Published: March 01, 2008
“We live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology” - so said astronomer Carl Sagan. With the possible exception of office politics, no other aspect of treasury (and probably other parts of the business too) is quite as emotive as technology. While we make use of IT on a daily basis, it has almost negligible coverage in formal qualifications and treasury training. Consequently, it is often the part of our role about which many of us are most fearful and inclined to rely on the knowledgeable few. Dr William Reville at UCC expands further in an article in the Irish Times,
“People generally feel uneasy about technology. We recognise that we are dependent on it but at the same time we feel in a vague way that we are in thrall to an alien influence.”
...or as the sign on cartoon character Dogbert’s wall said for a long time “Technology: No Place for Wimps”.
Technology in treasury is now the domain of the business manager, not only the department expert.
Things are changing, however, and with increasing recognition of technical standards and closer collaboration within and beyond the corporation, technology in treasury is now the domain of the business manager, not only the department expert. In this article, while we certainly don’t aim to elucidate everything there is to know about treasury technology, we look at some of the key trends which are happening this year.
As technology is frequently fraught with jargon, there is a tendency to think that technology evolution is happening as a parallel, but separate trend from priorities in treasury. In reality, trends in technology cannot be distinguished from those which are influencing treasury as a whole. Technology is simply the tool which enables change; Bent Benjaminsen, SVP, Strategic Initiatives at SunGard AvantGard explains,
“While treasurers are not necessarily engaging in new business activities every day, technology allows them to do things differently and more efficiently.”
Furthermore, as Joergen Jensen, Director of Product Management at Wall Street Systems says,
“Companies need to do more with less. They need to optimise their existing business and potentially take on new functions but with the same staffing. Technology therefore needs to take the strain.”
According to corporate participants in the Treasurers’ Benchmark, 46% of the activities which they expect to prioritise in the coming year relate to cash, liquidity and financial supply chain management (fig 1), including areas such as expanding treasury into a financial shared service centre, payables, receivables, forecasting and SWIFT connectivity. It is these issues too which are also dominating the technology agenda. The majority of the 27% of participants engaged in departmental issues are aiming to increase efficiency, controls, take on new areas of capability, implement new technology and connect systems more effectively.
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There are four issues on which we will focus from a technology standpoint: the integration of cash and trade; the evolution of the financial supply chain; SWIFT connectivity and technology deployment. However, all of these are closely related and in my mind, they are largely inspired by a change in approach by treasurers. Five years ago, if a treasurer was asked “What does your company do?” (not “what is your capital structure?”, not “what is your gearing?”, not “what is your balance sheet projection for next year?” - but: “what does your company actually do?”) many of us would know little more than the thirty seconds spiel to get through the first slide of a conference presentation. Today, treasurers are far closer to the business than they have ever been, in part encouraged by issues such as FAS 133 and IAS 39. Now, armed with a far better appreciation of the cashflow drivers in the corporation, the treasurer is in a position to deliver financial benefits which were previously not possible. Technology has followed this trend and provides treasurers with the tools to achieve visibility, process efficiency and better decision-making across the corporation’s financial landscape.
As Olivier Berthier, Head of Product Management, Misys Trade Services explains,
“Historically, cash management and trade finance were silos. Treasurers may have validated letters of credit before they were submitted to the bank, but there was little real involvement. With the rise of open account, we are seeing these come together on the corporate side and consequently on the bank side too. Vendors therefore need to do the same.”
At the very least, cash managers need future visibility over the transactions which underlie payments for liquidity management and forecasting and by influencing the timing of payments, these can be co-ordinated with collection dates to reduce the cash levels that the business requires. From the bank’s point of view, it makes sense to provide tools which offer an integrated view of both cash and trade, as greater visibility means that they are in a better position to identify additional services from which a company may benefit, such as pre-shipment supplier finance, factoring etc. While these services are not new, they are being used in new ways - invoice discounting, forfaiting, reverse factoring and in some regions, such as Spain and Latin America, confirming.
Foreign exchange is also moving into the same space, as if there is better visibility over the transaction flows, companies can conduct forward FX contracts at the time the purchase order is presented, which could take place automatically with the bank. This provides easier, earlier currency hedging and cash flow certainty and assists in satisfying hedge accounting requirements.
With the much-discussed issues around credit and a general lack of market liquidity, corporations are increasingly focusing on sourcing funds internally rather than looking outside. There are a variety of implications of this. Firstly, there needs to be greater visibility over cashflow across the organisation; secondly, the management of cash needs to be as centralised as possible, using both internal techniques such as in-house banking, multilateral netting etc. and external methods such as multi-currency, multi-entity pooling, notional pooling and zero balancing.
This might sound relatively simple, but as most organisations use multiple ERP systems, or multiple instances of the same ERP system, achieving a coherent view across the corporation can be difficult. As Joergen Jensen, Wall Street Systems emphasises,
“Generally companies will already have systems which can perform many of these functions, but they may have different systems in different regions or across functions.”
Extending the use of the ERP into treasury may in some cases exacerbate rather than resolve this problem, which is one of the reasons that many corporations prefer specialist treasury management systems, which can be integrated with different systems and provide web tools for business units to send and retrieve information from treasury.
Banks too have stepped up to the challenge, and banks’ electronic platforms now provide a far wider range of services than simply bank statement retrieval and transmitting payments. As Bent Benjaminsen, SunGard explains,
“There is a continuing focus on creating internal value - receivables financing, EIPP, collections etc. One of the factors with the greatest impact is how banks are increasingly enhancing their offerings. Banks are now trying to change the paradigm, such as moving to web-based solutions offering more holistic cash offerings, which are more in tune with corporates’ needs.”
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From a personal point of view, one of the most important developments in technology is the removal of the barriers between treasury, payables and collections. In some cases, this is resulting in treasury transforming itself into a financial shared service centre but in others, the departments may still be managed separately but more closely aligned from a technology standpoint. In many ways, it is ludicrous that these functions are often so remote, not only logistically: the business intelligence built up in one area, such as collections, is not always communicated to treasury in a consistent way. Therefore, the strategic, as opposed to purely operational benefit, is often lost.
SWIFT is perhaps the only logical place in which standardised connectivity both bank-to-bank but also bank-to-corporate connectivity can be achieved.
Technology offerings in payments and collections have facilitated the centralisation of payables and collections with companies achieving remarkably rapid payback on these projects - see the TMI USA article on Monster Shared Service Centre online at www.treasury-management.com. However, while there are undoubtedly benefits in centralising and improving the efficiency in areas of payments and collections, the true benefit to the organisation is when payables, collections and treasury are managed cohesively. Banks and system vendors have recognised this and are encouraging better integration across the whole financial supply chain, including both purchase-to-pay and order-to-collection processes.
This allows a far more effective approach to working capital optimisation - for example, rather than treasury having to finance weekly or monthly payment dates, these can be co-ordinated more effectively with collections, forecasting is improved and more strategic decisions can be made about how to engage with suppliers and customers.
The centralisation of payments via SWIFT Corporate Access has been one of the stormiest and initially most controversial developments in corporate-to-bank communications for many years. We will not discuss in detail the different means by which corporates can connect to SWIFT in this article (you can find more about it in TMI’s ‘SWIFT - A Guide to Corporate Connectivity’ which landed on your desk in September 2007; if it’s been buried by now, you can find it on-line at www.treasury-management.com). In summary, there are two models - MA-CUG (Member Administrated Closed User Group) and SCORE (Standardised CORporate Environment). Today, the MA-CUG model is available for privately held firms, and SCORE for publicly listed companies in most countries. SCORE is easier when connecting to multiple banks, but the process is largely similar. While most banks are now reconciled to the idea that corporations can now connect through SWIFT, traditionally the banks’ domain, Olivier Berthier, Misys observes,
“There has been a subtle shift of power between banks and corporations. Banks have never really acknowledged that corporates have multiple banking relationships - no single bank can give a large enough credit line so even corporates with the most efficient and streamlined treasury operations will work with multiple banks. By embracing this more fully, not least with SWIFT corporate access, banks’ solutions and approaches are changing.”
In reality, although earlier multibanking initiatives have paved the way for SWIFT corporate access, in much the same way as FX trading portals have anticipated the wider concept of portals, SWIFT is perhaps the only logical place in which standardised connectivity both bank-to-bank but also bank-to-corporate connectivity can be achieved. SWIFT connectivity has become an increasingly attractive option for large companies, particularly those which have embarked on a wider working capital initiative such as payments centralisation or bank rationalisation. Connecting directly to SWIFT can be quite difficult and resource-intensive, but indirect connectivity, using service bureaux or member concentrators, can greatly simplify the process and effectively outsources the technical effort, so that it becomes a business-led rather than technology-led initiative. Around 80% of all corporates connecting to SWIFT now do so through a service bureau. Hans Cobben, Group Vice President, Global Payments and Messaging, SunGard explains,
“As corporates evaluate the costs and operational requirements for SWIFT connectivity, they often realise that they do not want to bear the up-front investment and ongoing management overhead of connecting to SWIFT directly, using their own in-house infrastructure. For this reason, many corporates are turning towards a service bureau to provide the infrastructure and connectivity.
“A SWIFT service bureau is often a less expensive, faster and easier alternative to direct connectivity, allowing for a full range of SWIFT messages including securities, treasury, derivatives, payments and corporate actions in a fully serviced and secure environment. The indirect access model offers a continuum of service that helps satisfy SWIFT requirements from the largest to the smallest operations.
“This method essentially allows the corporate to outsource the management of the network and connectivity while still offering the same benefits and level of access afforded through a direct connection. The added benefit is a lower total cost of ownership as well as lower operational costs required to support and administer an in-house solution.” [[[PAGE]]]
It is still early days for SWIFT corporate access, and challenges remain. Olivier Berthier, Misys remarks,
“Even though SCORE is simpler than the MA-CUG model, it is still not easy and therefore it will take time to encourage wider support amongst corporates. SWIFT corporate access is still aimed at generic cash management services and doesn’t yet support all opportunities for connectivity between corporates and banks.”
There are changes planned for 2008, one of which is ‘SWIFT Lite’ which aims to simplify pricing (although this has not yet been released) and enable easier, web-based connectivity. The aim is to encourage a wider range of corporate participants, particularly smaller firms. More information will be released during Q2 and the first live pilot client is due by July 1 2008.
Outsourcing technology greatly reduces the amount of resource which treasury needs to dedicate to managing its systems.
So with communication between different parts of the organisation and with external partners becoming easier, why are we still scared of technology? As Bradley Bromide reassures us, “If computers get too powerful, we can organise them into a committee. That will do them in.” Many treasury departments are reliant on a very few individuals who fully understand their systems, how they are set up and maintained. While treasurers recognise that this is a risk, there are rarely many other individuals within the department who feel able to share this responsibility.
Going back to Dilbert, when threatened with dismissal he retorts breezily, “The company will be fine without my secret and exclusive knowledge of the critical systems. If the framistan starts to gabol, just purge the cache within 60 seconds and the servers won’t explode.” (22 February 2008) Obviously nonsense ...but we’re still a little bit scared, just in case... Increasingly, treasurers are seeking to reduce their reliance on key individuals, and/or their IT departments which have other priorities in addition to treasury.
Technology outsourcing is therefore becoming increasingly important - known as the ASP or application service provider model. There are different ways in which this can be applied, but typically the vendor will manage both the software, including installation, maintenance, upgrades etc. and the hardware on which it resides. Suppliers of treasury software such as Reval, SunGard, Wall Street Systems and others report considerable interest in technology outsourcing and some solutions are now only made available in this way.
Outsourcing technology greatly reduces the amount of resource which treasury needs to dedicate to managing its systems and means that treasury can focus on its core competencies. Developments in the speed, capability and security of internet-based tools have greatly facilitated this, as they have also permitted the development of portals. As Bent Benjaminsen, SunGard explains,
“The FX portals have encouraged treasurers to become familiar and comfortable with the concept and we are likely to see an increasing number of tools and range of functionality delivered in this way. Portals can be deployed quickly without the need to install software on-site and the ‘pay per use’ model is attractive, particularly for treasuries with lower volumes. While treasuries of FT-500 companies are likely to continue licensing software in the traditional way, portals provide a more economic and flexible way of delivering solutions to smaller companies.”
There are a plethora of opportunities through technology: payables; receivables; connectivity; risk management; forecasting; compliance; management reporting - the list goes on. So, faced with many alternative ways of spending our time (and money) how do we identify what is most important? Essentially, the priorities for technology spend should match as far as possible treasury’s priorities and/or where the greatest ROI can be achieved. It sounds obvious, but it is not always the case. Developing a watertight ROI can be difficult for treasurers, as typically the cost benefit of a technology project includes both quantitative benefits and qualitative benefits. Furthermore, ‘what if’ risk relating to fraud, missing payments or adverse, unhedged currency movements can seem very real to treasurers but are not always easy to explain to decision-makers outside the department.
A project which includes a payments factory and SWIFT connectivity will usually have a short payback period (typically 12-16 months maximum) with benefits in the cost/efficiency, security and quality of payments processing, together with the wider opportunities presented by SWIFT connectivity (such as statement retrieval etc.) and the strategic benefits of improved forecasting etc. Other types of project without such a compelling ROI, such as risk management technology, can be a little more difficult to justify, despite the advantages.
One of the most important elements of a successful technology project of any type, however, is that you finish it! Although phased projects are very common, in order to take rapid advantage of core functionality, omitting the later phases of the project is almost as common. For a TMS implementation, for example, management reporting, forecasting and integration with other systems are often scheduled for phase two or three. These are often among the most significant reasons for embarking on the project in the first place but frequently they fail to make it into the TMS at all. In the case of integration, too many systems end up operating in a standalone way so many of the potential benefits in cash positioning, automation, forecasting and the ubiquitous straight-through-processing are lost.
So in summary, while the opportunities in payments, collections and trade finance are not necessarily new, a collaborative approach across these functions is becoming more common to allow more effective working capital and financial supply chain management. SWIFT connectivity is increasingly an element of these sorts of project, particularly payments, although few companies would embark on a SWIFT project just for the sake of it. With a wider spectrum of companies embarking on these types of project, deployment options are also changing, with increasing use of ASPs and portals, both of which mean that treasurers can focus on the business outcomes of their technology, not simply the process of implementing and maintaining it.
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