New research from Greenwich Associates reveals that large US multinationals have resumed pre-crisis efforts to build efficiencies in treasury and cash management by consolidating these functions with a smaller number of providers. With most companies focused on international markets as their primary source of future growth, the largest US and global banks are poised to be the biggest beneficiaries of such corporate streamlining.
Prior to the onset of the global financial crisis in 2008, large US companies had launched a broad initiative to wring out costs and create new efficiencies in their operations and treasury departments. One important plank of this initiative was a reduction in the number of banks and bank systems used for core functions such as treasury and cash management. To a large extent, this push was enabled by the development and improvement of technology that automated certain tasks for the first time and allowed for the better integration of various functions.
New generations of bank platforms allowed corporate treasury centres to avoid the hassle and costs associated with using different systems from different banks with different interfaces. At the same time, the complexity of this new technology was giving rise to increased implementation and integration costs. These costs, which made switching vendors disruptive and expensive, argued in favour of working with a small number of providers who were committed to long-term relationships and willing to invest in the infrastructure required to support them.
However, the drive for efficiency increases stalled in 2009-2010. The reason: in the midst of the crisis, any designs on consolidation were swept aside by the more pressing need to preserve access to credit and to guard against counterparty risk. Rather than cutting back on the number of providers, companies moved to diversify their counterparty lists across credit provision, cash and treasury management and a host of other core banking services. For the span of nearly two years, risk management concerns trumped all other priorities.
Over the past 12 months companies have started taking tentative steps back toward consolidation. This resumption reflects a growing sense of confidence among large US companies. Although companies are far from bullish on their expectations for the economy, most large companies are well-positioned for the near term. After several years of cost reductions, their expenses are relatively low and corporate profitability in general is high. Credit – in the form of both bank loans and funding in the debt capital markets – is in ample supply, and many companies have amassed large holdings of cash. While the European sovereign debt crisis hovers like a threatening cloud, for the moment, companies still view the financial strength of their banking providers as an important component of choosing a long-term partner.
However, as they return their attention to building efficiencies, companies are not consolidating all cash management functions on an even basis. Rather, they are cutting back on the number of banks used for domestic cash management while adding new relationships in international cash management. “This divergence in approach is being driven by companies’ focus on international markets – and in particular Asian markets – as their primary source of future growth,” said Greenwich Associates consultant Don Raftery. “It is this dynamic that will give the largest global banks a strong competitive advantage in the fight to win spots as lead and core cash management providers to large US companies in an era of consolidation.”
Two-thirds of the 286 large US companies participating in a recent Greenwich Market Pulse identify international revenue growth as a priority for the next 12 months. Of those companies, approximately three quarters are looking to Asia as their most important international market for revenue growth. Another 42% of the companies engage in manufacturing operations outside the US. Of these, approximately 85% cite Asia as the region in which they are most likely to expand international manufacturing. Another 48% cite central and Eastern Europe, Middle East and Africa (CEEMEA).
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