Published: April 01, 2013
In 2010, Novartis embarked on a major finance transformation programme to position treasury and the wider finance function as best-in-class for the pharmaceutical industry. During the Cash Management University hosted by BNP Paribas, Brice Zimmermann and Peter Zumkeller of Novartis, shared their experiences of finance transformation.
Treasury is a corporate unit within Group Finance at Novartis, located in Basel, and divided between International Treasury, Capital Markets, and Control & Reporting. Treasury’s objective is to manage risk on behalf of the group and ensure that operating units are appropriately funded to meet their strategic and operational objectives.
Novartis aims to be best-in-class across all of its activities, including Finance. To support this objective, we launched a finance transformation programme to optimise process efficiency, enhance the quality of business intelligence and decision-making, foster the best skills in the profession, and improve transparency and control. We identified a variety of ways in which this vision could be achieved in treasury, including the following:
Ultimately, the objectives were: to standardise, simplify and automate treasury activities wherever possible.
Before embarking on the transformation programme, we had a fragmented approach to cash management and banking relationships. Cash management and funding were managed locally in each country, working with multiple banking partners: 56 for euros alone. It was impossible to centralise cash effectively with so many banking partners, and communication between business units and treasury lacked a timely, accurate view of cash and risk as reporting was provided only on a monthly basis. Each business unit had different processes and controls in place, with separate bank interfaces and file formats.
We restructured our treasury business so that cash, liquidity and risk were all managed centrally in treasury (figure 1), supported by an in-house bank. We rationalised our cash management banking partners in Europe to just three, including BNP Paribas. We standardised our processes and reporting using SAP, and we are now in the process of implementing a payments factory to centralise payments processing, connected to SWIFT for multi-bank connectivity using standard formats.
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It took around 18 months to migrate from more than 50 banks to just three. We used strict criteria for our bank selection, including: credit rating; pan-European network; the quality of our existing relationship; flexibility to configure systems and file formats, and the support that we would be able to rely on both during and beyond the implementation. As a result of this process, we selected BNP Paribas and two other banks, to balance diversification with financial efficiency and economies of scale, and ensure that we were receiving best-in-class services in each country.[[[PAGE]]]
When considering our treasury processes, and the technology on which they would be based, it was important to recognise that ours was not a project in isolation, with cash management processes also impacting on areas such as purchase-to-pay, order-to-cash and the general ledger. We recognised, therefore, that the transformation programme was an opportunity to streamline processes and information flows across the financial supply chain, leveraging SAP as our central platform. Furthermore, we simplified and standardised our account structures internally to facilitate automation and improve reporting.
We import previous-day bank statements each morning for accounts held by all Novartis entities in Europe. Each transaction is then reconciled automatically, mapped to the relevant general ledger code using unique identifiers and posted automatically. Zero-balancing entries are also identified with a specific code, so that as bank statements are imported, these can also be posted automatically. At 14.00 each day, we effectively run an end-of-day process for the in-house bank and produce intercompany bank statements that are sent to all subsidiaries, and posted to the ledger. At month-end, interest is calculated on daily balances on intercompany accounts throughout the month and posted to each account automatically. This process required linking several separate instances of SAP that had to be closely aligned and integrated to achieve the degree of automation that we require.
Another important process that we have been able to standardise, simplify and automate as part of our transformation programme is cash flow positioning and forecasting. We have defined various planning levels that correspond to the bank and clearing account structure. Information on all of these accounts is automatically transmitted from subsidiary systems to the in-house bank each day. A consolidated cash forecast is presented for each day, showing actual and projected cash flows, including both treasury and business flows.
Over the past two years of transformation programme, we have achieved our objective to standardise, simplify, and automate treasury activities in Europe, and have been able to materialise the following benefits as a result:
A project of this scale and complexity inevitably brings some challenges. One point we would note is the importance of finding out the company’s key contractual priorities from the legal department early on, and discussing these early on with potential banking partners. Furthermore, it should be noted whether partner banks will provide services under the same contract as the primary relationship bank, or whether a separate contract needs to be put in place. Establishing these points at an early stage can save a great deal of time.
Another essential task when transferring local payments and cash management from local entities to central treasury is to understand in detail what specific payment and collection methods, and local formats need to be supported. Not only will these prove an important element of the implementation, but they need to be detailed with prospective banking partners to ensure that they fully support the company’s domestic as well as cross-border cash management needs.
Related to this, these various formats need to be supported through an electronic banking system. While it is generally preferable to use a proprietary electronic banking system across all countries, at times it may be that a local multi-banking electronic banking channel is the better solution in a particular country. Again, these issues need to be identified and built into the project plan.
Looking ahead, we will complete the centralisation and transformation process in Europe and extend the concept we have already established, including cash pooling, to other regions. In addition, we will develop the payments factory, using a ‘payments on behalf of’ model, and fully migrate to SEPA payment instruments.
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