Corporate Treasury - The Changing Wave


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A new operating model, technology and best practice recommendations for optimizing the corporate treasury function.

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Corporate Treasury - The Changing Wave

  1. 1. Cognizant White Paper Corporate Treasury – The Changing Wave Executive Summary secular change and provides best practice recommendations for optimizing the corporate The operating model of the corporate treasury treasury function. continues to evolve. On the one hand, regulation and market discipline has limited treasuries’ ability and appetite to assume risk with the Global Landscape of Corporate corporation’s capital. On the other, technological Treasury advances have steadily enabled treasury Figure 1 on page 2, represents multiple management to be more centralized and evolve functions that form part of the corporate into a truly global resource for large companies. treasury operations in various organizations. Over the past five years, new operational Direct connectivity to SWIFT has transformed models have emerged, along with considerable the relationship between the corporate treasury regulatory changes and technology paradigms and banks. Hence, corporate treasurers are that have significantly impacted the corporate beginning to revisit the entire operating model treasury sector. The result is radical structural of the corporate treasury, looking at all aspects changes to treasury functions within of the value chain. How should a corporate multinational companies. The changes have a treasury position itself in relation to the vital impact on the relationships between company’s other operating units, so that it can corporations and banks -- from how banking deliver maximum value to an organization? products are selected, to the evolving service- level expectations that treasury organizations Figure 2 on page 3, depicts various components have for financial institutions. There is also a of a treasury operating model (in its entirety or significant paradigm shift in the technical partial) that can transform the way in which approaches used to exchange information multinationals and banks communicate between corporations and their cash electronically. management banks. The introduction of direct corporate access to the Society for Worldwide Payment Factories: Historically, multinationals Interbank Financial Telecommunication (SWIFT) have maintained separate accounts payable has had a positive impact on the operations of (A/P) organizations in each country to provide large global corporate treasuries. necessary local tax and payment expertise. However, there is a growing trend toward This paper proposes a new operating model, centralizing A/P functions into shared service discusses the factors and technology driving centers, a concept known as “payment white paper
  2. 2. Corporate Functions Percentage of Corporations Including These Functions in Treasury I U.S. Cash Management I Borrowing / Financing I Banking Relations I Cash Forecasting Over 80 % I Investing Operating Cash I Treasury Systems I Interest Rate Risk Management I Foreign Exchange / Risk Management 50% to 80 % I International Cash Management I Corporate Finance I Pension / Benefits I Insurance / Operating I Bank Reconciliation Risk Management I Balance Sheet Planning / 20% to 50 % I Capital Markets / Trading Management I Commodity Risk I Real Estate Management I Mergers and Acquisitions Less than 20 % I Investor Relations I Tax Figure 1 factories.” Shared service centers enable higher instruments for large corporations. The result is levels of back-office efficiency. Productivity that corporations have to communicate a improvements can be gained by eliminating significantly higher volume of electronic country-level staffing and by embracing best payment instructions to financial institutions practices on a regional level. Further savings than with checks. For large multinationals, the can be gained by relocating A/P functions to net increase in number of payment messages either captive or outsourced service centers in sent to banks could be in the millions per year. lower cost geographies. Transitions to centralized payment factories require staffing Centralized Treasury: Apart from creating and procedural changes, as well as shared service centers for A/P, corporations are standardization of A/P applications. Many re-evaluating organizational models for the multinationals are re-evaluating their approach treasury function. Many multinational to payment processing as they transition to enterprises are centralizing treasury groups on shared service centers. a regional or global basis. Historically, corporations allowed each country to manage Electronic Payments (conversion of checks to their cash needs locally. Centralization enables EFT): Corporations are rapidly migrating away a number of efficiencies in the areas of cash from checks and paper instruments to electronic forecasting, foreign exchange and cross-border funds transfer (EFT). The most significant payments. However, to realize the benefits, transition is occurring in the U.S., which corporate treasury organizations need access historically utilized checks as the primary B2B to real-time information on account balances, and B2C payment instrument. Credit cards, debit investment holdings and securities prices from cards, online bill pay and lockbox-based image their financial institutions. As a result, the conversion are rapidly driving B2C payments to transition to centralized treasury models is EFT. Adoption of EFT in the B2B payments driving higher demand for straight-through segment has been slower. However, procurement processing of information between corporations cards and Automated Clearing Houses (ACH) are and financial institutions. quickly becoming the primary payment white paper 2
  3. 3. Treasury Operating Model Payment Factories ERP Consolidation Regional Shared Standardized ERP Service Centers Applications Electronic Conversion Centralized ISO 20022 XML Treasury for Payments ACH RIGS and Statements XML In-House Banks Bank Relationship Management Bank #1 Software Swift Connectivity Multi-Bank SWIFT Network Bank #2 Cash for Routing Reporting Consolidation of Banking Relationships Figure 2 Internal Banking: Many large corporations are relationships in each country of operation. establishing in-house banks to support emerging Instead, corporations can consolidate banking centralized treasury functions. These banks are providers to the minimal number appropriate to not officially regulated or licensed financial cover the necessary geographic footprint and institutions. However, they act much like a offer the appropriate product features. As part of commercial bank by offering payment the consolidation process, corporations are processing, liquidity management and collections demanding that financial institutions provide functions to various subsidiaries of large, global lower processing fees, higher service level corporations. The creation of an in-house bank agreements and stronger technical integration. substantially impacts the corporate treasury Corporations are mandating a minimal set of interface. Instead of each operating company technology requirements with which financial routing payment transactions directly to a local institutions must comply in order to compete for bank, all disbursements are channelled through global banking contracts. the in-house bank at headquarters. Centralized payment processing applications managed by the The aforementioned components of the treasury group are configured to evaluate corporate treasury model are and should be opportunities to reduce banking fees. Multi- executed with the help of the following five lateral netting, supplier payment consolidation factors and supporting technology: and local funding techniques are examples of services provided by an in-house bank. ERP Consolidation: Most multinationals are trying to standardize and consolidate various Consolidation of Banking Relationships: Along ERP applications and instances utilized across with centralization of internal functions, their enterprises. Historically, different brands, multinationals are also rationalizing the number operating companies and legal entities have of banking relationships they maintain. Changing operated autonomously with their own regulations in the U.S., the European Union and enterprise systems. Fragmentation of ERP countries such as China have enabled numerous platforms prohibits sharing of information financial institutions to develop a global footprint. across divisions and with headquarters. Consequently, multinational corporations no Standardization of ERP onto a common longer need to establish local banking platform (e.g., Oracle 11i) enables consistent business practices across divisions and the 3 white paper
  4. 4. utilization of shared service centers for back- access. Furthermore, the SAP application has office functions. As multinationals consolidate seamless integration with the vendor’s treasury and standardize their finance, accounting and and accounting modules, thereby lowering the treasury modules, IT organizations are re- barriers to straight-through processing with evaluating their approach to bank connectivity. financial institutions. Out-of the-box support for emerging standards from major ERP vendors will SWIFT Connectivity: Several hundred large accelerate adoption by multinationals. corporations have registered to participate in SWIFT’s corporate access programs. SWIFT Best Practices for Corporate Treasury connectivity can reduce the costs and complexity associated with corporate banking There are many different models for how a communications. Corporations utilize many corporate treasury can be organized, as well as transmission mechanisms to exchange data with various measures of what can be deemed a their banks. High-volume data transfers typically treasury best practice. To find a path to treasury occur over private lines or Internet-based file excellence, corporations must first analyze their transfer. In some cases, older technologies such treasury’s setup and ask why it is organized in a as dial-up connections and fax transmissions are specific way. Even though each treasury is still in use by smaller corporations. Web portals unique, there are practices and service offerings have become an increasingly popular option for that may provide significant improvements to bank interfaces. With SWIFT access, corporations the performance of existing treasury operations. can replace the broad mix of connectivity It is a matter of knowing where and what to look mechanisms with a single, standardized for, and the starting point is to understand and approach. Messages and files can be sent to describe the current situation. SWIFT for routing to any of the over 7,000 banks on SWIFTNet, reducing cost and complexity. At this point, a large number of treasurers will claim that they know their current situation, Multi-Bank Cash Reporting; One of the key precisely. Some may even try to prove this with benefits achieved from centralizing treasury a document detailing their SOX compliance. functions is improved cash management However, to completely understand and capabilities. Treasury personnel with visibility describe the treasury operation, it is necessary into all cash positions at bank accounts to understand and clearly describe the six key worldwide are better equipped to perform cash components that form a corporate treasury. forecasting, borrowing and investment activities. Treasurers must be able to easily One approach that provides a clear collect account balance information from all understanding of how the treasury objectives bank accounts in all countries. Multi-bank and policies drive operations, and how the reporting applications developed by financial different components affect each other, is to institutions and technology providers offer divide the operation into the following account aggregation services. The services components: consolidate end-of-day and intra-day balances for all accounts onto a single Web portal or I Treasury Objectives: This includes the mis- channel the information directly into a treasury sion and objectives that govern a treasury. workstation. Corporations armed with These are defined by the corporation’s senior enhanced cash visibility can make borrowing or management. investing decisions earlier in the day, reduce the I Treasury Governance and Policies: From the probability of overnight idle balances and treasury objectives, a number of governance accelerate the processing of exception items. directives and policies are established. These ensure that treasury operations are per- Bank Relationship Management Software: Bank formed according to the corporate strategies. connectivity has become such a complex issue for corporations that several ERP vendors have I Treasury Processes: For each objective, there introduced specialized software modules to are a number of processes to fulfill the objec- simplify integration. For example, SAP recently tive. introduced its Bank Relationship Management I Treasury Organization: To perform each application. The SAP module offers native activity within the processes and adhere to support for ISO 20022 XML and SWIFT corporate white paper 4
  5. 5. the policies, a treasury organization must For each of the processes, corporations need to have pre-defined roles and responsibilities. define the key performance indicators. This will I Treasury Data: The activities performed in enable them to measure how well a process is the processes store, record, enrich and ana- performing. It becomes quite clear that process lyze treasury data and information. It is the efficiency measures (cost, time and error) are enrichment and modification of this data on valid for most of the processes, and for some, which the activities are focused, and, in turn, they are absolutely vital (e.g., for transaction will ensure that the objectives can be met. processing). Other processes require more treasury-specific measurements. The cash flow I System (Technology Platform): To store, forecasting process needs a measurement for record, enrich and analyze the data and infor- accuracy, while the FX hedging process needs a mation through the different activities per- measurement for risk mitigation related to the formed by different roles, system/technology hedging cost. support is essential. Examples of exercises that can be carried out to However, it is not enough to capture the current improve corporate treasury operations include: state of the treasury operation through the six components defined above. Corporations also I Advanced system comparison and evaluation need to understand the effect that change by analyzing the impact of a system on the would have on treasury operations in terms of processes, organization and data of a treas- performance. If corporations seek to achieve ury. For instance, what does the system sup- treasury excellence, they must determine the port and how? What are the effects, at the effectiveness and efficiency of the treasury process and organizational levels, of chang- operation. This will enable them to make ing between two systems? Which processes informed decisions on improvements. are not correctly supported? It is not hard to establish that the treasury process I Impact analysis of centralizing or decentraliz- is the component most suited for measurement. ing different functions. For instance, what is Treasury processes are defined to achieve the the impact on roles and responsibilities if cor- objectives and adhere to the governance and porations make the strategic move of central- policy directives set forth. These processes are izing the treasury operation? What will be the interconnected with the technology, data and effect on processes? Is the system able to organization that together form the treasury manage this change in roles and activities? operation. Furthermore, it is common practice to I System implementation methodology driven define processes and attach measurements to by the characteristics of the treasury opera- these processes. It can, therefore, be concluded tions’ components. By using the different that it is necessary to define, record and store key components of a treasury operation, corpora- process/performance indicators (KPI) for each tions can ensure that the systems are under- process that has been defined and established. stood and implemented from a treasury Which KPIs are chosen and used will drive how the operation viewpoint rather than a system treasury operation is improved. Defining the functionality perspective. When a treasury correct KPIs is, therefore, crucial. management system is implemented, the methodology utilized is driven from the prod- The processes that a treasury consists of will be uct functionality and features in the system. driven by the treasury objectives, including: I Forecast accuracy affects analysis. For exam- ple, which of the organization’s subsidiaries I Cash flow forecasting. are under-performing relative to treasury I Cash concentration process. forecasts, and what is the impact on hedging I Bank relationship process. and funding strategy KPIs? This could include cash flow forecast accuracy, hedge costs, I Transaction processing. funding costs, etc. I Hedging. I Treasury limits. 5 white paper
  6. 6. Long-Term Strategy, Near-Term providing them with an understanding of what Challenges to Achieving Treasury they are doing to manage capital and risk and to Excellence build value for shareholders. By reaching out to their bank relationship managers and providing Treasury should, as its long-term strategy, use a them with insight into the business, it can methodology that allows it to improve its become easy for corporations to go back to treasury operation continuously over time. The their credit managers with confidence. goal is to create a state-of-the-art treasury based on its situation and environment. As Every business is in the business of managing outlined in this white paper, it is possible to use risk. Successful companies are those that have a the following methodology: true understanding of the risks they face. That doesn't mean they can see the future -- it means I Capture the treasury operations and its com- they are able to achieve a timely and complete ponents. snapshot of the ever-changing present, and I Add key performance/process indicators. establish processes to make the best of events that are beyond their control. This is the only I Analyze the impact of changes, new services way to build confidence within an organization and solutions. and to project that confidence in a marketplace I Use treasury benchmarking to learn from that is full of uncertainty. Therefore, other best-in-class treasuries. performance measurement is a significant challenge for corporate treasury departments. A key issue for treasurers of multinationals in 2010 will be making sure they have sufficient credit lines in place. If current lines of credit Trends in U.S. Corporate Treasury: need to be renegotiated this year, corporations There are numerous developments specific to may well find this difficult to achieve or be faced U.S. based multinationals. These include: with vastly different terms. I Corporate treasury is shifting focus from risk The biggest issue most treasurers will face in 2010 and regulation to traditional challenges, such is re-building debt and equity in their company's as optimizing liquidity and managing cost of balance sheet, which will be vital as a direct capital. consequence of the credit crunch. This will specifically require treasurers to use their funding I Increased centralization and control of global skills because there will be shortages within the treasury activities. business and much reduced availability from I Acquiring and enhancing treasury technology capital market and bank providers. Treasurers remains a main focus, with a majority of com- need to become very good at communicating with panies using or planning to use treasury man- the outside world, particularly with financial agement systems. institutions, about how the business is performing. I Streamlining bank relationships and a focus The theme of treasury communication, therefore, on reducing service provider fees. Seeking a should find the front seat in the present scenario more consultative relationship with banks. to ensure continued effective liquidity and FX risk management. I Key distributions and product initiatives pur- sued by banks are not fully embraced or Corporations must be more proactive in understood by large corporations. maintaining relationships with lenders, white paper 6
  7. 7. References I “Trends in U.S. Treasury Management: Results of the 2007 U.S. Corporate Treasury Research Program,” Treasury Strategies, Inc., 2007, I “Ten Forces Transforming Corporate Banking Connectivity,” GSXinsights, 2009, I Stephen Baird, “Five Trends Transforming Global Treasury,” Business Finance, 2009, I Treasury Perspectives, Euro Finance, I John Tus, Honeywell, “Treasury’s Strategic Role in Value Creation,” keynote speech, Treasury & Risk’s A Vision for Tomorrow’s Treasurer conference, 2007. About the Authors Amish Agarwal is an Associate Consultant in Cognizant Business Consulting, specializing in Payments & Cash Management. He has worked as a domain consultant on multiple payments consulting assignments across geographies. Amish can be reached at About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting and business process outsourcing services. Cognizant’s single-minded passion is to dedicate our global technology and innovation know-how, our industry expertise and worldwide resources to working together with clients to make their businesses stronger. With over 50 global delivery centers and more than 85,500 employees as of March 31, 2010, we combine a unique global delivery model infused with a distinct culture of customer satisfaction. A member of the NASDAQ-100 Index and S&P 500 Index, Cognizant is a Forbes Global 2000 company and a member of the Fortune 1000 and is ranked among the top information technology companies in BusinessWeek’s Hot Growth and Top 50 Performers listings. Start Today For more information on how to drive your business results with Cognizant, contact us at or visit our website at World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: Email: Email: © Copyright 2010, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or oth- erwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.