Published: August 01, 2011
This article outlines Greg Zabikow’s experiences at one of the companies in which he has worked, specifically looking at the road to treasury centralisation. While the path may be long and bumpy, he explains that by creating a clear vision of the final destination, and making the journey rewarding with milestones along the way, it is possible to transform treasury from an operational centre to a strategic force within the business.
The company was run on a highly decentralised basis which created a variety of treasury and cash management challenges. Cash was held in lower tier entities which could not then be used to fund deficits in other entities, raising the amount and cost of capital whilst limiting the opportunity to earn a return on investments. Company headquarters could not easily determine cash balances and counterparty risk across the business. We therefore made the decision that we needed to centralise cash in order to leverage surplus cash balances to reduce debt, establish greater visibility, and control. However, in a decentralised business in particular, we recognised that it was important not to try to initiate a major transformation without first demonstrating the value that a change of approach could deliver. Consequently, we took a phased approach to centralisation, respecting the group culture and business organisation, in order to prove how we could add value.
As a first step, we wanted to achieve greater visibility and control over cash globally and across major currencies without changing existing banking structures but still taking advantage of more competitive interest rates. We also needed to ensure that any cross-entity flows would not be treated as dividends nor attract withholding tax. Furthermore, with a strongly decentralised culture, we did not want to affect individual entities’ bank account structures initially. The solution was therefore to establish a multicurrency notional cash pool. We established a Netherlands-based structure covering 26 currencies with a notional overlay account per currency. At 11am CET each day, the balances in each overlay currency account were converted to euro at a market rate. Surpluses were then used to offset debt or invested in a money market fund. The structure was backed by a parent company guarantee.
During the year following the implementation of the multicurrency notional cash pool, debt levels dropped by nearly 20% with low levels continuing until a major acquisition took place. There were other benefits as well. For example, Treasury and Tax worked together to create a new dividend programme due to the cash visibility. Furthermore, after the banking crisis in 2008, we recognised that the solution had successfully enabled us to reduce the risk to our banking counterparties, with greater exposure to our own business which was easier for us to control.
Having successfully established a track record of how treasury could add value without creating a negative impact on the local business units or affecting local management objectives, we were then in a stronger position to recommend a cash and treasury management infrastructure that would deliver further benefits. Prior to the financial crisis, the company had gone through some organisational changes, as well as putting a strong emphasis on cost management and control enhancements. These developments resulted in a greater management appetite for an optimised treasury environment.
There were various lessons we had learned from implementing the multicurrency notional pooling structure. First, it was vital to demonstrate value on a continuous basis, rather than designing a large and complex project where the benefits would not be apparent for a long time. We needed to create a simple vision that could be shared by both central and local management, and to reiterate this frequently so that they could clearly visualise the future and take a stake in it. To achieve this, we needed to build close internal relationships resulting in a good working rapport, and to ensure that we always delivered on our commitments to maintain trust and credibility. The key was to do what we said we were going to do. [[[PAGE]]]
We found that it was helpful to start with a blank sheet of paper when designing the treasury structure of the future, without taking into account technology, process, or organisational limitations. We realised we might not be able to achieve this in its entirety, but it meant that we had the right frame of reference. Our vision, shared with local and central management, was to achieve a truly global approach to treasury management with closely aligned regional treasury hubs who together could improve controls over cash, reduce operational and funding costs, and maximise investment income.
We took a multi-step approach to migration of cash and treasury activities.
We decided to establish three regional treasury centres (RTCs) based in Chicago, Amsterdam and Singapore. The one for Singapore will be created in the future. The Chicago operation would be responsible for global functions such as FX management, financing and bank relationship management, as well as regional cash and treasury management. The first of these to be established was the Amsterdam treasury centre. As part of the management re-organisation, we no longer had a European Treasurer, so it was important to stabilise staffing, as well as to establish a European strategy, and integration approach. In addition, we had made a major UK-based acquisition with its own treasury department, so it was a good time to migrate the disparate treasury functions into a single treasury centre.
We had a vision that was clear, concise, and compelling, and we shared it regularly with our colleagues and management to ensure its support. If the vision is not shared and repeated it is forgotten.
We took a multi-step approach to migration of cash and treasury activities. Firstly, we wanted to observe and then document existing processes. With the process we would outline the tasks required for the integration. Then we would transition these tasks to the regional treasury centre, on a like-for-like basis, but using centralised technology and processes, and run them in parallel for a period. At that stage, the treasury centre could then work towards enhancing our processes in order to achieve our operational and strategic objectives. We visited each of the key business units to explore their cash and treasury management needs, and demonstrate that a regional treasury centre could be trusted to manage these successfully.
It is often the case in a decentralised, geographically diverse company that each business unit will consider its own cash and treasury management needs to be uniquely complex, partly as it is difficult for them to see what other parts of the business are doing. We therefore presented a simplified view of cash management that we discussed with each local business including: i) start of day balances; ii) management of intraday transactions; iii) determining a closing position, and iv) funding or investment. This provided a framework for discussions and meant that it was easier to establish a consistent view of activities and processes.
During this due diligence process, a variety of issues became apparent. There was a significant amount of manual activity, including signing cheques and electronic fund transfer requests, sending fax instructions to the banks and collecting cheques. Spreadsheets were typically used to create cash positions, including manual entry of balance data, resulting in excess processing time. Bank relationships were often fragmented, with a large number of banking partners, some of which were local banks with a low credit rating and/or were not part of our loan syndicates. Surplus cash was frequently held in low interest current accounts or in local money market funds with high fees attached, limiting the return on investment.
When we migrated these activities to the Amsterdam treasury centre, we were able to deliver some immediate benefits, not least because of the better use of technology. We put in place a web-based electronic banking system, leveraged the treasury workstation, and payment workflow tool that we had in the United States to create more consistent, efficient processes. These steps enhanced our controls and auditability. We also made use of FX and money market portals for trading, enhancing transparency over the dealing process. One of our acquired companies had an offshore processing centre in India, so some back-office processes were transferred there, enabling the regional treasury centre to become more of a centre of expertise as opposed to a centre for processing. [[[PAGE]]]
Once the local cash and treasury management tasks were integrated with the Amsterdam treasury centre, we were then able to look at how these activities could be further enhanced. In particular our future plans are to rationalise our banking relationships so we have only one or two cash management banks per country in Europe. An arrangement that would be replicated in each region. We want to access these banks using web-based electronic banking. We would also rationalise our use of money market funds or deposit banks so that we could better monitor and manage our counterparty risk. Changing bank relationships is a major undertaking not only operationally: there are also relationships to consider. People may have worked with their local banking contact for many years, so a transition needs to be carefully managed in order to maintain motivation.
There are other challenges too in a project with this degree of organisational, operational, and strategic sensitivity. We needed to maintain both central and local management support and deal carefully with local relationships due to the changes. It was not always easy to maintain common expectations. At times, we relied on telephone and email exchanges for decision-making, which was difficult to audit in cases where people had different recollections of a decision. Project discipline was very important, particularly to set tasks with dates and specific resources, to ensure that people knew exactly what was required of them.
These tasks also needed to be followed up as a matter of course to ensure that the project continued to receive the required degree of attention compared with other business priorities. Despite the focus on policies, processes, organisation and technology, a project of this nature is ultimately about people. It was important to remember that concerns, objections and decisions may be emotionally as well as logically-driven, so we needed to manage this carefully. We addressed some of these issues by creating a clear governance and tracking process for the project, including specific tasks, timing, visiting the local offices, and allocating resources with defined accountability.
Despite the challenges, there were a wide range of benefits by implementing the European treasury centre based on industry best practices and technology. Following our vision we committed to improving investment income, reducing costs, and enhancing controls. As a result investment income was increased. We reduced counterparty credit risk and provided greater access to liquidity by centralising our cash and investing in AAA-rated money market funds along with deposits conducted with a panel of highly-rated counterparties. Moreover, centralisation of treasury processes, including use of an offshore processing centre enabled us to introduce greater consistency and control, reduce costs and reallocate headcount to other finance or business unit activities. We also reduced costs by tendering for our cash management banking business, so we were in a position to benchmark fees and to leverage greater economies of scale. Having selected our banking partners, we were also able to streamline bank connectivity and integration. Finally, our control environment was greatly enhanced. We were able to demonstrate best practices in treasury processes and segregation of duties, with transparency over decision-making and compliance with risk management policies. [[[PAGE]]]
Once the European treasury centre had been implemented the CFO set a series of clear global finance objectives: firstly, to manage cash to optimise capital utilisation; secondly, to improve financial control, and thirdly, to integrate a major acquisition into the group. Having centralised and transformed the treasury organisation, we found ourselves at the forefront of group strategy and we were equipped to achieve the company’s financial objectives. In addition to the specific advantages we had demonstrated within treasury, this was a major ratification of our approach and the priority we had placed on treasury transformation.
In my experience, optimising treasury should be a priority for every company; however, this will not necessarily be evident to everyone, particularly in a decentralised organisation where local management share both business and financial management responsibilities. Implementing change is a long-term process, more of a marathon than a sprint. My key finding is that creating a vision that is clear, concise, and compelling is important as it helps your colleagues and management connect to the message for the future. Finally, the vision needs to be re-emphasised constantly so that everyone internalises and lends their support to the change management process.
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