- Deniz Ates
- Head of Treasury, The NCI Agency
- Tom Alford
- Deputy Editor, Treasury Management International
The NATO Communications and Information Agency (the NCI Agency) is NATO’s technology and cyber hub. It provides capabilities and services that are critical to NATO’s ability to fulfil its core tasks of consultation, collective defence, and crisis management for its 31 member states. TMI called into NATO’s Brussels headquarters to meet Deniz Ates, Head of Treasury, the NCI Agency, and his team to discuss the vital role that treasury plays in supporting this key NATO division.
For its 31 member states – 29 European and two North American – NATO is a vital collective military security system. Protecting the protectors on the cyber-security front – its electronic defence – is the NCI Agency.
The NCI Agency was formed in 2012, following a major restructure of NATO into four new agencies. Today, the NCI Agency is a team of 3,000 civilian and military personnel located in more than 30 locations in Europe, North America and Southeast Asia. Its primary task is to help NATO and its member countries communicate and work together “to preserve peace and security for nearly one billion citizens”. As part of its remit, the NCI Agency provides C4ISR (Command, Control, Communications, and Computers, Intelligence, Surveillance, and Reconnaissance) technology, including cyber and missile defence.
It’s vital work but without the funding of its members nothing would happen. The function that is charged with safeguarding and optimising the NCI Agency’s cash and liquidity assets, and supporting the business in this respect, is its treasury.
Equivalent departments serve the other three core agencies, and while each has a different set of challenges, opportunities, and approaches, all share a set of minimum requirements. These have been clearly defined under NATO Financial Regulations and Financial Rules and Procedures (FRP).
It all sounds rather grand in scope, and it is. Despite its huge responsibilities, the NCI Agency treasury is small, with just five people, comprising, like NATO itself, several nationalities but with the same ambitions. It’s a set-up familiar to many corporate treasurers, as indeed is the nature of the day-to-day work carried out by the NCI Agency treasury team to deliver on its responsibilities.
However, given the role in the world of NATO and the NCI Agency, it would be hard to overstate the importance of treasury’s input here. For this reason, Ates explains that it is subject to an internal, arm’s-length reporting and auditing regime designed to ensure compliance with NATO’s rule book, its own NCI Agency internal audit process, and the watchful eye of an internal control officer sitting in the NCI Agency finance function.
Within that finance function, which also includes GL, AR/AP and travel payments, treasury takes on all the transactional processes, reporting directly to Accounting Services (AS). The Head of AS answers to the head of finance who, in another organisation, would be referred to as CFO but in NATO terms is designated as Financial Controller (FC).
Within that hierarchy, for certain cash-related responsibilities, such as account opening, treasury reports to and works directly with the FC. And while treasury strategy is typically formed in consultation with the Head of AS, the direct responsibility here is to the FC, the line of command therefore similar to that of a commercial enterprise where the treasurer and CFO often work alongside each other.
Driving value
With a primary aim being to enable the business to function at a financial level at all times, in all locations (and in the right currency), cash visibility is one of the main treasury focuses. The NCI Agency treasury is also required to continually drive efficiencies across its duties, notes Ates, even if it is naturally expected to be run as a cost centre. While most treasurers face similar pressures, the FRP requires the NCI Agency treasury not to engage in speculative acts.
Because it calls for every cost to be passed back to member states, whose membership is funded by and answerable to their own taxpayers, the NCI Agency must deliver efficient services to its stakeholders. “The aim is not to do what we do at any cost, but to ensure our costs are always reasonable and under control,” Ates comments. And by driving efficiencies, deriving interest income (now a more likely scenario) and decreasing its cost-base, he says the NCI Agency treasury actually works efficiently.
As part of its delivery process, the NCI Agency works in partnership with a large portfolio of industry, academic, and not-for-profit organisations to, as it says, “help NATO keep its technological edge”. A large team of procurement professionals is employed to source suppliers (very tightly scrutinised for both service provision and financial credibility) that meet the needs of the members at the right cost level. After the roster of third-party providers, the most significant NCI Agency cost base is its employees, with, for example, a large pool of project managers required to deliver on its commitment to all nations and NATO forces.
To achieve its goals, the NCI Agency operates as any commercial business would be required to by its stakeholders. In essence, it is a business function, with treasury “a key part of the machine”. But there are differences created by the unique structure of NATO that impact treasury.
Reporting progress
Of course, the quest for an optimal treasury function is not exclusive to the NCI Agency. However, monitoring treasury’s progress towards its goals are a number of committees “with full rights to demand answers”, says Ates. Committee enquiries into costs, and even levels of employment, leave no stone unturned in the pursuit of efficiency. It means reporting can be a demanding, albeit necessary process, given the interests of NATO’s members.
“We carry out the financial planning in the same way that a corporate company does but with the addition that we need to seek approval for this from the supervisory board before it goes out to the nations. We also need to declare and possibly defend our financial statements,” explains Artes. “Our declarations and approvals are sent before the NCI Agency General Manager, the boards and the committees for their scrutiny. And although we must maintain our monthly reporting regime in treasury, we are not always directly involved in the ensuing discussions.”
Being driven by a clear and strong process of scrutiny has seen treasury form its own roadmap of how to improve its operational efficiency. “We’ve done a good job on that. We are the change agent in finance,” says Ates. Its approach has been to map its entire set of actions from end to end, to gain a clear understanding of what it does and how it does it.
The first outcome was an understanding of how certain processes can be streamlined for efficiency, with a number achieved already. The second was a decrease in some of its cost bases. In all cases, the approach to each process has been fully documented. And for good reason.
“We never want to be dependent upon one individual for a particular job,” explains Ates. It means that the knowledge accrued in the manual relating to any treasury process or procedure can be transferred to anyone at any time; there will never be a point when the team is unable to complete a task due, for example, to staff absence. “Logging every process also means we have a map of every internal control function and how they are applied in every case.”
Related to this business continuity planning effort, the team has also developed what it refers to as a ‘treasury competency matrix’. This maps the skills and capabilities of every team member as related to the whole range of treasury activities. By knowing who can do what, and at what level, it’s easy for the team to see where training is needed.
Targets for team and individual improvements are incorporated into the performance development plan, with all of these being documented so progress is charted. The team has been working on individual objectives so that at the end of the year each member can see what needs to be done to take their competency levels to the next stage. Training is largely on-the-job and the small size of the team means interaction is easy.
Cash power
As NATO members pay in advance at certain points in the year, most of its operations collect on these contributions in advance too. “Normally cash upfront would be a luxury,” says Ates, “but when it comes to negative interest rates, it’s a real liability.”
Indeed, with the cost of carry becoming unacceptable in terms of its efficiency mandate, treasury had to revisit its structure and find ways of lowering costs further to absorb the damage inflicted by negative rates. “We managed quite well; one year we were positive net interest and another we achieved a very limited cost position.”
Most of the upside in the NCI Agency treasury was achieved by renegotiating terms with its banks. It also enlarged its portfolio of banking partners to help drive better terms. It now has five, which remains well within the scope of manageability for a small team, says Ates.
Further measures taken by the NCI Agency treasury during the negative rate period included the redistribution of its cash asset portfolio – dividing its portfolio to rebalance and optimise the percentages of the currencies it holds – and with its FX holdings, seeking wherever possible to create natural hedges. Here, the aim has been to understand its future exposures in USD (which do not cost anything today in terms of negative interest rates) and then ensuring it holds a sufficient level of that currency – without appearing speculative – to establish a natural hedge against the negative rate currencies held.
While being cash-rich is normally a good position for any treasury to be in, Ates points out that the cash under his control in effect belongs to NATO members, which is collected with a degree of seasonality. NATO has agreements with members concerning how much it receives during the lifetime of the contract. This means treasury’s liquidity levels can change dramatically throughout the year.
“In reality, because of seasonality, we don’t truly have the right to say we are cash-rich as it’s not always the case,” he says. “There are also emergencies that require a quick response so we can’t always assume we will always receive all the due cash. And we often don’t have the luxury of being able to map the flow of what’s being paid in to what’s being paid out.”
The nature of the cash collected brings with it several responsibilities. Transparency through reporting is essential. The money and all related negotiable documents – bank guarantees, for example – have to be seen to be safeguarded at all times.
Another important role for treasury is to ensure “there are no surprises”, says Ates. When preparing cash forecasts, for example, the team reconciles multiple reports and discusses consolidated amounts on a weekly basis, “so we can make our decisions accordingly”.
As part of its risk mitigation planning, treasury has also set a minimum cash buffer, spread across different currencies that can be rebalanced as required. Should this amount be reached, plans are in place that, for instance, will prioritise certain payments. System outages are also catered to in treasury’s risk mitigation planning mix, Ates stating that “we try to make sure the business knows treasury will continue to function whatever happens”.
Given the role in the world of NATO and the NCI Agency, it would be hard to overstate the importance of treasury’s input here.
Hello world
With the NCI Agency’s role as the cyber-security arm of NATO, technology is in its DNA. This places it at the forefront of innovation in the defence space. But this means any part of the business that has a digital connection with the outside world has to tread very carefully. While the treasury function has many options these days to push the boundaries of innovation, it is understandably subject to a blanket and hard-hitting security review. There are no exceptions.
As part of its own purchasing process, treasury has formally adopted and adapted the assessment and documentation methodologies from its procurement colleagues. This means every partner it works with meets the same stringent risk management criteria imposed upon the NCI Agency’s technical third-party providers. It covers both business and IT integrity and aims for full process rigour and transparency.
This is not to say that new systems cannot be onboarded. Ates says the team is currently exploring options for a TMS. “We know what we want at a functional level, and we know which vendors can meet our needs.” If the system was on-premise, there would be no security issue but it would be much more expensive and would deliver a lot of redundant functionality, he notes.
But with most TMSs today delivered as a SaaS system, while functional redundancy is entirely removed, system security becomes a major concern. Indeed, it will take considerable time and effort for the NCI Agency’s IT and cyber teams to assess and approve the vendor and the access points and data flows that its system exposes to the external world. “It won’t be happening tomorrow,” jokes Ates.
It’s perhaps no surprise when Ates states the main requirement of any system used by the NCI Agency treasury must follow the KISS principle (‘keep it simple, stupid’). “It has to be user friendly, but enable us to access, compile, and present our reports exactly as we want to use them,” he explains. He also calls for report modification and parametrisation capabilities, with ‘what-if’ scenario analysis to help treasury assess the impact of the NCI Agency’s sometimes unpredictable receivables and payment approvals processes.
Making connections
The nature of treasury today, as an important source of data, information, and advice for other functions, rings as true in the NCI Agency as it might elsewhere. Being part of Accounting Services leads it directly to the door of AP and AP colleagues in the quest to understand cashflows and payment activities, with accounting, reconciliations, and GL teams also close by. And procurement is a regular point of contact, sharing master data on bank account management and bank guarantees, for example. “It’s a two-way flow,” notes Ates. “We need to understand their business so we can better support them, and they need to understand ours so they know how we can help.”
In cash management terms, treasury has opportunities to explore, especially as interest rates are rising, and using cash efficiently takes on a new meaning. Collaboration comes to the fore here because it requires more accurate cashflow forecasting “to ensure we are using every penny available to invest”, Ates notes. He is also keen to investigate with procurement how treasury can more effectively support the NCI Agency’s suppliers.
“Given that we are generally cash-rich with no funding issues, we also think of ways to use our position to support our suppliers in a way that also benefits us.” An example of this is supplier finance or dynamic discounting. These would have been even more interesting in the days of negative interest, says Ates, but the restrictions on external connections prohibited their adoption. “It’s still an opportunity for future discussion,” he states.
Other opportunities arrive under less obvious circumstances. The emergence of the pandemic, despite the nightmare scenario it presented, has been cited by many businesses as an opportunity to progress from old paper-based routines to new digital processes. With the advent of lockdowns, the NCI Agency treasury saw the chance to finally eliminate paper documents and wet signatures. It also presented an opportunity to use IT-sanctioned remote working, which has since remained for official devices only (in fact, no personal devices are allowed in any secure area of the Brussels HQ).
At the top of its game
Being quick to respond to events is a mark of professionalism, and one for which the NCI Agency treasury has been formally recognised. It was an Association of Corporate Treasurers in Belgium (ATEB) award winner in 2022. “We have always been keen to share best practice so we were encouraged to put ourselves forward for the award,” comments Ates.
ATEB recognised the NCI Agency team for its work in “elevating the treasury processes, strengthening the governance and internal control framework, and improving on reporting and the use of systems”. The main achievements the awards panel cited were the NCI Agency team’s “introduction of overarching treasury policies, establishing key internal controls, allowing better preparedness for business continuity situations, and the realisation of many process improvements”. In achieving this, it said, “the treasury team has also demonstrated its added value to many internal stakeholders”.
While this much is true, the ATEB award is also viewed by the team as a means of demonstrating its relative value compared with the rest of the treasury community. Indeed, it represents recognition from its peers that it is at the top of its game. Which, given the role of its parent organisation, is welcome news for hundreds of millions globally.
