Published: February 01, 2012
This month’s reader poll focused on centralisation, exploring the degree to which companies globally have already centralised their treasury activities, what factors may have delayed their plans in the past, and the challenges that remain. Due to the holiday period, this poll was only open for a short time, but attracted 93 high quality responses. Of these, 63% represented companies with a turnover exceeding $1bn. Responses were drawn from across all regions, with 40% based in Europe (including Central & Eastern Europe), 20% of respondents based in the Middle East with the remainder spread across North America, Latin America and Asia.
Treasurers indicated a strong preference for centralising their activities as far as possible. In the case of financing, investment and FX, there is a bias towards global as opposed to regional centralisation. For cash management and bank connectivity, an equal proportion of respondents indicated that they have centralised these activities globally or regionally. Filipe Simao, Head of Client Advisory, BNP Paribas comments,
“While it is not surprising that treasurers have managed to centralise activities such as financing and investment globally, it is difficult in practice to achieve the same degree of centralisation in cash and liquidity management. For example, cash flow forecasting is a process that cannot be performed centrally as it requires input and dialogue with local business units. It is also difficult to centralise accounts payable functions across widely differing time zones.”
Of the 32% of respondents who indicated that they had centralised their cash management globally, the majority of these were smaller businesses and/or those with a limited geographic reach. On the other hand, only 32% of respondents had centralised bank connectivity at a global level, although as Filipe urges,
“Bank connectivity is an obvious activity to centralise with few organisational implications. Companies can benefit from lower technology costs and improved control even if other financial activities such as payment initiation continue to be performed decentrally.”
The results reflect the fact that collections and payments remain the most challenging areas to centralise, not least because of the diversity of payment and collection methods across countries and regions. In addition, these areas are typically most closely aligned with the business, so there are often organisational difficulties.[[[PAGE]]]
Respondents were asked which of the centralisation projects they had completed to date had delivered the greatest value (figure 2). Cash and liquidity projects were considered to be the most beneficial (23%), followed by bank connectivity, FX and organisation of the treasury function into global and/or regional treasury centres (14% each). Filipe Simao, BNP Paribas explains,
“Concentrating cash at a regional level delivers immediate and demonstrable value through lower borrowings, greater returns and enhanced management of risk. Bank connectivity is also a logical project to undertake irrespective of the organisational structure. For example, we find that around 70% of payment centralisation projects are payment hubs, where payment processing continues in its existing locations, but files are channelled through a single bank connection.”
Collections, treasury management system centralisation and investment were identified by the fewest number of respondents as delivering the greatest value. In the case of collections, this is likely to be because the fewest number of respondents had undertaken centralised collection projects so far. Such projects are also difficult to achieve at a global level, as Filipe Simao discusses earlier, due to the diversity of formats and collection methods, as well as organisational challenges.
The benefits of centralising investment are closely linked to, and a by-product of, centralised cash and liquidity management and therefore may not be specifically identified by respondents as being a discrete project. In addition, with interest rates at a historic low, the ability to increase returns is less likely to be a primary objective for treasurers at present.
There are clear benefits to rationalising and centralising treasury management technology, but typically, this would be part of a wider optimisation project.[[[PAGE]]]
Respondents who were currently implementing, or planning to implement centralisation projects were asked what factors had prevented these projects from being undertaken previously (figure 3). For example, the advantages of centralising functions such as cash and liquidity management, bank connectivity and payments are well-documented, so it is often surprising that these opportunities have not been embraced previously. The results illustrate a broad range of reasons; however, at 31%, the need to focus on other business priorities is the most significant factor that has delayed centralisation projects in the past. Filipe Simao summarises,
“Often there are just too many projects that a treasury department would like to undertake, but with only limited resources.”
He suggests, however,
“Budget constraints are identified by only 9% of respondents which would appear to be rather low. We typically see budget as a more significant hindrance to treasury projects; however, this may be only one factor amongst others.”
Twenty per cent of respondents indicated that a decentralised business culture had been a hurdle to projects in the past. The fact that they have now overcome this may suggest that senior managers have now recognised the value of centralising treasury functions for enhanced risk and liquidity management and have removed organisational roadblocks. In some instances, organisational culture is more a perceived hurdle than a reality; after all, as Filipe Simao explained earlier, projects such as centralised bank connectivity require little or any organisational restructuring.[[[PAGE]]]
As figure 4 illustrates, establishing greater visibility and control over liquidity and risk is the most significant driver for centralisation projects, followed by operational efficiency and working capital optimisation. These findings are highly consistent with previous research projects, as Filipe Simao outlines,
“It is no surprise to see such a clear trend towards greater visibility and control. Even before the 2008-9 crisis, we saw treasurers seeking to enhance this area in response to compliance requirements such as Sarbanes-Oxley as well as an evolving view of best practices.
“The trend for improving operational efficiency is also an important one. By removing manual tasks, treasury is in a position to move up the value chain and contribute more strategically to the organisation.”
He continues,
“Equally, it is no surprise that SEPA is a key driver for only a few corporates at present. However, issues such as SEPA and the obsolescence of bank communication platforms are often a useful catalyst for change that treasurers can leverage to add further value to their organisation.”
He concludes,
“It is, perhaps, surprising that so few respondents highlighted cost savings as a key driver after all, the reality is that most projects need to deliver a return on investment.”
It seems likely, therefore, that cost savings are a requirement to justify the project, but the strategic benefits may be the key drivers of change.[[[PAGE]]]
While centralisation projects typically have a compelling business justification and demonstrable success, there are inevitably challenges and difficulties in any project with a regional or global scope with multiple stakeholders. As figure 5 shows, respondents had encountered a wide range of issues. Over 50% identified internal resistance as a key challenge, which Filipe Simao explains is no surprise,
“Few people like change, especially when it means handing over responsibilities or limiting autonomy, so a strong management mandate, ongoing communication and a continuous demonstration of how treasury is adding value is essential. In reality, it would be interesting to see how this statistic compares with perceived challenges in other IT or change management projects.”
He continues,
“Fiscal and regulatory disparities would seem to be the most valid concerns expressed, as they cannot be overcome through different processes, technology or organisation.”
The responses indicating a lack of banking products, connectivity or third party technology are perhaps surprising. As there are examples of companies that have very successfully centralised their treasury activities, these issues cannot be valid unless a company has not selected the right bank, connectivity platform or third party technology vendor for their needs. This is, of course, often an issue of budget, but there are increasingly licensing models available that enable smaller companies to take advantage of highly sophisticated solutions at a lower cost.[[[PAGE]]]
With the highest proportion of respondents indicating that increasing visibility and control of liquidity as their greatest concern, we asked treasurers’ preferred liquidity management technique. Almost 50% of respondents stressed that they prefer cross-border physical cash pooling per currency, providing full control over cash at either a regional or global level, whilst still holding balances per currency to fund outgoings. A further 25% expressed a preference for cross-border, cross-currency cash pooling, enabling them to pool cash and reduce currency risk, presumably in situations where most of their expenditure is in their base currency. A further 19% had a preference for notional pooling, where business units maintain balances on their accounts, but these are pooled for interest offset purposes, allowing the total cash balance to be used to net off borrowings or generate a return. In most cases, however, companies need to use a variety of techniques depending on the regulations that exist in the countries in which they operate.
Respondents were asked what single factor would enable them to achieve greater success with their centralisation project. As shown in figure 7, the most popular responses related to IT infrastructure (28%) and management support (26%). In both cases, these are surprising as Filipe Simao discusses,
“Inadequacies in treasuries’ IT infrastructure are often used as an excuse; in reality, if treasury has selected the technology solutions that are right for their business, and implemented them in the right way, technology is an enabler not a hindrance. The second issue highlighted here is also somewhat of a concern: if there is insufficient management support for a project, it is difficult to see how it has been authorised in the first place.”[[[PAGE]]]
It may, of course, be the case that the project steering committee does not have the right people to remove project roadblocks and work with local management to ensure a smooth transition of responsibilities. It would seem, however, that the most valid issues that a treasury might face relate to resources, culture and regulation. Filipe Simao concludes,
“The right resources are essential to any project, and without these, there will be limitations in what can be achieved. Secondly, regulatory restrictions continue to create challenges, particularly in regions such as Asia. In these instances, working with the right banking partners with expertise and experience on how to meet project objectives whilst complying with the necessary regulations is essential. Finally, the importance of a company’s culture cannot be underestimated. A culture that promotes and rewards co-operation and shared goals is a major factor in driving the success of project with a regional or global scope.”
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