Published: November 01, 2011
Since the new Alitalia business was launched in 2009, the management team, combining both existing and new senior executives, has focused on repositioning strategy and modernising processes, creating synergies and efficiencies and streamlining the organisational structure. From a treasury perspective, we had already made progress towards transformation and modernisation, but the reorganisation acted as a catalyst for delivering a highly efficient, centralised treasury structure.
Consequently, we now have a re-engineered and automated treasury function. We have eight treasury personnel and we have focused heavily on centralising and rationalising bank relationships, cash flow, treasury processes and financial control reporting. For example, we have centralised the management of our six primary currencies, and ten of our banking relationships, which amounts to 90% of cash flow. This article outlines the treasury transformation at Alitalia, and the achievements so far.
I first became involved with Alitalia’s treasury in 2005 as a consultant, and therefore developed a detailed understanding of the challenges and opportunities that existed before taking on leadership of the treasury function. The bankruptcy and subsequent restructuring of the company was, in reality, a major catalyst for finance transformation, with a strong management appetite for enhancing operational and financial efficiency.
The reorganisation acted as a catalyst for delivering a highly efficient, centralised treasury structure.
There was a wide range of challenges that we sought to address, derived primarily from fragmentation of the treasury operation and a lack of automation. For example, we maintained hundreds of bank accounts globally. We had several separate treasury functions and foreign subsidiaries managed their cash and treasury management requirements independently, preventing cash surpluses being netted against deficits in other parts of the business and without reference to central treasury policies. From an operational perspective, we lacked a central treasury management system, leading to fragmentation of data and irregular, manual processes such as reconciliation. Payments were also conducted manually, with the potential for error or fraud. Similarly, approval authorities were dissipated across the business.
From a strategic point of view, these issues led to a variety of limitations. Costs were high due to the predominance of manual processes and replication of tasks. Data on which reporting was based lacked integrity, and it was impossible to gain a complete, up-to-date picture of the company’s cash and risk position.
Consequently, in 2005, we launched the Financial Process Optimisation (FPO) programme which defined the objectives, tasks and timescales for creating a new treasury function. This programme comprised five main project areas:
Having benchmarked our treasury activities against other airlines, there was scope for improvement in our performance ratios. We recognised that in a highly competitive environment with narrow margins, it was important to enhance our performance to improve our competitive advantage.[[[PAGE]]]
The bankruptcy process in late 2008 and subsequent incorporation of the new Alitalia was a further catalyst for change and transformation. Across these five project areas, we aimed to create value through operational and financial efficiency. The transformation affected every aspect of treasury, including strategy and policy, processes, technology and staffing. We first focused on the tasks that would have the biggest initial impact, and after that, we could restructure our processes, systems and banking relationships. We therefore embarked on the following key initiatives:
As a result of these initiatives, we achieved a highly centralised treasury infrastructure. We closed our local Italian treasury centres, and centralised cash management in Italy using cash pools. We also centralised credit card acquiring and collections, and streamlined our cash flow categories to support more accurate, consistent reporting in SAP. For our foreign entities, we also centralised card acquiring and collections to the greatest degree possible, migrated cash and treasury management activities to Italy and concentrated cash flow through both intercompany netting and cash pooling. We took the opportunity to rationalise and enhance other key treasury and cash management processes such as payments.
Only four months after the corporate restructuring, we had a streamlined group of banks.
To centralise cash flow effectively we needed to rationalise our banking relationships. We have 40 branches and 19 subsidiaries within the Alitalia Group, most of which worked with a local bank, resulting in lots of bank relationships that were impossible for treasury to manage, and both cash and information were highly fragmented. We therefore reviewed all of our banks in terms of service quality, cost, geographic coverage, technology and information, and implementation/migration support. We then sought to appoint one bank in each region.
By March 2009, only four months after the corporate restructuring, we had a streamlined group of banks, with improved service, lower costs and greater visibility over cash. Before embarking on the FPO project, nearly 70% of financial flows took place at a local level, with treasury managing barely more than 30%. Today, treasury has control of around 90% of the Group’s financial flows (in terms of volume).
Ensuring that card acquiring is as cost-effective as possible is critical for an airline with around 50% of sales (approximately €2bn) derived from debit and credit card purchases. Consequently, even a very small improvement in fees or payment terms can have a major financial impact. Before embarking on the FPO project, we had tens of card acquirers, which made it very difficult to achieve economies of scale or to manage relationships proactively. So we made the decision to appoint a single card acquirer across the Group. This in turn has created significant cost efficiencies, enabled us to standardise processes and reporting, and led to a far better relationship with the card acquirer.[[[PAGE]]]
From a central treasury perspective, it is extremely important to have rapid access to a consolidated and reliable cash position and forecast. This was a major area of focus, particularly to remove replication across different business units and departments, and to ensure greater consistency and improve cash control. For example, different units of the Group were using the same data to build reports, which was inefficient and lacked integrity. Therefore we worked with senior management to put together a suite of management reports and then defined the relevant processes to produce them.
We reviewed the old model and removed fragmented responsibility from across the business: one office is now responsible for sourcing all the relevant data and producing financial management reports and key data at scheduled times. This has already been a major step in reducing the overall workload required to produce reports, whilst ensuring greater integrity, completeness and timeliness of reports. The next step was to integrate SAP with a data warehouse so we were able to retrieve data from across the business automatically and automate the reporting process.
It was very important during the FPO programme that our investment was kept to minimum, particularly due to the corporate restructuring that was taking place. We therefore made the decision to leverage our existing SAP infrastructure to support our treasury activities, supported by a variety of spreadsheet downloads, we did not add to our systems infrastructure. We now have all of our transaction management in SAP, together with in-house banking, cash management and liquidity planning tools. We have also integrated SAP with our banks and with our internal subsidiaries. The result of this has been a dramatic improvement in the automation of transaction processing, visibility and control over data, and more streamlined and sophisticated decision-making. In the future, we intend to enhance our treasury technology infrastructure further, which will potentially include SWIFT connectivity which we are considering as part of a SEPA migration.
The FPO project required not only a new approach to processes, technology and decision-making, but also the skills that we maintained within the treasury department. Of the original team, we retained three senior treasury professionals, and employed graduates with great flexibility and team-working capabilities who initially lacked treasury experience, but quickly built up the skills and expertise that we needed. We now have a team of eight people, seven of whom joined as part of, or subsequent to the FPO project. During this period, it was very valuable to leverage new ideas and new ways of doing things, and with new personnel, it was easy to establish a fresh and re-energised treasury culture.
The FPO project has resulted in both operational and strategic benefits. By concentrating our cash and centralising the treasury function, we now have far greater control over cash, and our cash flow forecasting process has more integrity. Cash and risk information on which decisions are made are more reliable and timely and transaction processing is more efficient, with greater integration between internal and external systems. By concentrating cash and managing intercompany flows more effectively, we reduced the need for external borrowing, and can leverage investment opportunities. We now have fewer banking partners, but these relationships are stronger and deliver greater benefits, with the potential to create economies of scale. These activities are all managed by a highly professional, focused treasury team, with a focus on constant business improvement.
Alitalia has been through a radical transformation, both financially and culturally, in a relatively short period of time. Based on this journey, there are a variety of experiences that we have had from which others embarking on a similar transformation may benefit. As a starting point, benchmarking the treasury function against similar companies is very valuable in establishing where the priorities should be and what developments are likely to yield the greatest benefit. It is also important to take a long-term view. It can take months or even years to deliver major enhancements, by which time the business and market environment may have changed. The vision needs to be broad and flexible. It is difficult to maintain momentum over a long period of time, and resources are finite; consequently, it is essential to structure the project to prioritise activities that deliver ‘quick wins’ with rapid benefit to the business. This demonstrates credibility and makes it easier to justify longer-term initiatives where the value may be gradual or delivered late in the project.[[[PAGE]]]
It is also important to be realistic. Delivering a perfect scenario may not be cost-effective, so it can be worth compromising on some details. Furthermore, due to different financial and regulatory environments that exist around the world, and consequent variations in banking services that are available, centralising 100% of cash is rarely achievable for a business operating globally. Therefore, it is worth focusing on what is realistically achievable rather than spending excessive time and resources trying to centralise the last few percentages. However, the results of cash concentration can still be outstanding.
It is also likely that no bank can fulfil every requirement in every region. Consequently, a single global bank is probably not a realistic objective, whereas a small panel of banks that cover their region of expertise is entirely achievable. A regional banking approach also allows treasury more leverage over its banks compared with a single bank, where the opposite applies, and it is difficult to change banks should the need arise. The relationship with partner banks is essential, but neither party should be complacent, with costs and service levels reviewed and benchmarked regularly to ensure that the company is receiving the optimum level of service.
Although we have largely completed our FPO project and achieved our objectives, we are constantly seeking new opportunities for improvement and ways to both manage and anticipate our changing business needs and market evolutions. Looking ahead, for example, we have plans in place to implement the new SEPA Credit Transfers to further reduce the costs of payments in Europe. This may also include a bank connectivity project leveraging SWIFTNet. We are also seeking centralised card acquirers for our business in Latin America, Africa and Asia.
Treasury at Alitalia has changed unrecognisably over a relatively short period of time. We have moved from a decentralised culture with general treasury resourcing to a centralised panel of treasury specialists. This has benefited the business immeasurably, with greater integrity and visibility over data, a better ability to define and deliver on a competitive treasury strategy and position the business for future growth.
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 […]
