Catch 22 – The Treasury’s Dilemma

Treasury is caught in a paradox: on the one hand, its ever-expanding remit is putting more and more pressure on its departments, and yet over the years many units have faced cutbacks in terms of personnel. So treasury is expected to do much more with fewer resources.

In addition, while companies are seeing great opportunities opening up in pursuit of centralisation in a number of different areas, in reality the structural transformation does not seem to be happening to any great extent. This was discussed in a recent article ‘Centralisation – The Eternal Trend?’, where year-on-year cash management surveys have seen treasurers continue to project a substantial move to centralisation in the near future, however processes and mandates remain, to a large extent, decentralised.

What is the ‘Catch-22’?

Treasuries are under increasing pressure due to demands to absorb responsibilities for new strategic tasks while not being able to expand its workforce. Yet many treasuries do not fully utilise their treasury management system (TMS) functionality and therefore still struggle with cumbersome, labour-intensive and manual or semi-manual processes. It is this contradiction that is forcing treasuries to invest in new treasury modules and technologies to free up its workforce’s time in order to cope with expanded responsibilities.

The expanding role and responsibilities of treasury are very clearly displayed in the gtnewsCash Management Survey 2010, conducted in conjunction with SEB. This development has been tracked over the past five years (see Figure 1).

Figure 1: gtnews Cash Management Survey 2010

Source: gtnews

One interesting finding from the surveys is to what degree treasury has responsibility for a certain areas. The treasury departments saying they are the owner of a specific area has risen dramatically over past two years, for example:

  • Cash management ownership has risen from 75% in 2008 to 91% in 2010.
  • Ownership of financial risk management/mitigation has gone up to 71% from 52%.
  • Corporate finance from 40% to 61%.
  • Trade finance from 40% to 51%.
  • Capital markets/investment has more than doubled, from 42% to 85%.
  • Pensions management from 18% to 33%.
  • Treasury IT/systems from 38% to 66%.

Why Catch-22?

The reason that treasuries are stuck in a catch-22 scenario can be traced to their shortcomings in presenting a solid business case to top management. If they could achieve this feat, they could also launch initiatives that would add value to the company.

To find out more on this topic, I posted a question on the financial online community in April 2010: “The catch-22 could be partly found in the difficulty to build a strong business case to get management buy-in for necessary investments. If treasuries could compile a solid case, then they would be able to launch initiatives adding a lot of value to their company. Do you agree?”

One response was: “One catch-22 that I have discovered (luckily not personally) is that treasury organisations rise and fall with their standing/transparency in the eyes of their senior management, which is usually the chief financial officer (CFO). Cash management, particularly, is a black hole for many treasurers, since the usual experts have credit, risk or foreign exchange (FX) management background. But an advisory role, for example a governance role in the area of the single euro payments area (SEPA), is something that rarely surfaces in the mind of the person ultimately responsible. Even potential savings of €1m or more per year are turned down after comparison with sparing some basis points on merger and acquisition (M&A) deals or bonds.”

Any Quick Fixes?

If you already have a TMS in place, the probability is quite high that you are not using it to its limit. As frustrating as it must be, many treasurers use a TMS but also note that much treasury personnel time is tied up in manual and time-consuming routines. The treasurer intuitively knows that this should be done in a different, more efficient way and that it should be taken care of by the TMS in an automated way. And the chances are pretty good that it could – it’s just so hard to find the time and energy to look into it.

With a bit of support from outside the company there might actually be some quick fixes, as this case study reveals. Recently, SEB Cash Management did an advisory workshop on cash and liquidity management with one of its customers – a large corporate with an international business and a rather small treasury function – using the Cash Management Value Chain methodology. After having assessed the company’s processes and practices, system set-up, treasury processes and policies by means of a scorecard, the results were discussed and compared with relevant best practices. It immediately became apparent that many treasury processes were manual or semi-manual.

The main reason for this was that the TMS was not used to its full potential. The TMS was originally installed with very basic functionality, but had additional modules and processes that could be easily activated and put to use. Some very easy fixes provided immediate payback in terms of the time invested.

Furthermore, certain medium- and long-term actions were identified and prioritised. The exercise resulted in the treasury having a well-formed agenda, guiding them in short- and medium-term action planning, as well as in more long-term initiatives.

The project gave the treasury the opportunity to look up from the day-to-day workload and see things from a wider, overall perspective.

Risk Management

Controlling and hedging financial risk, the core activity of a treasury unit, has become a very wide area to manage. It’s multi-dimensional and global. But what other unit in a company would be better suited to assess and mitigate risk than the treasury?

Traditionally, treasury covers liquidity, foreign exchange (FX) and interest rate risk. But emerging over time and stressed by recent events are other risks, such as counterparty risk (banks) and operational risk, which have surfaced in the minds of treasurers.

gtnews surveyed the area of risk management during the spring of 2010, the results of which can be read here. One of the key questions was: “Which risk do you see as being the most important for your treasury to manage successfully in the 12 months to come?” The answers were distributed as follows:

Figure 2: Most Important Risks for Treasury in Next 12 Months

Source: gtnews

But it is important to remember that risks are not just one-dimensional. For example, counterparty risk is not solely from the perspective of banking partners but also other important counterparties, such as strategic customers and suppliers. Liquidity risk also has many layers to it: apart from not having adequate funding in place, a corporate must also have an appropriate forecasting process in place to avoid a situation where it runs into a short-term problem with paying suppliers and investors when they otherwise have a sound financial position.

Building Blocks of a Treasurer’s Business Case

The solution to the catch-22 dilemma is to mix different ingredients into the picture – return on investment (ROI) alone will probably not do the trick. A treasurer needs to take in – and preferably put a value on – working capital performance, compliance, quality and different types of risk. Elements to consider are:

  • Cost – reduced cost, as well as avoidance of cost.
  • Process efficiency – working capital.
  • Compliance versus non-compliance.
  • Quality.
  • Control and visibility.
  • Risk management from a more holistic perspective.
  • Technology – software-as-a-service (Saas) and, looking further into the future, maybe even cloud computing.

A Useful Formula

Process efficiency drives cost and working capital, which in turn is a driver for free cash flow. Risk management is a driver for a company’s weighted average cost of capital (WACC). Together they determine the value of a company (see Figure 3).

Figure 3. Process Efficiency and Risk Management Through to Company Value

Source: SEB


Treasury can play a vital role in making these drivers transparent. It can demonstrate to management and business units what can be done in terms of hands-on activities, as well as modelling the end result. Treasury can also use this formula for its own purposes, further expanding it and taking ownership of this tool in order to build the business case for more investment.

Upcoming Article

The next article in this series, to be published in early December, develops an in-depth analysis of how to make use of these different building blocks and compile them into a convincing business case.

To learn more about SEB, please visit the company’s gtnews microsite.


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