The future of treasury and finance was under the microscope at SunGard’s London City Day, which offered myriad perspectives on tackling the effects of the financial crisis and moving forward effectively.
Centralisation: the Holy Grail?
The value of centralising treasury was a main focus of the session ‘What happens next in treasury management?’. Sungard’s Andrew Woods, vice president of treasury solutions, who led the session, said that as the role of the treasurer has become more strategic in the past five years, moving from an operational role, via an analytical role, to a strategic role, the treasurer is required to have a much more holistic and sophisticated view of liquidity risk, with a corporates’ foreign exchange (FX), debt and interest rate risk all requiring a centralised view. “The role has been more in the spotlight over the past 18 months or so – it is an evolving part of the business. People are looking to the treasurer to set the operations policy.” Centralisation, Woods added, is a highly topical concern as centralisation of liquidity can obviate a need for third-party funding.
But there are still vastly different levels of centralisation relating to different areas of companies. For example, 94% of companies have a centralised interest rate function, followed by 89% of currency, compared with 17% of payments departments and a mere 6% of receivables – despite the fact that that centralising receivables is a key way of lowering a firm’s days’ sales outstanding (DSO). Woods pointed out that definitions of centralisation range between ‘a single global centre for a function’, to ‘multiple decision-making centres with a single point of execution’. In answer to a question as to whether centralisation was the ‘holy grail’, Woods said that a complete view of finances, which results from centralisation, is indeed vital to corporate survival. “It’s about going back to basics,” he said. “Having a number sitting on a sheet is just not good enough any more.”
A Changing Landscape
On the changing landscape of payments, single euro payments area (SEPA) Direct Debit (SDD) scheme, electronic bank account management (eBAM) and account reporting services were highlighted as the latest ways to improve compliance, efficiency and increase automation. Jon Purr, managing director of SunGard’s AvantGard Solutions, gave an overview of automating credit collection processes, by applying a systematic approach to assessing customers’ credit risk and focusing on those representing the highest risk, automating the order-to-cash (O2C) workflow, and following through with an effective and proactive collection policy.
Business consultant Patrick Dixon drew a large crowd, despite a lunchtime session, with his presentation on restoring the reputation of banks. He warned of the danger of believing that improving compliance would, per se, have a positive reputational impact. “Compliance will help you stay out of prison, but it won’t protect your brand. It is about how the public perceives your level of risk.” Dixon also warned against a reliance on benchmarking, or “hiding behind the collective wisdom of the industry”, as a substitute for risk analysis. This type of paradigm shift, he said, would help restore the public perception of banks as a fundamental part of countries’ infrastructure.
The Right Information
The danger of excessive liquidity was examined in ‘What happens next in liquidity management?’. Consultant Leonard Matz said: “Too little liquidity will kill your bank quickly. But too much will kill it slowly. You can’t always hold out for a low-probability/high severity event.” He warned of the dangers of relying on value-at-risk (VaR) figures as an indicator for future liquidity. “It is an indicator of your current position. Instead, look in the lobby: are there people there? Are the doors open? If yes, you have enough liquidity. But you need prospective information.” He added that, as poor liquidity is a consequence rather than a cause of financial difficulty, the right mix of key risk indicators (KRIs) would reveal potential problems. The answer, Matz said, is contingency planning, which allows firms to identify secondary sources of income before the liquidity buffer becomes dangerously depleted by funding a negative cash flow.
Matz emphasised that stress testing was about identifying vulnerabilities rather than predicting the future, pointing out that most of the recent financial crises bore no resemblance to the crises that preceded them. Stress tests need to incorporate both short- and long-term scenarios; creating a framework for stress testing would offer most institutions a degree of warning. “Most liquidity events unfold over time, even if that time period is as short as three days or as long as 12 months,” he said.
Adapting for the Future
Summing up, Clive Pedder, chief executive, SunGard Northern Europe, said that although markets around the world were now applying the recommendations to protect themselves, a strong element of uncertainty remained: “[They] will apply these recommendations but no one can tell what will happen in the next six or 12 months. We need to understand that we will see more changes to our industry – and we will have to adapt.”
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