Most global corporate treasurers are calling out in their sleep for a centralised treasury structure. Whether the focus is on managing payments and collections, or cash management structures, cash concentration techniques, liquidity management, etc, centralisation is a treasurer’s equivalent of ‘nirvana’ because it provides visibility, control and efficiency.
The gtnews Cash Management Survey, conducted in conjunction with SEB, has tracked the desire to centralise treasury over the past five years. This year’s survey continues the trend of positive signs towards a centralised structure, with an increase in companies with a global cash concentration structure – 34.9% this year, compared with 25.5% of companies in 2009. Over half (52.1%) of companies said they are likely to move to a centralised cash management structure in the future.
The year-on-year cash management surveys’ results are compelling: while processes and mandates are to a large extent decentralised, treasurers continue to project a substantial move to centralisation in the future. Yet, in reality the projection doesn’t seem to move any closer to fulfilment (see Figure 1).
This contradiction is reflected in this year’s survey analysis, which states: “The fifth cash management survey shows a worrying consistency with previous ones. Treasury organisations are still seeking to abolish decentralised and manual processing – but very few are seeing tangible results in their efforts to improve cash management processes.”
What are the significant benefits to centralisation and why is change happening so slowly?
Benefits Derived from Centralisation
A long list could be drawn up with regards to the benefits of centralisation, but the three cornerstones that underpin why it is so important and sought after are:
- Fundamental economics.
- Quality and transparency.
- Top management demands.
Today, fundamental economics are about cutting costs and therefore treasurers need to gain visibility and control over cost. The drive for efficiency provides numerous business case scenarios for centralisation, for example: streamlining vendor payments by executing them in the same way from one location, instead of making the payment in different ways from different locations; handling incoming supplier invoices, preferably electronic ones, in one efficient workflow; streamlining the process of billing customers, etc.
When considering quality, it is easy to see how things will improve with centralisation. Having common, and as few as possible, processes under centralised management will enable continuous enhancement of data accuracy and reliability. This in turn will have a positive effect on cashflow forecasting, liquidity management and working capital management. Also, once a centralised and streamlined structure is in place, it will be easier and more cost efficient to add newly acquired companies and extricate divested entities.
Transparency will increase as best practices are applied: it will become evident where a treasury can get the best value out of its business processes, whether this is in bank agreements, pricing, connectivity, reliability or straight-through processing (STP).
In addition, current best practice is to centralise the trade finance function and to integrate it with cash management, according to gtnews Trade Finance Survey 2010, because payment data needs to be visible whether it comes from a trade finance document, on open account or is part of the company’s other cash flows. The survey showed that 75% of companies have either fully or partially integrated their trade finance with their cash management activities. In the 2009 survey, the figure was 72%, so this shows a shift – albeit a small one – in the right direction.
Senior treasury management demand for sufficient and reliable information of liquidity positions has increased over the years and was, of course, boosted by recent events. During the worst of the financial crisis, top management, and even board members in many companies, woke up to the imperative of having a good overview of liquidity and cash flow today, tomorrow and in the coming weeks.
All of a sudden the shortcomings of a decentralised set-up were quite apparent in terms of accurate information gathering. Senior management have now focused more attention on financial reporting on liquidity positions, customer and supplier behaviour, bank covenants and, consequently, the reliability of those reports. Only a centralised structure can give them the oversight needed for this new, tougher environment.
Two Centralisation Case Studies
One northern European manufacturing company has centralised its treasury operations into a brilliantly simple structure. In this centralised set-up, one company buys all the components and value-adding activities from production entities, which means that it owns the finished product and sells it on to dealers and distributors. In practice, this means that one company sources and buys components globally, one company gets billed by all relevant suppliers globally, one company owns all production components regardless of which production unit receives the shipment, etc.
Consequently all vendor payments, irrespective of supplier origin, are handled centrally in one streamlined process. This, in turn, means that forecasting of cash flows are straight forward and risks, such as counterparty risk, political risk and currency risk, are centrally and commonly assessed.
Another example is a continental European manufacturing company whose structure is built on technology bringing all units, purchasing, production, sales, etc, onto the same enterprise resource planning (ERP) system, with a seamless link to its treasury system. Although the company’s large number of subsidiaries are scattered all over the world, it allows for centralised functions and practices such as billing, purchase order and supplier invoice handling, trade finance document handling, vendor payments, reconciliation of accounts receivable (A/R), cash flow forecasting, cash concentration, risks management, etc.
An additional benefit of both approaches is that treasury gets the possibility to act as an internal advisor in different areas, for example working capital management, thanks to the vast amount of information from different parts of the organisation becoming accessible, transparent and comparable. With its financial competence and central role, treasury gets the unique opportunity to extract, visualise and push best practices across a number of processes.
Why is Centralisation Not Happening?
Although there are some positive signs of movement towards centralised structures for global cash concentration, there is a long way to go before it corresponds with the future aspiration, as liquidity management, forecasts, A/R and accounts payable (A/P) are to a very large extent still decentralised. Generally, change in this area has been very slow.
To find out why, I posted this question on the financial online community thebenche.com in March 2010:
“Why is it that the treasurers’ wish for centralisation is not coming true? Is it because of lack of resources? Lack of focus from top management? Or is it too difficult to drive group-wide initiatives from a treasury standpoint? Or something else?”
Some of the answers/comments were:
- “Lack of resources could be a basic constraint. For many years the treasury responsibilities have been extending and diverging. This has resulted in increased workload, which of course has been accelerated by the need for short-term risk management – something which has required treasurers’ full attention during the crisis.”
- “In a worst case scenario, you have to perform a totally different set-up with every bank you approach. This eats up time and money, which are scarce resources these days. This is why centralisation is not happening.”
- “Having a sound and realistic business case is probably something you should have as a first priority when beginning a major centralisation initiative. However, foreseeing every possible obstacle and unforeseen cost and delay is, to say the least, very difficult.”
- “For some organisations the centralisation of liquidity management has tremendous value, but for others centralising risk management or setting up a payments factory provides the most bang for the buck. Quantifying the value of centralisation initiatives for management and other stakeholders in the organisation is of utmost importance, and then implementing projects in an prioritised order.”
In summary, there are a number of reasons as to why centralisation is not happening:
- Resource constraints in treasury and other adjacent parts of the organisation.
- Weak treasury mandate resulting in poor understanding and response from business units and other units outside treasury.
- Lack of communication and common goals between different parts of the organisation.
- Many, differentiated and increasing responsibilities has been put on treasury over time, resulting in a catch-22 scenario, where being stuck in an obsolete or inadequate system environment leads to cumbersome manual processes adding to workload and operational risk.
- Treasury is a business support function (not core business), resulting in inadequate top management attention and unwillingness to invest in needed technology.
- Difficulties in arguing a business case good enough compared to other types of initiatives.
The drive towards centralisation is in the hearts and minds of treasurers because they can see the huge benefit that their department – and the business as a whole – could gain from streamlining treasury processes and technology. However, they seem to have a hard time arguing their case for much-needed investment. Why? One reason might be that, although they are a highly specialised and competent species, treasurers are also quite lonely – isolated deep inside a corporation.
But this situation is changing due to the economic crisis – treasurers are becoming much more involved in board-level decision making. Therefore, they need to be able to articulate a sound business case for investing in technology to enable centralisation.
The solution to the 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.
Additionally, in order to gain commitment for investment, a treasurer needs support from the core businesses of the company. One way to get that support is to work more in sync with the different business units, understanding their business and providing guidance and advice in financial matters.
Treasurers should also tap their core relationship banks for advice. When it comes to cash management, for example, banks should be able to offer advice on different alternatives and share experience on best practices.
The approach to take here is one of continuous improvements over time. In this sense, centralisation is indeed an eternal trend, as there is always something more a treasury could do to enhance quality, reduce cost, improve visibility, boost working capital performance, etc.
The catch-22 scenario and how to start building a solid business case will be elaborated in separate follow-up articles planned during the autumn of 2010.
gtnews Cash Management Survey Results 2006-2009
- In 2006, 38% of respondents had global oversight with regional autonomy of cash management and 26% had a global cash management structure. The survey results showed that more corporates (39%) wanted their treasuries to manage cash management on a global basis in the future. Only 5% said their treasury would have cash management structures that allow for some level of local autonomy in the future.
- The 2007 survey found that 25% had a decentralised structure, 24% had a regional cash concentration structure, and 20% had a global cash concentration centre. Over a quarter (27%) said they would adopt a global cash concentration centre and 20% said they would adopt a transaction centre (payment and collection factory or shared service centre). The results supported the trends identified in 2006 that fewer corporates will stick with a decentralised structure – a decrease from 25% currently to 3% in the future – and that regional concentration will still exist but for fewer corporates – 24% to 13%.
- In 2008, 28% of respondents operated a decentralised structure. Corporates were working towards creating global and regional cash concentration centres, with just 8% committed to a decentralised structure in the future and 29% moving towards global cash concentration.
- In 2009, the majority of respondents (68%) chose decentralised structure or regional cash concentration (overlay structure). Significantly, 89% said they plan to move to a centralised structure in the future.
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