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

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. 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. 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. 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. 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. 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. References
I “Trends in U.S. Treasury Management: Results of the 2007 U.S. Corporate Treasury Research Program,”
Treasury Strategies, Inc., 2007,
http://www.treasurystrategies.com/resources/research/CTS07FinalFindings.pdf.
I “Ten Forces Transforming Corporate Banking Connectivity,” GSXinsights, 2009,
http://www.gxsinsights.eu/2nd_edition/innovation/0809_Ten_Forces.htm.
I Stephen Baird, “Five Trends Transforming Global Treasury,” Business Finance, 2009,
http://www.treasurystrategies.com/resources/articles/TransformGlobalTreas.pdf.
I Treasury Perspectives, Euro Finance,
http://www.eurofinance.com/level3/treasury-perspectives.
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 Amish.Agarwal@cognizant.com.
About Cognizant
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