Treasurer as Technologist

by Maciej Müldner, Treasurer, Skanska Poland

It is universally acknowledged by treasurers that the right treasury technology has a major role to play in increasing process efficiency, transparency of data and the quality of decision-making. In most cases, treasurers work with ERP or specialist treasury technology vendors to implement a technical environment that is appropriate to their business. In addition to these systems, however, treasury departments frequently have ancillary systems built in Microsoft Excel®, Access® or other database systems. By maintaining multiple systems, data may be fragmented and reporting integrity and security may be compromised by having different processes in place. In Skanska Poland’s case, we recognised the potential risks of a fragmented technology infrastructure, but our approach to addressing our technology objectives has been different from many companies, as we made the decision to develop our own systems internally.

Project background

When I joined Skanska Poland in 2002, we had a high volume of FX transactions (over 1,000 per year) including a large proportion of long-term forwards and derivatives. At that time, these transactions were stored and managed in a spreadsheet. Although this did not present any particular challenges at that time, as we had established a coherent workflow and a disciplined approach to maintaining the spreadsheet, we recognised that a spreadsheet would not be sufficiently sophisticated to manage our FX requirements once hedge accounting had been introduced. In particular, we would have had to integrate the underlying exposures, as well as the hedge transactions, into the spreadsheet, which would have made the volume of data unwieldy. Furthermore, our processes, security and data integrity could have been compromised with more people interacting with the data.

We looked more closely at the issue and recognised that firstly, we needed a database to store transactions and report on them in a consistent and secure way. Secondly, a solution had to facilitate an efficient transaction process, including input, settlement, confirmation and transaction management from inception to maturity. Furthermore, transactions would need to be linked to forecast cash flows for hedge account purposes. These would be likely to change over time, so we needed to be able to track effectiveness of a hedge, including the history of the transaction. Consequently, we needed a sophisticated and robust system that provided both analytics and reporting as well as transaction management.

We wanted the new system to demonstrate a high degree of security and prevent the risk of external intrusion.

Decision to develop in-house

We reviewed a variety of alternative solutions. We soon realised that the costs of acquiring a third-party system would be considerable, and we found it difficult to justify this investment. Furthermore, as hedge accounting had only been introduced recently, many of the tools we considered did not yet have the full range of functionality that we required. We discussed our requirements with our IT department, and together made the decision that it would be feasible and cost effective to develop our own system internally. We considered using an external Access® database but ultimately decided that it would be easier to build it on top of our ERP. Since then, we have now integrated our system with our ERP so that we can link cash flow hedges to construction projects.

The new system – a success

The new system took only a couple of months to build, but included a range of work flow tools to enhance our operational procedures, such as transaction event reminders, automatic transmission of deal confirmations to our banks via email etc., which has resulted in an increase in productivity. We asked our auditors to review the system before migrating from our legacy spreadsheets, and found that they were very supportive of our approach. Since introducing the new system it has proved a great success and we have increased our security, control, efficiency and analytic capabilities significantly. [[[PAGE]]]

Although our original objective was to use the new system for FX management, it proved so effective that we recognised that its use could be extended to cash management, including supporting our payments factory. We had 20-30 people processing manual payments, so we decided to extend the system functionality to automate payments and integrate it with the ERP so that all banking communications are undertaken through treasury. Payment approval is undertaken by project or site managers in the ERP, which are then released into the treasury system. Authorities can be checked and then the payments transmitted automatically to the bank.

One challenge during this part of the system design and development phase was to ensure that the system achieved our compliance requirements. Although we do not report under Sarbanes-Oxley, it is important to the business that we demonstrate best practices in financial processes. We therefore designed the system with robust work flow controls. For example, treasury cannot make changes to commercial payments and can only initiate treasury-related payments (i.e., those derived from treasury transactions). We have between 500 and 3,000 supplier payments each day, which used to take around half a day. By automating processes, introducing SEPA payment instruments and netting payments across the region, we have both reduced the total number of payments significantly and limited the time taken to process payments to less than one hour a day.

In addition to process controls, we wanted the new system to demonstrate a high degree of security and prevent the risk of external intrusion. While we were confident about the system itself, we were concerned that the files exchanged between the ERP and our treasury system, and the treasury system and the bank, were insecure and could be altered between systems. We have therefore introduced digital signatures and industry-leading file encryption to protect data more effectively. File content cannot be seen and any changes to the file would invalidate the digital signature.

Documentation

The construction industry has specialised needs in areas such as trade finance and insurance. For Skanska Poland, with 300-400 open projects at any one time, this creates a significant documentation requirement. For example, we have around a thousand bank guarantees each year, so we have extended the treasury system to handle the initiation, approval and production of bank guarantees. Insurance documentation is also produced and maintained in the system. Previously, these functions were decentralised, with a network of people dealing with separate elements of the process, but since around 2006, we have centralised trade finance and insurance within treasury.

The resource requirement to design, develop and manage our own treasury system has not been substantial. We have two people on the business side, one of whom identifies system enhancements, and the other converts treasury requirements into a design specification for IT.  There are also one or two programmers engaged in system programming. Programmers do not need to be specialists in treasury due to the design specification process which contains all the logic, analytics and reporting definitions.

Lessons learnt

Based on our experiences in  designing, developing, implementing and using our proprietary system, there are a variety of elements that we would highlight to other treasurers facing the challenge of how best to manage their transactional, operational and reporting requirements, particularly if budgets are constrained and you face industry-related special requirements.

Firstly, whether buying a system or developing in-house, you need a clear understanding of what you need, which may not be the same as what you would like! These need to be prioritised to ensure that you focus on the most important functionality.

Secondly, it is probably quicker and less labour-intensive to acquire a third-party system, but it is worth considering an in-house development if you have the resources available and your needs are sophisticated. For some industries, such as construction, which have very special needs, working with a solution tailored to your requirements can be very valuable.

Thirdly, whether the system is proprietary or managed by a third party, data integrity is paramount. If there is a multitude of peripheral spreadsheets or other database applications, data becomes fragmented and it becomes increasingly difficult to create timely, reliable reporting. Ideally, the objective of any new systems project should be to rationalise systems into a single application.

Finally, when implementing any new functionality, it is vital to test it thoroughly before transferring it into a live environment. It is easy to cut corners to accelerate a project that may have seen delays, but this is a false economy. For example, it is important to run a variety of different transactions through the system, testing the results at each stage. This process should then be undertaken periodically. [[[PAGE]]]

Next steps

We have continued to enhance the depth as well as breadth of capability of the system over time, such as introducing netting of FX exposures for hedging. We are currently developing new functionality to manage receivables. Overdue collections and reconciliation used to be managed outside treasury, but our remit was extended into this area during 2010 so we are expanding our use of the system accordingly. This will include diary reminders to chase invoices etc. as we are accustomed to for events on treasury transactions.  While this is a significant undertaking, it will add considerably to our ability to manage working capital, reduce bad debt and determine appropriate credit policies. We will also be developing cash flow forecasting in the system in due course.

Although we take pride in our new system, it is difficult to appreciate the scale of our achievement until listening to other treasurers and some of the ongoing challenges they experience. We have invested substantially in skills, decision-making and project management to facilitate the development and operation of a new system, but the benefits to treasury, and the wider company, have been considerable.