Published: January 01, 2012
As readers of TMI will be aware following the series of interviews with Peter van Rood, Corporate Director, Treasury, AkzoNobel during 2010, and the article in March 2011, the company embarked on a major cultural and business organisation transformation. From a treasury perspective, this involved taking the department from an operational function conducting payments to a strategic partner for the business, providing the financial efficiency and risk mitigation that positions the company for the next stage in its development.
Enhancing our cash management infrastructure was a key element of our treasury transformation project. Firstly, we recognised that the transaction banking infrastructure would be one of the cornerstones of a successful transformation. Secondly, the ICI acquisition in 2008 brought a large number of new bank accounts and bank relationships into the group. With over 120 cash management banks, we were experiencing considerable challenges in terms of visibility and access to cash, bank communications, and capital efficiency.
It is easy to describe concepts and ideal scenarios when considering how a global corporation can streamline and optimise its cash management. Rationalising banks and accounts, concentrating cash, centralising treasury and finance processes are all straightforward on paper, and/or in a model organisation, but the reality can be quite different. This article aims to address some of the practicalities of realising a vision in an imperfect world.
AkzoNobel is a company that has grown through acquisition, with business units located across the globe. Traditionally, we have had a highly decentralised business organisation and culture, with local business units taking their own business and finance decisions. This resulted in around 120 banking relationships externally, but just as significantly, we had 141 ERP systems in operation, 168 separate charts of accounts and 198 processing centres. It took nine days to produce our reports at the end of each financial period, with a non-competitive cost structure of our finance function.[[[PAGE]]]
Despite this highly fragmented environment, with a long-standing culture of decentralised processing and decision-making, our goal was to become best-in-class in our peer group, by supporting the business activities across the group, and enhancing financial and operational integrity. From a cash management perspective, our objectives were to increase the visibility of cash; to improve control over cash flow, and to enhance cash management efficiency.
To achieve this required us to review and revise every aspect of our technology, processes, banking relationships, collaboration with business units and the skills and culture within the team. Furthermore, in a decentralised organisation, it is important to remember that the finance community extends beyond the head office departments such as treasury, tax, investor relations etc., and involves everyone with functional accountability to the CFO, including all those working in financial control, accounting and transaction processing.
Within this context, we needed to establish a culture where customer focus, teamwork, innovation and a genuine ambition to add value to the organisation were paramount. From a treasury perspective, we recognised that one of the ways we could embrace, extend and perpetuate this culture was to become a leading example in people development so that as a department, we demonstrated the highest level of engagement, enthusiasm and ability. By being proud of our contribution and focusing on demonstrating value, we could share this professionalism and passion more widely across the business.
Although we have not yet completed the project to achieve all of these objectives fully, we have already made significant progress towards streamlining our internal and external cash management infrastructure, and rationalising bank accounts. One element of this has been to review and rationalise our bank relationships. Working with too large a panel of banking partners makes it difficult to concentrate cash, standardise communication and integration, and achieve economies of scale in pricing terms. However, we did not consider appointing a single global bank, as we needed banking partners that were close to the local communities in which we operate, and that could manage local payment instruments, including manual payments such as cheques. Therefore we decided to appoint one primary cash management bank in each region to increase the professionalism of execution, enable greater visibility and control over cash, and be more cost-effective. This bank would be the default bank for all cash-related activities in the region, and we would only appoint additional banks if our primary bank could not fulfil our requirements in a particular country.[[[PAGE]]]
Our overall liquidity management was to centralise cash into group treasury as far as possible through a global pooling infrastructure. However, one of the challenges that we have faced is the high proportion of our business in semi-open or closed economies, such as in Asia and Latin America. For example, we already generate around 25% of revenues in Asia, 11% in Latin America and 9% in emerging Europe, and we expect that revenues derived from fast-growing economies will increase to 50% within this decade. Therefore, devising a strategy for optimising cash management in the more complex and highly regulated markets was just as important as streamlining cash in the typically more straightforward Western European and North American economies.
We made the decision to group our countries of operation into three groups: open economies, closed economies and semi-open economies. For each group, we identified a series of objectives and strategies for achieving our visibility, control and cash efficiency goals. For example, in open economies in North America and Europe, we made the decision to implement zero-balancing structures wherever possible, which would be provided by our primary banking partners. In semi-open and closed economies, we needed to analyse the requirements of each business unit in detail, and work out what was feasible. For example, in countries with semi-open economies such as Mexico and Indonesia, we could net cash flows and conduct USD pooling, but we needed to explore in detail the wider opportunities that were available, and also to understand the balance sheet in each country in order to use corporate finance transactions such as dividends where these supported our cash management objectives.
While we already had a payment factory and in-house bank in place at AkzoNobel before embarking on the treasury transformation project, its scope was limited. As part of this project we have focused on rolling out the in-house bank, expanding the scope of our payments factory, standardising the cash application process and extending the shared services model to collections. This is based on a best-in-class SAP hub with SWIFT connectivity to our banks, using XML ISO 20022 and MT 101/940 formats where appropriate. We also achieve straight-through processing for transactions and revaluations with integration with our dealing portal and rates provider.
In the same way as our liquidity management decision-making, we had to establish different strategies depending on the regulatory environment in each country. For example, in open economies, we use the payments on behalf model, supported by the in-house bank. In closed economies, we use payment forwarding for accounts payable and receivables, again facilitated by the in-house bank.
Critical to the success of this infrastructure is effective connectivity and collaboration with our business units. Our transaction banking group worked closely with each business unit to understand their cash needs, analyse the balance sheet and identify where cash was located. The efforts and skills provided by this team have been key to success in achieving cash management efficiency in a decentralised business environment. In some cases, it was not easy to convince business units of the value of our approach, and of the benefits of working with group treasury as opposed to interacting directly with a local bank. In companies where there is a strong senior management directive to do this, this part of the process may be easier, but in our case, it was essential to demonstrate value.[[[PAGE]]]
The way in which treasury could deliver value was not always the same for each business unit. For example, in addition to lower costs and greater access to management information, an important benefit that we could offer was to reduce FX exposure, which is more important to some business units than others. For example, in Sweden, around 60% of the balance sheet is exposed to foreign exchange rates, so we could support the business through risk reduction and preservation of capital.
Another issue that the team had to address was how to integrate financial flows and information between treasury and each business unit’s ERP. By standardising integration formats, we were able to establish a single interface definition, which would remain consistent even if we changed banks.
However well-planned and well-documented the policies, procedures and project plans for a complex project of this nature, the right people are critical to success. It was not easy to obtain the skills we needed in this team as there are limited resources available in the market with the experience of implementing a global, streamlined cash management strategy, but it is vital to source the right skills. It is worth taking the time to use these skills effectively, to explore the business, challenge business practices, identify what is working and what needs to be reviewed. Benchmarking is an important part of this process. Although there are few comparable organisations, so it was difficult to benchmark our cash management activities in their entirety, we were still able to review specific matrices and business practices.
We are now moving towards the conclusion of the cash management transformation in North America, and we have migrated our existing banking business to our new regional banking partner. Although we started first in Europe, the process of moving away from legacy banks has proved more difficult. When we approached the project initially, we considered it to be primarily an IT project, such as connectivity with banks and business units. In reality, it is as much a people project as a technology project, and we have been far more successful in our dealings with business units by taking the time to understand their needs and support the integration process actively, as opposed to expecting them to follow a manual. Although the transition has taken longer than anticipated, we have achieved 100% acceptance from our business units and we expect to complete the project in Europe shortly. We are also now starting the project in Asia and based on our experiences so far in other regions, we have a high degree of confidence that we will be able to connect with all of our business units during the course of 2012.
Once we have completed the project in its entirety, we will be able to determine the outcomes more clearly. However, we are already well on our way to achieving our objective to reduce bank accounts by around 50% as well as rationalising our bank relationships and connectivity. Using physical cash pooling wherever possible (and notional pooling in other situations) allows us to centralise our cash more successfully and optimise liquidity by avoiding isolated pockets of ‘trapped’ or inaccessible cash. Our processes have become materially more efficient, and we are paying around 70% lower bank charges as a result of greater economies of scale and enhanced straight-through-processing. The result of these improvements is that we have been able to enhance our capital structure substantially. In 2009, we had both large cash balances and high debt levels. In 2010, we were able to reduce our net debt by around 40% whilst enjoying a 25% increase in working capital.
We are also focused on delivering greater value wherever possible. For example, once our payment factory has been fully rolled out and standardised, we will be looking to the next level of operational and financial efficiency. One such development may be to be create a purchasing entity for each country that purchases raw materials, which would then cross-charge expenses through the in-house bank. Invoice processing could be accelerated using eInvoicing and reinvoicing in order to reduce the approval process and increase automation. We are also considering offering supplier fiancing to selected suppliers to further enhance our financial supply chain.
Consequently, while streamlining cash in a decentralised organisation poses challenges, it is achievable with the right planning, resources and pragmatism. It is rarely possible to change an entire organisation and culture quickly, but by actively working with the business, understanding their needs and demonstrating value, a streamlined and efficient cash management structure can be developed.
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