Published: May 01, 2011
Managing treasury in a decentralised business environment is an entirely different proposition than in a business where management responsibility and business support functions are concentrated at regional or global level. Coming to Guardian from my predecessor company was quite a culture shock. While my previous company is predominantly a marketing-driven organisation, which typically creates a more centralised culture, Guardian has emphasised local responsibility and therefore is far more decentralised in its culture. This article shares some of my experiences of managing an efficient treasury operation in a decentralised business environment.
All banking relationships are maintained by treasury, with no need to establish local communication channels, except for payroll.
As treasurers are constantly striving to centralise cash and business processes in order to create more visibility and control, there is a common perception that a centralisation is the ‘right’ business model, and therefore, a decentralised approach must be ‘wrong’. For example, at my former company, the headquarters functions were strong, and shared service centres (SSCs) operated very efficiently. Guardian is more of a sales-driven organisation, with more responsibility and accountability held by local sales and business management teams. Bearing in mind the nature of our products, this business organisation creates significant advantage for the company. For example, it is difficult and expensive to transport glass-related products, so it is important to operate close to our customers. Furthermore, it is difficult to sell our products into volatile markets, so we need to remain in touch with local situations and maintain flexibility in our approach.
Consequently, while from an organisation and business management perspective, a decentralised structure is undoubtedly the ‘right’ one for a company with Guardian’s profile, it creates considerable challenges for treasury. Firstly, the role of the treasurer is perceived quite differently inside such a structure. In a centralised organisation, the treasurer can set policies across the business relatively independently; in a decentralised operation, however, this role is effectively reversed, and treasury is seen much more as a service provider to the operations.
While treasurers’ objectives in a decentralised organisation are the same, i.e., cash management, FX, interest rate risk management, financing, investment etc., the number of customers or internal stakeholders is far higher, with obligations to each individual plant. Our treasury operation comprises four people, supported by a small, efficient and specialist SSC of three people based in Luxembourg, which is responsible for accounts payable (AP) and accounts receivable (AR) for 12 plants across the region, managing over €1bn of cashflow. AP and AR are a major priority for our business, and in fact, we have achieved a higher degree of centralisation in these areas than most organisations that have a centralised business culture are able to achieve. We have recognised that while management of these functions is best located in the local operations, we can still create economies of scale by centralising technology and processes.
For example, we have one account per currency across the group, with all payments in Europe managed through a central payments factory (payment on behalf) based in Luxembourg and two payment runs in each month. We manage this in treasury, including acting as an in-house bank, and we transmit reports on each entity’s cash position on the intercompany accounts regularly. For collections, we use the subrogation principle. All collections are made by the Luxembourg entity on behalf of every other entity, and posted automatically onto our intercompany accounts.
All banking relationships are therefore maintained by treasury, with no need to establish local communication channels, except for payroll. We use proprietary systems for AP and AR, a third-party accounting system and proprietary add-ons, resulting in a robust platform that is well-developed and fits our purpose. We leverage a pan-European solution from our primary cash management bank, Royal Bank of Scotland, with host-to-host connectivity for high volume, low value payments, and an electronic banking solution for high value payments.
A decentralised organisation is not in conflict with the idea of an optimal treasury model. On the contrary – using this decentralised management approach, Guardian’s treasury has developed a regional treasury centre answering all the needs and ensuring revenue optimisation of all its plants.
The benefits of this approach have been substantial. Local management gains the advantage of economies of scale and receives value-added services and reporting without the need to maintain local banking relationships and technology, or the resulting administrative overheads. At a group level, we are realising working capital improvements, enhancing the quality and frequency of reporting, and ultimately contributing positively to the P&L. This latter point is particularly important: as each plant is responsible for both EBITDA and bottom-line results, solutions delivered by treasury need to result in financial gain or optimised P&L at business unit level.[[[PAGE]]]
Consequently, so long as our services deliver tangible value to the business, treasury typically gains considerable support from business unit management, and the initiatives in which we engage have significant momentum. However in a centralised organisation, it is often particularly challenging to encourage local sales, administrative teams, SSCs, etc. to engage and commit to a project; however, in our case, there has been a great deal of local support. To achieve this, treasury needs to invest sufficient time in the initial engagement process with business units to help them to understand how a proposed solution will benefit them, and gain their support. Having done this, however, there is often significant momentum to realise a project. For example, Guardian is proud to be SEPA compliant in several countries while still today, many corporations are still wondering how they will achieve this.
A major factor in making a decentralised organisation work is its culture. Guardian is privately held. It has a strong heritage of accountability, with individuals taking personal ownership and leadership of processes for which they are responsible, at all levels of the company. This means that everyone is motivated to embrace efficiency and process optimisation, which is not the case in every organisation. From a treasurer’s point of view, it becomes important to put oneself in the shoes of the local business managers, who typically do not have a financial background, and adapt the way that treasury communicates complex concepts and terminology. Having created trust and credibility, the partnership between treasury and a business unit can be transformational, and deliver significant value to the enterprise.
There are some areas that create particular challenges, such as FX risk management; a decentralised organisation brings added complexity. While a centralised business may be more familiar with a hedging mandate determined by a central risk management or treasury committee, the opposite applies in a decentralised company. While treasury can determine what hedging should take place, we need to convince the relevant business units, including in some cases gaining consensus from multiple parties to net exposures. As each plant is responsible for its own P&L, we need to justify where a loss of individual performance is justified in the interests of the group overall. Treasury therefore needs to take the time to understand the issues in each plant, educate and negotiate where appropriate. The outcome, however, is positive, with treasury contributing to the performance of each plant, educate and negotiate where appropriate. The outcome, however, is positive, with treasury contributing to the performance of each plant, and treasury strategies closely aligned with each business. Although at times treasury may feel constrained, the result is no mistakes and no surprises.
Based on the time I have spent so far at Guardian, together with my experience in other organisations, there are various issues that I would highlight for other treasury and finance professionals working in a decentralised corporation.
Firstly, the culture of the company is key to its success. This is either right or not, and treasurers are rarely in a position to change it. For example, at Guardian, we have an informal approach to business dress, communication and the way that we collaborate to develop solutions. This makes it easier to collaborate, share ideas and develop strategies than perhaps a more formal organisation would allow. However, a decentralised organisation brings a larger number of stakeholders, and treasurers need to be prepared for their ideas to be challenged by people with different ideas and backgrounds. Treasurers must learn to speak an easy language, avoiding lingo, and making themselves understood by the organisation.
Secondly, treasurers cannot simply be financial managers. They also need to be equipped for selling both internally and externally. It is easy to be squeezed between the banks and group businesses, so treasurers need to stay focused on the core objective, whether cash management, risk management, capital structure, etc. The benefit, however, of having a large number of stakeholders is that treasurers can draw on expertise and insights across a broad base of industry professionals, with more brains to use, more contacts and more influence. Relationships are key to leveraging this organisational structure; treasury cannot service the rest of the organisation without their mandate to do so, and to achieve this, there needs to be communication and collaboration, not confrontation.
Treasury at Guardian is as an enabler and facilitator of value creation. Value creation starts by producing glass and ends by selling to customers at the best price. To maintain our margins, we need to help plants to take control over factors that are more difficult to influence than supplier costs and customer sales. We therefore help them to reduce the impact of volatility in the FX and commodity markets, manage interest costs, and maintain working capital, taking into account the specificities in each country. This is challenging, but also immensely rewarding, as treasury takes its place amongst the value creators in the business.
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