Published: January 01, 2012
When I joined SGS’ treasury department in 2002, the group treasury function was still in the early stages of its development, with FX, cash and treasury management activities managed autonomously by individual business units. Following a management change, however, the decision was made to centralise cash, treasury and risk management activities to achieve greater visibility and control over cash and risk, and enhance operational and financial efficiency. As part of this initiative, we made the decision to outsource many of our treasury activities to a third party provider. This article explores some of the factors that contributed to our decision to outsource treasury management at SGS, and our experience of doing so.
The decision to outsource many of our treasury activities at SGS was not a difficult one at the time, for a variety of reasons:
Firstly, both the CEO and I already had experience of treasury outsourcing in previous roles, and recognised the benefits.
Secondly, we did not have the personnel in group treasury required to manage treasury activities on behalf of the group. It is not always easy to attract high calibre staff into corporate treasury departments, particularly in an organisation with relatively simple requirements and a conservative attitude to risk. Furthermore, while it is important to employ a minimum number of front- and back-office staff to maintain appropriate segregation of responsibilities, we did not have the scale or complexity to justify this.
Thirdly, we would have needed to set up a full technology infrastructure, including business unit connectivity, transaction management, reporting and risk management. We wanted to focus our treasury team on meeting the financial needs of the group rather than managing technology, so outsourcing enabled us to do this.
Based on the experiences I had had with a previous employer, we recognised that there were different types of outsourcing provider operating in the market. For example, agency treasuries effectively act as a transaction execution function, based on instructions given by the client’s treasury team. Application service providers enable access to a technology infrastructure, but the client manages their treasury transactions and reporting themselves. A business service provider delivers a combination of the two, but added to this, they often have greater decision-making freedom given to them by their clients. We made the decision to appoint a business service provider who would have some decision-making capability (within policies and procedures defined and monitored by SGS) together with transaction execution and reporting, and management of the systems environment. [[[PAGE]]]
We first appointed an outsourcer in Dublin as our outsourcing provider. This was a very successful relationship, and we were attracted to the services, staff and technology that they provided. Initially, we outsourced loans and FX, and then extended this to netting and cash pool management, including an in-house bank. Through the in-house bank, the outsourcer worked with our business units to provide intercompany borrowing and investment services within limits and terms of business defined by our treasury centre (figures 1 and 2).
There were some activities we chose not to outsource. For example, we continue to maintain bank relationship management internally and negotiate terms and conditions on behalf of the group. Similarly, we retain control over treasury policies, capital market transactions and any position-taking. We continue to fulfill the treasury control function, and define internal limits for our business units.
There are some points to consider when deciding whether, and how, to outsource treasury activities. The primary issue is the dependency on a third party company. It is, of course, important to perform due diligence on potential providers, and select one with the financial ability and strategic aim to continue the business in the long term. However, as we found, this process can only provide a certain degree of reassurance. The outsourcer in Dublin wound up its treasury outsourcing business in 2007, so we transferred our business to an independent outsourcing provider based in Neuchatel, Switzerland.[[[PAGE]]]
This relationship has proved very successful, and as the company is located only an hour away, it is easy to have regular meetings with the team. The team they employ is of a high quality, which is important to the success of the relationship. There were some things that we changed based on our experience with our previous provider. Establishing contingency arrangements was an important consideration. For example, it is valuable to agree as part of the initial contract that there should be a transition period of at least six months to an alternative provider. In addition, although the Swiss-based outsourcer manages the technology environment, including remote access to our business units, we now own the system, so that we could bring these in-house in the future if necessary without interruption to our business or loss of data. It is still frustrating today that we cannot access historic data from when our treasury activities were managed in Dublin, but this would not happen again.
There are other risks associated with outsourcing, such as the risk of fraud. However, we determined that the risk is no greater than if transactions were managed in-house, and may even be less. For example, if we managed treasury operations internally, we would not have the scale or complexity to justify a full front-, middle- and back-office function, so our ability to achieve clear segregation of duties would be limited. By working with the outsourcer in Neuchatel we enjoy the benefits of a larger treasury function without the costs or management input.
Our experience of outsourcing has been very positive, despite the need to change providers. We have a more robust and extensive operational and technology infrastructure than we would be able to achieve in-house, whilst maintaining the same degree of visibility over our transactions, and control over treasury policies as we would if we were managing transactions in-house. As we do not need to deal with daily transaction management, we are able to focus on business issues such as working with business units, mergers and acquisitions etc. With operations in more than 140 countries, and only four people in treasury, plus two people each in Singapore and the United States, it is very valuable to be able to engage with more strategic business activities.
Based on our experiences of treasury outsourcing, there are some points that we would share with other companies considering a similar approach:
Firstly, it is important to organise the treasury function, including defining policies and optimising processes before outsourcing, as it is very difficult to do so afterwards. We were fortunate at SGS as we were establishing a new treasury organisation, so we could make decisions about how it would be structured at the same time as outsourcing to a third party, but our situation was unusual;
Secondly, one of the economies of scale achieved by working with a third party provider is through the standardisation of processes across multiple companies. While existing processes may have been effective while treasury was managed in-house, it is important to accept that so long as these are secure and efficient, it is typically most cost- and resource-effective to keep processes consistent.[[[PAGE]]]
Thirdly, outsourcing often represents a major cultural change and treasurers can no longer use the number of employees in the department as a determinant of its status. Outsourcing does not result in a loss of control and actually enhances the treasurer’s ability to engage in strategic decision-making, as opposed to being weighed down with daily transactional issues, but it may be difficult to recognise this.
There would appear to be few corporations that would not benefit from outsourcing a proportion of their treasury activities. So long as policies are defined and monitored in-house, and the treasurer retains full access to data, there are operational efficiencies, enhanced controls and strategic advantages that can be achieved.
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