What Drives the Treasury?


1 June 2005


Michael Thrower of Wall Street Systems explores the factors driving today's treasury and payments operations. The Head of European Business Development also identifies some optimal structures to encourage business growth.


Perhaps the biggest challenge facing finance directors and treasurers today is how to develop a robust and efficient treasury and payments infrastructure that supports the needs of a constantly evolving and developing business.

The key challenges here are reducing operational costs, creating disaster-tolerant infrastructures and establishing scalable operations that will grow with the business.

At the same time, this infrastructure is faced with external pressures from regulators, auditors and shareholders for greater financial transparency and timelier reporting.

This seemingly unbridgeable divide is causing organisations to review their treasury and payments infrastructures. By looking for the synergies in these competing demands, a common way forward can be found that resolves conflicts and delivers an enhanced future state architecture.

Before we start, it might be worth setting out a functional taxonomy for the treasury and payments operation. The purpose of a functional taxonomy is to provide a common method for relating and categorising functions and solutions.

This is important because in the area of treasury and payments there are often major differences in terminology, leading to confusion and a general lack of clarity. Without clarity it is difficult to define our road map to an optimal future state architecture.

ORGANISATIONAL DIFFERENCES

There are a number of common components to be found in almost all companies, but the actual topology and implementation varies considerably. Some organisations have single global ERP systems supporting their core lines of business; others have multiple ERP solutions dispersed across many locations, entities and business lines.

For some organisations, commercial payment processing and collections management are handled within these various ERP silos, but increasingly we are seeing firms move towards a single global payment factory model.

From a treasury perspective, we also see diverse models with individual global implementations that bring efficiencies, standardisation and resilience, as well as decentralised models that allow for local variation and autonomy.

The final component in the treasury and payments taxonomy is the banks. Again, we see a wide range of implemented models from hub banks providing multi-banking to completely decentralised approaches.

From this functional taxonomy we can begin to explore the challenges faced by finance directors and treasurers and move towards an optimal treasury and payments infrastructure.

"Key challenges are reducing operational costs, creating disaster-tolerant infrastructures and establishing scalable operations."

AN OPTIMAL TREASURY INFRASTRUCTURE

Looking at the treasury landscape, we find treasuries in multinationals at various stages along the evolutionary scale.

In some companies, we find treasuries that are fully decentralised – where local business units have full control over foreign exchange exposure, liquidity management and funding, bank relationships and payments processing. The IT architectures in such organisations are generally not integrated, and opportunities to reduce interest expense and bank fees are sometimes not apparent.

These types of organisations are often in a high-growth phase, where such inefficiencies are not a priority.

As treasuries and their parent corporations develop and mature, we see an increased focus on driving down the costs of treasury, especially funding and bank fees. This leads to regional, and ultimately global, treasury operations.

THE GLOBAL TREASURY MODEL

Under the global treasury model, it is easier to achieve more efficient funding and liquidity management, resulting in more sophisticated and integrated technology environments.

In addition, we often find that the headcount required to operate treasury is significantly reduced compared with the decentralised and regional models.

Having achieved a highly developed global treasury model, treasurers and finance directors will typically seek to leverage best practice and expertise within the treasury function by applying their skills to value-added activities.

These may include becoming more involved in the procurement process, bringing pricing, risk management and forecasting expertise into play – for example, when purchasing forward commodity contracts.

AN OPTIMAL PAYMENTS INFRASTUCTURE

One of the main goals for finance directors should be to develop an optimal model for commercial payments. Payment activities and, by implication, bank relationships are often devolved to business units or localised operations.

Increasingly, we are seeing companies moving towards an integrated global payment factory model. Under the decentralised approach, MNCs are exposed to the larger bank fees associated with cross-border payments and higher operating costs caused by each business unit having to maintain teams and systems for managing the payment process.

By moving towards a global payment factory model, companies can dramatically reduce these expenses. At the same time, by taking greater control of the payments process, the treasurer and the finance director will be able to improve their cash management process significantly, creating a more efficient funding model.

THE PAYMENT FACTORY

The entry point in any payment factory is a flexible but robust integration layer. This layer must be capable of handling payment data from multiple sources in a wide range of formats. It will be able to coexist with multiple middleware products and transport protocols, with payment messages arriving in file or web formats or via GUI screen input.

"We are seeing an increased focus on driving down the costs of treasury."

Once payment has been accepted within the payment factory, a verification process will ensure that the message is a valid payment instruction from a trusted source and not a duplicate.

The payment factory will typically have a sophisticated rules engine, which will then determine the lowest-cost method of payment. The objective is to find low-cost payment channels, translating cross-border payments into domestic payments.

By implementing a global payment factory, a company can deliver significant benefits to the organisation, specifically:

  • Elimination of duplication of duties by centralising payment processing, creating critical mass at the centre and thereby reducing headcount
  • Reduced bank fees (with cross-border payments translated into domestic payments), increased use of inter-company netting and a stronger negotiating position in the company's primary banking relationships
  • A rationalised, efficient automated payments channel instead of a system where multiple payment files are transported to and from multiple banks
  • Greater control of the payment process, thereby making the flow and the status of payments more transparent and improving reporting and reconciliation activities
  • Major improvements to funding and liquidity management within the cash management function, resulting in reductions in interest expense and improved management of the timing of payments

Of course, moving towards a global payment factory model is not easy. The implementation and associated business process of re-engineering is not without risk. The key risks to bear in mind are vendor, bank, lines of business cooperation and technology risks.

Vendor risks: it is essential that you select the right vendor. They must have a flexible solution that can integrate seamlessly with your technical environment, that has the implementation skills and post-implementation support model to ensure the project is a success, and that can adapt as your business grows and develops.

Bank risks: it is important that you manage the relationships with your partner banks throughout this process. Improvements in efficiency mean some of your banking relationships will change, so your ability to anticipate and control this migration will be key.

Lines of Business (LOB) cooperation risk: before embarking on a centralised payment factory model, it is essential that the finance director gains buy-in from the LOB, which must now integrate with your payment factory. This is not a central project but one that involves the whole business.

Technology risks: having moved to a centralised global payment factory model, it is likely that you will be processing significant value through a small amount of technology. However, if you put all your eggs in one basket, you need to ensure that you have a sound disaster recovery and business continuity plan in place.

FOLLOWING THE OUTSOURCING MODEL

So far, we have focused on how finance directors and treasurers can get their own house in order by creating a platform to support growth, efficiency and M&A activity. By developing an optimal treasury and payment model, an organisation can go a long way towards achieving best practice in these areas.

Finally, companies must consider the role of outsourcing. Can the outsourcing model boost the value of your treasury and payments operation?

We believe the answer is yes, and we are working with some of the leading providers in the outsourcing industry to bring this model to market. The outsourcing of administrative and back-office functions has been common practice for some time.

"Can the outsourcing model boost the value of your treasury and payments operation?"

Indeed, even full outsourcing of treasury operations is an accepted model thanks to the efforts of Agency Treasury Services. We are now seeing the next generation of outsourcing solutions being brought to market.

Such outsourcing solutions appeal to a wide range of companies. Certainly, there are some organisations that do not want to implement these kinds of optimal treasury and payments infrastructures themselves, in the belief that the same result could be achieved by outsourcing to an external provider bank.

OUTSOURCING BENEFITS

Outsourcing is also a good option for companies that have a regional or decentralised approach to treasury, or those that want to set up an operation in a new territory without investing in treasury funding, exposure management and banking relationships.

Today, sophisticated outsourcing providers can offer the treasurer and finance director either a full service or a tailored service addressing one specific area. This can be done on a global or regional basis.

In short, we now have a much clearer idea of how treasury and payment infrastructures can deliver more efficient and robust solutions. These can be achieved in house through partnerships with key strategic vendors. Another equally valid option is to outsource.

These programmes can deliver real value and make a compelling ROI case. The only question is when to start on the journey.