Published: September 01, 2013
Salvatore Ferragamo S.p.A. is one of the world’s most prestigious brands with a commitment to quality and integrity that extends throughout every stage of its supply chain, from the sourcing of materials and manufacturing inputs to the point of sale. This same commitment extends to Ferragamo’s internal processes, such as cash and treasury management. In this article, Federico Focardi, Group Finance Director at Ferragamo, discusses how the company has leveraged its SEPA migration project to embark on a transformation project, including the appointment of a global cash management bank and the centralisation of payments through a highly efficient payments factory.
We have around 32 legal entities that have relationships with suppliers, each of which has historically been responsible for its own payments. We recognised that this approach was leading to some inefficiencies. In particular, it was difficult to standardise processes and controls in each country, given fragmented bank relationships and technology systems. Payment approvals were also cumbersome, and often required senior management time to engage in manually-intensive processes, particularly when multiple banking systems were involved.
The introduction of SEPA and the obligation to migrate to the new payment instruments provided the opportunity to address these challenges by centralising payments and implementing efficient, standardised processes. We made the decision to implement a payments factory as a related initiative to our SEPA migration – not only would this enable us to improve efficiency and reduce costs associated with payment processes, but it would also help us to manage liquidity more effectively. The payments factory would operate using a ‘payments on behalf of’ (POBO) model, where a single entity (the mother company) makes payments on behalf of European subsidiaries, supported by the correspondent recording on intercompany accounts. We would also benefit from a reduction in the number of bank accounts required, as we would need only one account per currency, and leverage ISO 20022 formats – which enable the entity on whose behalf a payment is being made to be recorded on a payment and passed through to the beneficiary to assist with reconciliation.
The appointment of a cash management bank that would support both SEPA compliance and our wider payments transformation objectives – initially in the euro area, and ultimately on a global basis – was a key requirement. We approached a variety of banks to assess the resilience of their payments processing, strength of their cash management solutions and the depth of market knowledge. Following a rigorous process, we made the decision to appoint Deutsche Bank. In particular, we were impressed by the quality of Deutsche Bank’s advisory approach to, as well as the Bank’s technical support in areas such as XML ISO 20022 implementation, payment centralisation and SAP integration. Deutsche Bank also had a proven track record of working with comparable corporations on a global basis.
We have already implemented SAP’s In-House Cash module, which allows us to manage the inflow and outflow of payments, and used as the basis for the payments factory. This module enables us to streamline and automate the external financial flows – as well as the associated intercompany transactions when making payments on behalf of group entities– and is now closely integrated with Deutsche Bank’s web-based electronic banking solution.
Group subsidiaries have responded very positively to the introduction of the payments factory. In the past, not only did local finance teams need to input payments information into SAP, but they also needed to manage – and navigate – local banking relationships and systems. Under the new arrangements, group companies simply need to input or upload payments into SAP, with no further need for them to maintain local systems and bank relationships. As all payments-related information is held in a single system, there is also no need to manage different user security rights and passwords. At the same time, users have complete access to payments-related information, including the ability to drill down into payment details to access a complete set of information in SAP. Critical to the success of the project was the support of all the functions involved, in particular the administration and IT department.[[[PAGE]]]
Click image to enlarge
[[[PAGE]]]
We have now completed the first phase of implementation – including the centralisation of payments for all seven companies in the euro area, a single point of access to bank account information for our European entities, and migration to SEPA Credit Transfers (SCT) using XML ISO 20022 formats.
The next step is to roll out the payments factory to our businesses in the UK and Switzerland (started in September 2013), culminating in the inclusion of all our global European entities and centralised FX payments.
The ability to manage foreign cross-currency payments and receivables has become an integral part of our organisation’s day-to-day operations. Using Deutsche Bank’s innovative, cross-border and cross-currency payments platform, FX4Cash, to execute our foreign currency payments directly out of a euro account was critical, and also allows us to maintain only those currency accounts that are really needed. Thanks to FX4Cash, we will be able to increase the efficiency of our FX dealings, by streamlining the process of settlement and improving transparency for all FX conversions, even in non-deliverable currencies. We will achieve significant costs savings through the consolidation of accounts, elimination of idle local cash balances and aggregation of FX trades.
In some regions, such as China, there are both regulatory and demographic complexities, so we will rely heavily on Deutsche Bank’s market expertise and international connections to achieve our operational and financial objectives, whilst observing the relevant regulatory requirements.
Although there were inevitably some challenges, as expected with a project of this scale and complexity, these were overcome quickly through the efforts of our internal team and Deutsche Bank. For example, the Bank has been able to offer significant expertise on ISO 20022 formats, shared experiences on successful SEPA migration and advice on best practices.
We have already obtained a variety of benefits from our payments factory. While business processes were fragmented and inconsistent in the past, necessitating significant manual intervention, we have now achieved streamlined, automated processes based on a single technology platform, reducing costs and risk of error, and in addition strengthening the authorisation monitoring process. We have two payment cycles each month and only a few urgent payments and some local payments such as tax payments that cannot be centralised, which fall outside of these cycles. We have a single banking system (db-direct internet) providing a single point of access for account balance and transaction information, which will include all our accounts globally as we roll out our project from Europe into the Americas and Asia Pacific.
With centralised cash and payments processes across the Eurozone, we have reduced our bank costs by rationalising bank relationships and accounts, and leveraging SEPA payment instruments. SEPA migration, appointing a cash management bank and centralising our supplier payments were the first steps in our transformation process. These steps form the basis of a wider programme of cash and treasury transformation. For example, in addition to rolling out our payments factory globally, we will be seeking to optimise our cash pooling arrangements. Now that we are exchanging XML ISO 20022 messages for our SEPA payments, we can leverage the same format not only for payments in other regions, but also for centralised collections. For example, we are looking to centralise collections for the euro area based on XML formats on a ‘collection on behalf of’ (COBO) basis, which will permit greater efficiency, control over collections and simplified cash management arrangements.
It is unlikely that we would have been in a position to justify the budget and resource requirement to embark on this project had it not been for SEPA. SEPA is an opportunity and a catalyst for change – not simply a compliance issue – and we have already obtained considerable operational and financial advantages, including both direct cost savings and an enhanced ability to manage cash and working capital effectively.
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 […]
