Strategic Treasury

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The Long Run to Centralisation The road to centralisation may be long and bumpy, but donít let that put you off. Greg Zabikow outlines the steps necessary to transform treasury from an operational centre to a powerful strategic force within the business.

by Greg Zabikow, Assistant Treasurer, Evraz Inc NA

This article outlines Greg Zabikow’s experiences at one of the companies in which he has worked, specifically looking at the road to treasury centralisation. While the path may be long and bumpy, he explains that by creating a clear vision of the final destination, and making the journey rewarding with milestones along the way, it is possible to transform treasury from an operational centre to a strategic force within the business.

A challenging start

The company was run on a highly decentralised basis which created a variety of treasury and cash management challenges. Cash was held in lower tier entities which could not then be used to fund deficits in other entities, raising the amount and cost of capital whilst limiting the opportunity to earn a return on investments. Company headquarters could not easily determine cash balances and counterparty risk across the business. We therefore made the decision that we needed to centralise cash in order to leverage surplus cash balances to reduce debt, establish greater visibility, and control. However, in a decentralised business in particular, we recognised that it was important not to try to initiate a major transformation without first demonstrating the value that a change of approach could deliver. Consequently, we took a phased approach to centralisation, respecting the group culture and business organisation, in order to prove how we could add value.

Reaching the first milestone

As a first step, we wanted to achieve greater visibility and control over cash globally and across major currencies without changing existing banking structures but still taking advantage of more competitive interest rates. We also needed to ensure that any cross-entity flows would not be treated as dividends nor attract withholding tax. Furthermore, with a strongly decentralised culture, we did not want to affect individual entities’ bank account structures initially. The solution was therefore to establish a multicurrency notional cash pool. We established a Netherlands-based structure covering 26 currencies with a notional overlay account per currency. At 11am CET each day, the balances in each overlay currency account were converted to euro at a market rate. Surpluses were then used to offset debt or invested in a money market fund. The structure was backed by a parent company guarantee.

During the year following the implementation of the multicurrency notional cash pool, debt levels dropped by nearly 20% with low levels continuing until a major acquisition took place. There were other benefits as well. For example, Treasury and Tax worked together to create a new dividend programme due to the cash visibility. Furthermore, after the banking crisis in 2008, we recognised that the solution had successfully enabled us to reduce the risk to our banking counterparties, with greater exposure to our own business which was easier for us to control.

A proven pioneer

Having successfully established a track record of how treasury could add value without creating a negative impact on the local business units or affecting local management objectives, we were then in a stronger position to recommend a cash and treasury management infrastructure that would deliver further benefits. Prior to the financial crisis, the company had gone through some organisational changes, as well as putting a strong emphasis on cost management and control enhancements. These developments resulted in a greater management appetite for an optimised treasury environment.

There were various lessons we had learned from implementing the multicurrency notional pooling structure. First, it was vital to demonstrate value on a continuous basis, rather than designing a large and complex project where the benefits would not be apparent for a long time. We needed to create a simple vision that could be shared by both central and local management, and to reiterate this frequently so that they could clearly visualise the future and take a stake in it. To achieve this, we needed to build close internal relationships resulting in a good working rapport, and to ensure that we always delivered on our commitments to maintain trust and credibility. The key was to do what we said we were going to do.

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