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Aberdeen Group: The Integrated Approach to Treasury and Risk

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http://spr.ly/SAP_Finance - Learn how to achieve greater returns through automation and visibility. This report, based on a survey of 100 organizations, outlines the reasons that organizations integrate treasury and risk data, the key capabilities of a Best-in-Class organization, and the benefits of an integrated solution.

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Aberdeen Group: The Integrated Approach to Treasury and Risk

  1. 1. This report, based on a survey of 100 organizations, outlines the reasons that organizations integrate treasury and risk data, the key capabilities of a Best-in-Class organization, and the benefits of an integrated solution. THE INTEGRATED APPROACH TO TREASURY AND RISK: ACHIEVING GREATER RETURNS THROUGH AUTOMATION AND VISIBILITY June, 2014  Nick Castellina, Research Director, Business Planning and Execution Report Highlights Best-in-Class organizations are 50% more likely to have implemented integrated treasury and risk management solutions. The Best-in-Class are 27% more likely to be able to manage cash and risk together. The Best-in-Class are 29% more likely than All Others to have the ability to monitor and detect fraud. Organizations with an integrated treasury and risk management solution see a greater return on short term investments and have a lower cost of short-term borrowed capital. p2 p5 p9 p11
  2. 2. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 2 Today's finance department is in a state of evolution. No longer is finance purely looked at as a back office process that lacks innovation and does not serve any strategic function. Rather, a modern finance department can be a source of efficiency, collaboration internally and externally, and as a source of valuable insight that can be used in decision-making. Aberdeen's 2014 Excellence in Financial Management Survey noted that the second and third leading priorities of finance departments are the automation of core functions and promoting collaboration across all finance roles. The number one priority: to conduct assessments of financial processes and technology capabilities. This means that today's finance function is looking for technology that will automate processes and provide integrated views of data across finance functions. Take, for example, treasury and risk management. These two functions can benefit greatly through effective integration. This is why Best-in-Class organizations are 50% more likely than All Others to have implemented integrated treasury and risk solutions. From payment and other operational financial systems, to cash and liquidity management, to debt and investment management, through to financial risk management; top performers can benefit from an integrated, end-to-end approach to treasury and risk. This report, based on a survey of 100 organizations, outlines the reasons that organizations integrate treasury and risk data, the key capabilities of a Best-in-Class organization, and the benefits of an integrated solution. The Need for Integration in Finance When asked to indicate their "top two" pressures, respondents to Aberdeen's 2014 Excellence in Financial Management Survey placed the most emphasis on risk and how it relates to cash forecasting and treasury management (Figure 1). From payment and other operational financial systems, to cash and liquidity management, to debt and investment management, through to financial risk management; top performers can benefit from an integrated, end-to- end approach to treasury and risk.
  3. 3. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 3 The Aberdeen maturity class is comprised of three groups of survey respondents. This data is used to determine overall company performance. Classified by their self-reported performance across several key metrics, each respondent falls into one of three categories: • Best-in-Class: Top 20% of respondents based on performance • Industry Average: Middle 50% of respondents based on performance • Laggard: Bottom 30% of respondents based on performance • Sometimes we refer to a fourth category, All Others, which is Industry Average and Laggard combined. Figure I: Pressures Impacting Treasury and Risk Management Forty-one percent (41%) noted increased financial risk. Further, 36% cited an inability to accurately forecast cash flows. But risk can take many forms. One example could be the risk of regulatory oversight. Another could be the risk of customers defaulting on payments. This could have a significant impact on cash flows. For these reasons, among others, 21% indicated that they had insufficient information to effectively hedge or ensure against financial risks. Therefore, modern finance organizations must find a way to provide greater visibility across finance and risk factors in order to aid in decision-making, compliance, and efficiency. As a result of these priorities, Best-in-Class organizations have initiated a variety of strategies that will help to improve treasury and risk management. Organizations were asked to select their "top two" strategies and all are important, but there are two key strategies that Best-in-Class organizations have particularly differentiated themselves with. These include the implementation of technology and the automation of processes (Figure 2). 16% 21% 32% 36% 41% 0% 20% 40% 60% Lack of visibility into and understanding of outstanding accounts receivables Insufficient information to effectively hedge / insure against financial risks Greater regulatory and compliance oversight Inability to accurately forecast cash flows Increased financial risk (foreign exchange, interest rate, sovereign risk, commodity risk, etc.) Percentage of Respondents, n = 100 Source: Aberdeen Group, June 2014
  4. 4. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 4 In Aberdeen's 2014 Excellence in Financial Management Survey, respondents were ranked on the following criteria: • Days to report global cash position: o Best-in-Class - 1.9 o Industry Average - 7.4 o Laggard - 8 • Variance in global cash forecasting: o Best-in-Class - 3%, o Industry Average - 8% o Laggard - 11% • Change in risk exposure over the past year: o Best-in-Class - 20% decrease o Industry Average - 1% increase o Laggard - 2% increase Figure 2: Best-in-Class Strategies to Align Treasury and Risk By implementing treasury and risk management solutions, organizations can connect related functions in the finance department. And by automating financial transactions, and other processes, organizations can ensure efficient hand-offs and connected process flows. For example, this could enable organizations to build out deals based on liquidity requirements, or dynamically update cash forecasts in real time. The goal is to create a comprehensive approach to risk management. These strategies may be accomplished through the implementation of a variety of capabilities that relate to treasury and risk, whether separate or integrated. Key Capabilities for Effective Treasury and Risk Management Effective treasury and risk management starts with integration. Note that Best-in-Class organizations are 47% more likely than All Others to have integrated business systems that serve as a complete and auditable system of record (Figure 3). 21% 10% 27% 53% 38% 16% 21% 21% 47% 68% 0% 20% 40% 60% 80% Formalize risk management and cash flow forecasting processes Implement new treasury and risk management technology Centralize treasury and payments processes Improve cash flow forecasting Automate financial transactions Percentage of Respondents, n = 100 Best-in-Class All Others Source: Aberdeen Group, June 2014
  5. 5. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 5 Figure 3: Taking an Integrated Approach What does this mean? One thing that it means is greater visibility. In fact, Best-in-Class organizations are over twice as likely to have real-time updates to financial metrics. This ensures that they can react to business events immediately and make agile decisions. Integrated systems also enable the ability to connect related functions that may have existed in silos previously. For example, the Best-in-Class are 27% more likely to be able to manage cash and risk together. Taken separately, there are two key components of this strategy: risk analysis and visibility into cash:  Best-in-Class organizations are 56% more likely than all others to have the ability to identify and quantify risk exposure. This means that organizations can identify the factors that may impact performance, as well as what that potential impact may be.  Sixty-eight percent (68%) of the Best-in-Class have real- time visibility and control into all cash account balances. Therefore, they may understand how much cash is 72% 61% 56% 61% 68% 49% 28% 44% 39% 58% 0% 10% 20% 30% 40% 50% 60% 70% 80% Integrated business systems serve as a complete and auditable system of record Real-time updates to financial metrics Ability to manage cash and risk together Ability to identify and quantify risk exposure Real-time visibility and control into all cash account balances PercentageofRespondents,n=100 Best-in-Class All Others Source: Aberdeen Group, June 2014
  6. 6. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 6 available to them at any given time in order to aid in decision-making. When focusing on treasury specifically, Best-in-Class organizations have implemented a variety of capabilities that impact visibility, efficiency, accuracy, and enable advanced cash management functionality (Figure 4). Figure 4: Enhanced Cash Management Over 60% of all organizations have the ability to forecast cash positions for defined time periods. This is the foundation of effective treasury management and extremely valuable across the organization. With visibility into future cash positions, business leaders can have confidence that cash will be available when committing to investments or attempting to build a war chest. But treasury management is so much more than simply providing visibility into cash positions; there are essential and advanced processes that Best-in-Class organizations implement at a higher rate. For one, 67% of Best-in-Class organizations have streamlined and centralized payment processing. This helps to ensure accuracy, efficiency, and consistency. It can also ensure 61% 67% 58% 56% 72% 60% 59% 33% 30% 51% 0% 10% 20% 30% 40% 50% 60% 70% 80% Ability to forecast cash positions for defined time periods Streamlined and centralized payment processing Ability to invest end-of-day surplus cash Ability to support multiple pooling structures and bank relationships globally Support for integration of new banks / accounts PercentageofRespondents,n=100 Best-in-Class All Others Source: Aberdeen Group, June 2014
  7. 7. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 7 that data is updated more quickly and available across the organization for other functions such as reporting. It can also impact customer satisfaction. But these treasury management capabilities are pretty consistent across all organizations, where the Best-in-Class really differentiate themselves is in some of the more advanced capabilities. For example, due to greater visibility, Best-in-Class organizations are 76% more likely than All Others to have the ability to invest end of day surplus cash. Provided they understand risk factors, this enables organizations to get greater value of the capital that is available to them. Further, capabilities such as the ability to support multiple pooling structures and bank relationships globally (56% vs. 30%) enable more creative and flexible ways to manage cash that can lead to greater value. This flexibility can be attained by utilizing business solutions to efficiently manage the new integration of banks and accounts, a capability that best-in-Class organizations are 41% more likely to have. The connection between treasury and risk comes through reporting, data sharing, and control (Figure 5). In order to ensure that processes are completed efficiently and that data is utilized effectively, there must be control that ensures best practices are adhered to, such as the enforcement of standards based on the presence of risk that will allow or limit spending. Additionally, organizations must enforce regulatory compliance in a dynamic regulatory environment. There is value in tracking all financial instruments and activity in a single, consistent database, with accurate accounting and compliance. This is why the Best-in- Class are 73% more likely than All Others to have continuous process compliance monitoring.
  8. 8. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 8 Best-in-Class organizations monitor a variety of risk factors at a higher rate than All Others: • Credit risk: 47% vs. 36% • Interest rate risk: 37% vs. 25% • Counterparty risk: 32% vs. 16% • Reputational risk: 26% vs. 21% • Do not track risk: 21% vs. 44% Figure 5: The Importance of Reporting and Control The integration of treasury and risk also impacts visibility across functions and enables more robust decisions. The Best-in-Class are twice as likely as All Others to have automated financial reporting. One specific example is the automation of transaction posting to general ledger and other financial systems, a capability that 74% of the Best-in-Class organizations have implemented. Through these links top performing organizations are able to gain access to a variety of risk management capabilities (Figure 6). Figure 6: Effective Risk Management 71% 50% 74% 41% 25% 51% 0% 10% 20% 30% 40% 50% 60% 70% 80% Continuous process compliance monitoring Automated financial reporting Automated transaction posting to general ledger / financial systems PercentageofRespondents,n=100 Best-in-Class All Others Source: Aberdeen Group, June 2014 72% 67% 67% 33% 41% 46% 51% 52% 21% 39% 0% 10% 20% 30% 40% 50% 60% 70% 80% A risk- and compliance-aware culture is established to ensure accountability and alignment to organizational objectives Ability to evaluate credit Ability to monitor and detect fraud Ability to optimize and automate hedging strategies Ability to optimize cash and support intercompany funding and lending PercentageofRespondents,n=100 Best-in-Class All Others Source: Aberdeen Group, June 2014
  9. 9. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 9 Effective risk management starts with making risk a part of organizational culture. Best-in-Class organizations are 57% more likely than All Others to accomplish this. Risk is an extremely broad topic, but there are many capabilities that Best-in-Class organizations are more likely to have, including those that factor risk data back into treasury management. These include:  Sixty-seven percent (67%) of Best-in-Class organizations have the ability to evaluate credit, in comparison to 51% of All Others. These organizations can then ensure that they are taking on customers which will be able to pay on-time. This will enable accurate cash forecasts.  The Best-in-Class are 29% more likely than All Others to have the ability to monitor and detect fraud. Fraud is a potential risk factor, and this capability allows organizations to account for it in plans, react to it more quickly, and potentially avoid it.  The Best-in-Class are 57% more likely than All Others to have the ability to automate hedging strategies. This capability enables organizations to monitor risk and utilize the data to manage cash through making investments to reduce the risk of changes in the price of assets.  Forty-one percent (41%) of the Best-in-Class have the ability to optimize cash and support intercompany funding and lending. Optimization comes through careful analysis of what may happen, which requires insight into risk factors. These capabilities create an organization that is able to utilize risk broadly across the organization. Something that is difficult to do without modern solutions.
  10. 10. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 10 The above capabilities are enabled, in part, by a variety of technologies. By implementing this technology, organizations can help to facilitate processes, gain greater visibility, ensure compliance, and increase collaboration within finance. Best-in- Class organizations are more likely to implement solutions for treasury and risk management, as well as governance, risk, and compliance (Figure 7). But where organizations can truly differentiate themselves is by implementing solutions that provide this functionality and link this information to provide a more connected view of the essential data. Therefore, Best-in- Class organizations are 50% more likely to have implemented integrated treasury and risk management solutions. Figure 7: Key Tech Enablers of the Best-in-Class The Benefits Compare organizations with integrated treasury and risk solutions to those without (Table 1). Organizations with these solutions deliver a greater amount of more accurate reports to managers in the time that they need to make decisions. This can impact overall forecast accuracy because decisions are based on real business conditions and take into account risk data. These 50% 44% 39% 33% 30% 26% 0% 10% 20% 30% 40% 50% 60% Treasury Management System Governance, risk, and compliance (GRC) solutions Integrated Treasury and Risk Management platform PercentageofRespondents,n=100 Best-in-Class All Others Source: Aberdeen Group, June 2014
  11. 11. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 11 are broad metrics, but pay close attention to have integrated treasury and risk solutions impact treasury and risk metrics specifically. For example, organizations with an integrated treasury and risk management solution see a greater return on short term investments and have a lower cost of short-term borrowed capital. These organizations are able to forecast cash twice as effectively. On the risk side, organizations with an integrated treasury and risk solution saw half the loss due to unmitigated risk over the past two years as compared to organizations without a solution, and saw a 5% decrease in risk exposure over the past year. Combined, these improvements provide a compelling case to implement an integrated treasury and risk solution. Table 1: The Benefits Source: Aberdeen Group, June 2014 Average Performance Integrated Treasury and Risk Not Integrated Percentage of reports delivered in time needed by managers for decision-making 84% 73% Accurate financial reports in the last 12 months 90% 80% Variance in revenue forecast between forecast and actuals 9% 17% Average return on short-term capital investments 2.6% 2.4% Average cost of short-term borrowed capital 2% 2.8% Variance in global cash forecasting 4% 8% Loss due to unmitigated risk over the past two years 2% 4% Decrease in risk exposure over the past year 5% 0%
  12. 12. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 12 Key Takeaways A modern finance department prioritizes automation of processes and collaboration across finance through the investment in technology. Rather than individual silos, finance must be a comprehensive, cohesive unit, with end-to-end visibility, control, and automated process that are in alignment across finance. Treasury and risk management are perfect examples of processes that can benefit from this approach. In order to accomplish this, organizations should heed the following recommendations:  Take an integrated approach to finance and GRC. Best- in-Class organizations are 47% more likely than All Others to have integrated business systems that serve as a complete and auditable system of record  Provide visibility into cash management and forecast effectively with predictive data. Over 60% of all organizations have the ability to forecast cash positions for defined time periods.  Identify risk factors and monitor them on an ongoing basis. Best-in-Class organizations are 56% more likely than all others to have the ability to identify and quantify risk exposure.  Automate transactions and reporting. The Best-in- Class are twice as likely as All Others to have automated financial reporting. Further, 74% of the Best-in-Class have automated transaction posting to general ledger and other financial systems.
  13. 13. www.aberdeen.com The Integrated Approach to Treasury and Risk: Achieving Greater Returns through Automation and Visibility 13  Utilize key technology. Best-in-Class organizations are 50% more likely to have implemented integrated treasury and risk management solutions. Following these steps can help organizations to maximize the value of their cash while avoiding the negative impact of risk. These are valuable tools in the modern environment. For more information on this or other research topics, please visit www.aberdeen.com. Related Research Integrated Cash Flow and Balance Sheet Planning: Accurate Forecasts, Confident Decisions; May 2014 The Modern Approach to Cash Forecasting: Enhanced Accuracy Enables Smart Decisions; December 2013 Treasury and Risk Management: Top Financial Risks and Tools to Ensure Business Continuity; February 2013 Effective GRC Management: Strategies for Mitigating Risks and Sustaining Growth in the Tough Economy; May 2012 Author: Nick Castellina, Research Director, Business Planning and Execution (nick.castellina@aberdeen.com) About Aberdeen Group For 26 years, Aberdeen Group has published research that helps businesses worldwide improve performance. We identify Best-in-Class organizations by conducting primary research with industry practitioners. Our team of analysts derives fact-based, vendor-agnostic insights from a proprietary analytical framework independent of outside influence. The resulting research content is used by hundreds of thousands of business professionals to drive smarter decision making and improve business strategy. Aberdeen's content marketing solutions help B2B organizations take control of the Hidden Sales Cycle through content licensing, speaking engagements, custom research, and content creation services. Located in Boston, MA, Aberdeen Group is a Harte Hanks Company.

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