The first step for any company looking to centralize is to streamline systems and processes, according to Shahrokh Moinian, head of CMC sales for western Europe at Deutsche Bank. “But in order to be able to put in place a centralized treasury, companies have had to centralize IT platforms—for example, moving to a single ERP system, a single treasury workstation and other IT systems within finance,” he says. “This has given many companies an opportunity to set up shared services, in-house banking, payment factories and so on.”
This is critical to creating a cohesive liquidity management picture. Indeed, one reason why many firms struggle to, for example, produce accurate cash forecasts is the surfeit of systems and applications being used to manage the underlying data. They are trying to accurately bring together information often from multiple treasury management systems, spreadsheets and email. Working with such disparate data sources makes it difficult to capture the real information that is required to produce an effective forecast.
Walsh: Many companies are starting to tackle receivables
Ron Wessels, treasurer at wine and spirits distributor Maxxium Worldwide, says: “When Maxxium started back in 1999, I had the opportunity to set up the treasury department from scratch. Besides defining various processes, I had to choose a treasury system that was able to grow with the company.”
The group had three different vendors pitch for the business, with special attention given to centralization of functions such as in-house banking, payment factoring and FX management. “IT2 of Simcorp came out offering the best solution,” says Wessels. “Two years later we started to run a cash pool in mainland Europe, and on the back of it we set up an in-house bank.” He says what he finds most useful about the in-house bank structure is the single-entry straight-through processing (STP) it offers. “We are clearing 10 countries on a daily basis with only two people,” he says.
One treasurer at a European multinational explains that central treasury within their organization works as an internal bank for the entire company. “All business areas are obliged to call us when they want to do some deal or foreign exchange transaction and so on. We sit on top of it all, and when business areas want to do something, it goes through us,” this treasurer says. “The goal for us was to see the big picture—to get a good overview of the financial and currency risks across the company. In addition, we wanted to get benefits of scale,” he adds.
The advantage is in the net position, explains Rob Hansell, product manager with SunGard AvantGard: “On a given day if there is a net positive position that central treasury has, they will get a better rate for investing because they have the backing of all the assets across the organization, and with this borrowing is less because they are borrowing on the net position of the entire pool.”
Moinian adds: “Companies can get internal cost reductions through economies of scale—by having, for example, a single treasury accounts-payable and accounts-receivable function rather than one in each country. Then there are the IT cost reductions.” By streamlining the number of systems they use, companies can garner great savings in maintenance costs. “The cost for maintenance per interface between systems can be between $25,000 and $50,000 per year, so reducing those connections can lead to great savings,” he says.
Madhavi Mantha, senior analyst at financial research firm Celent, notes that because inter-company payments are handled by the in-house bank, companies also achieve greater efficiencies in their inter-company payments processes. “For example, by reducing settlement errors due to the automated processing of internal payments, it lowers the process-related costs of these transactions,” says Mantha.
In addition, there are the banking cost reductions. When companies centralize, in particular by setting up an in-house bank, they tend to reduce the number of banks they work with. By doing so, there is a volume effect: A higher volume of transactions to fewer banks means better pricing and a reduction in the number of connectivities that they have to maintain.
Maxxium is a case in point. Wessels says: “We have moved from multiple banks—more than 30 in Europe—managed locally, to few banks—just four—managed centrally. Needless to say, this has pushed down our bank costs.” Cost efficiency is a big driver for such developments. “By completing projects such as the in-house bank, we have managed to drive down our financial expense bill by almost one third,” he adds. The group has streamlined internal operations, reducing the number of people running treasury, and has also streamlined external operations.
However, an in-house bank is not right for all companies. It is important to have the size, structure and scale to make centralized functioning useful. Explains Hansell: “From an in-house banking perspective, this is something that makes sense for corporates with multiple divisions that on a daily basis require funds or have excess funds to invest.” Then the central parent company would create an internal vehicle to invest or provide funds to business units. “This is something we have seen for years with larger US companies, but it is really growing rapidly now as well with global corporates,” he notes.
Conversely, for those companies that are becoming more global and developing operations in numerous countries and market environments, managing entity-wide liquidity becomes that much more difficult. Whether such developments involve organic growth or involve the acquisition of new businesses—and the business processes and systems that come with them—the complexity of the organization grows exponentially. In order to create the greatest efficiency across business processes, both for expanding entities and for established multinationals, by centralizing as many functions as possible it creates the opportunity to better control processes and have a clearer picture of global liquidity.
While the basic structure has been available for quite some time, how corporates are using it has changed. Increasingly, companies are taking advantage of a centralized structure to drive through efficiency in other processes across the working capital cycle. This has long been a trend for payments management, but now corporates are also looking to other processes.
Weiss: SEPA will trigger growth in the adoption of payment factories
Walsh explains: “Often in the past, subsidiaries decided terms with clients, and a lot of efficiency was lost in the receivables flow. Subsidiaries would say, This is the local practice and clients won’t accept anything else. By moving this into a shared service environment, they can take best practice from one country and employ that in other countries. With a shared service center they don’t have that emotional relationship so they are more easily able to see the benefits of moving to more efficient collections instruments and force that from a business-case perspective without damaging client relationships.”
The introduction of SEPA looks like it could improve the business case for in-house banks. Juergen Weiss, chief product architect of SAP’s financial supply chain and treasury management solutions, believes that SEPA will definitely have an impact. “The need to manage local bank accounts for payment purposes goes away. We expect even more corporates to set up payment factories as a result,” he says.
In theory this means that a company could have just one bank connection in Europe to run local and pan-European transactions—at equal terms and conditions for execution time, execution duration, price, tracking, reconciliation and correspondence. “Additionally, with SEPA there will be a competition on transaction costs among countries and among banks in countries participating in SEPA,” Weiss says.
However Graham Lloyd at PA Consulting has a different take on things. “In our view it is hard to make a continuing case for a true in-house bank. The payments market alone is increasingly such a volume-driven, commoditized activity and subject to increasing regulation that it makes little sense to enter, except as a seriously invested player willing to compete for third-party business,” he says. “It would be better for several large corporates to buy an established bank, but even here it would be a struggle against the bulge players.”
“It is better to think of transactional activity as an outsourceable activity and apply the golden rule of outsourcing: Don’t outsource the problem; clean it up as far as possible in-house first,” Lloyd suggests.
Regardless, many corporates are adopting a centralized approach to finance functions, as Aliza Knox, senior vice president, Visa Commercial at Visa International, explains. “The trend seems to be toward at least regional if not global consolidation of cash positioning and cash disbursements,” she says. “Otherwise the risk is that they are using cash ineffectively.”