Oiling the Gears of Finance

The way in which companies approach the structuring of finance teams to achieve optimal performance is increasingly informed by a desire to bring finance and treasury teams into closer relationships with other parts of the business. The aim is to have operations, strategy and finance working towards a common set of goals and achieve a better view of how internal business functions and the overall organisation are performing.

Within this, it is vital to clarify the role of the treasury and have in place a means to measure how and where the impact of its activities are felt elsewhere in the enterprise.

"What happens in the treasury always affects a business unit somewhere," observes Steve Richardson, CFO for the treasury function at Zurich Financial Services Group.

Zurich is a provider of insurance-based financial services. Headquartered in Switzerland, it operates a widespread network of subsidiaries and offices throughout the world, and its provision of general insurance and life insurance products and services to private individuals and commercial enterprises of all sizes is approached very much on a global basis.

The treasury function has of course played a key part in the group’s success over the years. In the world of insurance, the treasury is primarily charged with optimising the return on the capital by allocating that capital to the activities generating the optimum risk adjusted returns, both from an underwriting perspective and from managing the float that is generated by the difference between the premiums received from the insured and the money paid out to them to settle claims. As well as reporting responsibilities, it is responsible for managing liquidity, foreign exchange, interest rate and other risks through hedging. It also controls matters of corporate finance and cash management.

Over time, these activities have become even more crucial to the success of organisations in the financial services sector, and are especially important now in a climate where financial institutions are under pressure from the crisis in the markets and the industry as a whole is under intense scrutiny from regulators, shareholders and customers.

Within the treasury function, Zurich has marked out the specific role of CFO for treasury that Richardson now holds, and it has proven to be a vital cog in the gears of an organisation that has prioritised the quality of reporting and governance.

Richardson built his experience in treasury, operations and consultancy during nine years at PricewaterhouseCoopers in London before joining Zurich. Over the last eight years he has been responsible for systems implementation, centralising the group’s treasury operations and establishing a framework for the treasury function’s risk management and reporting activities. This range of responsibilities has now crystallised into his current role.

Richardson reports to the group treasurer, who in turn reports to the CFO Dieter Wemmer. The CFO for the treasury has the responsibility of overseeing the planning and performance management activities of the organisation’s global treasury function. He also holds the reins of corporate finance for the various corporate entities within the Zurich Group, for which he also controls capital management. In addition, he handles not only the treasury risk reporting process, but also the more formal financial reporting process for the treasury balance sheets.

From its inception the role has had a positive impact within the broader group’s treasury function, which suggests that similar positions may emerge in other financial institutions or large companies that are examining the structure and performance of the finance function.

Common standard, shared goals, clear metrics

The responsibilities of Richardson’s position brings many challenges. Beyond overseeing traditional reporting activities, the task of preparing the balance sheet for the entire group of companies is complex. In all, there are 26 balance sheets across six jurisdictions. Alongside that there is the measurement of financial results and performance management to address.

The state of the world’s financial markets makes corporate finance and capital management just as challenging, and it is no small task to manage exposures or define the right metrics to drive cash flow and return. Richardson has a key role to play in deciding where Zurich makes the crucial trade-off between operational flexibility and the security of the business going forward.

He must ensure that all of the necessary people, controls and systems are in place to monitor the exposures the treasury function manages across its global business units.

"There is a huge demand for explanations of our positions, so we do not want to duplicate our efforts to answer each new question. We avoid the analysis paralysis that comes with a large volume of data," says Richardson.

The financial planning and performance management aspects of his job highlight the advantages of the wider approach that the organisation has adopted to bring the different internal streams together so that they operate as a cohesive entity.

"We bridge cashflow to the business using the language of P&L. We’re concerned with the what, when, where, why, how and who. What will be the impact of our activities on performance and why? When will that impact occur? How and where will it impact our financials? Who will be impacted?" asks Richardson.

The performance of the treasury is measured against a clear plan, and it is up to Richardson to ensure that it is measured accurately and managed in a way that meets set targets.

"Like any other part of the business we must deliver against our forecast and budget," he notes.

A rigorous approach to performance management, in which the role of CFO for treasury plays a pivotal part, has certainly made a difference to the way Zurich operates. Most important is the success it has had in communicating in the language of finance throughout the organisation and focusing the efforts of the many strands within the group around simple, clear goals.

"There have been tangible results from creating the role. We are trying to blow away the clouds of complexity, focus the treasury function and bring all of our information into one place so that we can bring it in the right form to senior management to inform their decisions," says Richardson.

"Most importantly, people can understand the language of finance throughout the corporate entity," he confirms.

The common understanding of metrics and objectives throughout the group is an important part of a more far-reaching effort to co-ordinate a complex organisation.

"We deliver through standard processes, plans and forecasts. All parts of the organisation are subject to the same balance sheet discipline and my role bridges the gap between treasury activities and the rest of the business. Alignment with the business is part of the Zurich way. Throughout the organisation we are standardising the way we do business," continues Richardson.

‘The Zurich way’ is how the organisation refers to a cultural shift that has been taking place over the last few years, as it aims to define and implement a consistent and uniform way of doing business. The foundation for this effort is the introduction of common business processes and methodologies throughout the group. It sets high operational standards, and puts in place the tools and metrics to measure and improve its efficiency and effectiveness as a financial institution.

Since 2003, the Zurich way and other operational improvement programmes have generated over $3.2bn in after-tax improvements.

A role in evolution

With the responsibilities of CFO for treasury clearly delineated, and working in the context of the new operational platform that Zurich has been putting in place over recent years, Richardson’s role is an important element in the group’s combined efforts to address the immediate challenges that stem from the ongoing crisis in the global financial markets.

"Given everything that is going on in the world’s financial markets our main challenge is to filter out the background noise. We need to maintain up-to-date forecasts and focus ourselves on what is really driving results. We need to identify what we can control, and we need to manage our exposure to those things that we can’t control," says Richardson.

"There are a lot of challenges to address, but the key to them is communication within the organisation and setting priorities together. There needs to be discussions with the treasurer, senior management and people right across the business," he stresses.

There is potential in other organisations in the financial services sector, and also in large enterprises in other industries that have the similar levels of capital to manage, for the responsibilities that Richardson holds to coalesce into positions similar to his own. Ongoing pressure from regulators alone is likely to put even greater emphasis on reporting functions in the future, and there is likely to be growing demand for transparency across any business.

"I can see the role being applicable to other organisations. The treasury is under great scrutiny at the moment. Generally, the credit crunch and related issues are increasingly felt in treasury, which is required to generate more information. The decisions that are driven by that information are quite major," says Richardson.

He also believes that his job description will continue to evolve, not least because of the rapid turnaround in market conditions that has taken place in the last 18 months.

"In the future there will be a more forward-looking aspect to the role, focusing on forecasting and planning, and proactive management from a treasury perspective. It will also look at more strategic aspects of the business," Richardson believes.

"The main influence will be more focus on planning and forecasting, from the perspective of liquidity and P&L. People will look at how to drive metrics to drive value out of capital. In general, there is a move in financial services to a longer term view of sustainable performance, not just what meets the reporting cycle."