processes on which they have relied for a long time. So change management is critical as well. And it is not only about introducing new ways of working. It is also about cleaning up the legacy structure.
We have been very well supported by Santander, ING and their partners, Bank of America, TD Bank, PricewaterhouseCoopers, and the individual team members, both individually and externally, and we look forward to future success as we roll out our project across the globe.
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 […]
