Corporate Treasury: Lessons Learned and Post-Crisis Priorities

The economic crisis has created new challenges for all organisations, regardless of their size or industry. Recent research1 has found the organisations that most effectively weathered the storm and overcame those challenges were those with the ability to access mission-critical information that was timely, accurate and usable.

Two Different Responses to the Crisis

On 15 September 2008, the collective gasp of corporate treasury departments was heard around the world as the reports of Lehman Brothers’ collapse emerged. While Lehman’s competitor Bear Stearns had collapsed earlier that year, the effects of the Bear Stearns collapse had been significantly mitigated by the swift work of the Federal Reserve in striking a deal to sell Bear Stearns’ assets to JPMorgan. Lehman was different: it was not rescued. In addition, as one of the largest financial institutions in the world, nearly every treasury group had exposure to the firm, either directly or indirectly. Corporate treasurers around the world knew the ripple effects would be unlike anything experienced before.

Within minutes, treasurers around the globe received panicked calls from their chief financial officers (CFOs) asking “What are our exposures to Lehman?” At that moment, treasury groups generally had one of two very different reactions: a fortunate few breathed a sigh of relief, while scores of others felt their hearts pound. While this initial experience was significant, it was only the first of many similar calls over the next few days, weeks and months, as CFOs called to ask about exposures to money market funds (MMFs) that froze or ‘broke the buck’, risks stemming from the collapse of the world’s largest insurers, and the failure of two top 10 US-based banks, among dozens of additional financial nightmares. Treasury had never before been as visible within the organisation, nor as critical.

Looking back, the driving forces behind these two different corporate reactions may be slightly less obvious than they appeared at first glance. The initial reactions of those that breathed a sigh of relief were not due to this group having significantly smaller exposures. In the case of Lehman Brothers, nearly everyone was vulnerable. Rather, the primary driver of the relief or panic felt was whether the treasurer was able to identify the amount or extent of the exposure when the CFO called requesting it. Further, the impact of knowing these exposures extended beyond the simple ability to provide information to the CFO – the less time it took to identify the extent of the problem, the less time it took to resolve it.

One year later, discussions with industry practitioners reveal that the most influential factor for treasury groups that successfully navigated the past 12 to 18 months hinged on whether the information needed was readily available, usable and accurate. Treasury groups have been consistent in their feedback: information is power. Unfortunately, for a large majority of corporations, critical information was located across a variety of disparate internal and external systems and spreadsheets.

The information needed varied considerably by treasury group, from the counterparty exposures mentioned previously to global cash and liquidity positions, future cash needs, working capital balances and more. Because of this, all corporations depended heavily on a combination of their internal systems, bank online reporting platforms, and third-party solutions, such as enterprise resource planning (ERP) and treasury management systems (TMS), risk management products and tools, among others. When these systems shared information readily and seamlessly, treasury was positioned to respond swiftly and intelligently as events occurred.

Lesson Learned: Information is Power

Among the many lessons learned from the crisis, one of the most common themes we heard from the corporate community was that information is power. Critical data exists across a corporation. This information needs to be aggregated to provide a full and accurate picture of a company’s situation for regulatory compliance, management control, and investor needs. Beyond the internal reporting, such data helps corporations assess trading partners and better manage those relationships.

Effectively and efficiently performing many of the most critical treasury functions depends largely on the integration of the multiple systems on which the information is stored. For example, optimising liquidity requires the ability to identify global liquidity positions on-demand across many banks. Effective risk management demands immediate access to counterparty exposures, and functions such as working capital management, cash forecasting and fraud are no different. The effectiveness and success of a treasury group depends heavily on the ability of its information sources to connect and integrate with one another.

Empowering Treasury for the Future: the Role of Technology

Corporations use a variety of systems to access information that is timely, accurate and usable, including treasury management systems, dedicated risk management solutions, market information systems, investment management systems, ERPs and more. Discussions with industry participants indicated, at an aggregate level, that the most critical information corporations needed during the past year was related to providing visibility into global cash and liquidity positions, risk management and working capital automation. Treasury groups that had implemented the technology necessary to access this information prior to the crisis were often able to act in near-real-time – much more quickly than those that had not.

Figure
1: Top Priorities of Corporate Treasurers Post-Crisis


Source: Aite Group

Based on discussions with treasury groups, vendors and banks, we estimate that approximately 90% of US-based corporations with annual revenues of less than US$1bn struggled to access mission-critical information when it was needed and have yet to invest in the necessary technology to do so. For these firms, much of the past year or two was spent trying to keep up, rather than looking ahead. While larger organisations generally had technology in place, many still struggled due to greater exposures and higher vulnerability to global risk. Aite Group estimates that 65% of firms around the globe with annual revenues greater than US$1bn had technology in place to support their most critical needs as the crisis played out.

Visibility into Global Cash and Liquidity

This information provides corporate treasury groups with the ability to accurately determine end-of-day cash positions and day-to-day borrowing needs. As every organisation experienced the credit crisis to some degree, visibility into cash was essential to success. Unfortunately, however, much of this information exists across myriad internal and external locations, and many treasury groups struggled to get information that was as clear as they desired.

At the most fundamental level, cash information is spread across a variety of banking relationships. Depending on their size, industry and needs, the number of corporate bank relationships varies considerably. At the upper end of the market, our research finds that one in two corporations work with at least 20 banking partners. With so many partners, accessing the necessary information can be daunting.

As such, many companies have invested in technology solutions to automate this process. Such systems poll an organisation’s banks and aggregate positions across accounts, automating what could be a full-time process prone to manual errors into a streamlined, easy-to-access, accurate process (assuming the banks pass accurate information on). These types of solutions include TMS/treasury workstation cash and liquidity modules, multibank reporting tools from treasury banks, the Society for Worldwide Interbank Financial Telecommunications (SWIFT), and others. These technology partner solutions focus on automating a critical, yet often underfunded, task. For treasuries with these systems in place during the credit crisis, benefits such as quickly identifying underused internal cash and borrowing needs and focusing on strategic tasks (such as risk management and reducing the cash conversion cycle) were realised.

Risk Management

As much as anything else, risk management was exposed as a major concern in many corporate treasury groups. Corporations faced exposures to risks ranging from various investment vehicles MMFs, asset-backed securities, etc.) to counterparty risks due to failed banks and even supply-chain and channel partner risk. Systemic challenges such as credit and other risks were also plentiful. To identify, quantify and respond to these risks required corporations to quickly access information such as that mentioned in the Lehman Brothers example above.

Unfortunately, investments in risk management are often made because of rather than in case an event happens. Many corporations experienced this over the past year when their CFO called to ask about each of the counterparties that had failed. Counterparty risks, such as the Lehman example, are a significant risk, but by no means the only risk faced by treasury. Others include liquidity risk, currency risk, regulatory risk and countless other factors. The key to effective management of all of these risks is, once again, information.

The technology that supports treasury in risk management comes from a variety of places. Some risks, such as counterparty exposures, can be managed and hedged in a TMS. Treasury can input its debt or investment policy and set limits per counterparty or investment vehicle. If a bond purchase will increase the company’s exposure to the bond issuer beyond the predetermined limit, for example, the system can generate an alert message and even prohibit the transaction from occurring. One of the risk management finalists at Treasury and Risk’s 2009 Alexander Hamilton Awards conference hailed the benefits of risk management technology, saying, “When news came that one of our counterparties was struggling, I was able to identify our exposures, in real-time, and actually called my CFO before he called me.” Information is power.

Other risk tools include dedicated risk management systems that pull market information, credit information on trading partners, currency exposures and many others. Different solutions address different risks. Until this crisis, however, risk management was one of the most underfunded investments in treasury groups large and small. Because of this, it is of little surprise that risk is front-of-mind to all treasury groups, and many are looking to put systems in place as they move forward.

Working Capital Automation

Corporations of all sizes identified working capital as a key area of focus. Solutions that automate working capital management empowered corporations by shortening the cash conversion cycle. Further, as working capital is often financed by bank credit lines, reducing borrowing needs by using the corporation’s own cash means lower interest costs.

Responsibilities for working capital management differ by corporate department, with needs varying considerably. In the accounts receivable (A/R) group, for example, a key area of focus and measurement is the ‘hit rate’, or the ability of the group to reconcile payments as they are received. Because of this, A/R groups are highly concerned with actual transactions, and less concerned with aggregate trends.

Treasury groups, however, are very concerned with aggregate trends. When tasked with optimising liquidity and minimising associated risks (such as liquidity shortfalls), for example, the length of time it takes to collect an organisation’s receivables, has significant impact – especially in the current economic environment. As a result, corporate treasurers are increasingly involved in A/R and other working capital processes, as a company’s receivables represent liquidity that will, sooner or later, exist as cash in the organisation’s bank accounts.

Corporations look to their banks and technology vendors to support these processes. As a result, working capital functionality is high on the development list for most banks and the vendors that support them. These solutions address both the transaction-level needs of accounting groups, such as reconciling payments received or event-driven payables released, and aggregate information to assist treasury in cash positioning, forecasting and other liquidity management functions.

Further demonstrating this increased role of treasury groups is the feedback of vendors and banks that support working capital processes through technology solutions. Historically, the sale of payables, receivables and other solutions supporting working capital were targeted at accounting groups: A/R or accounts payable (A/P) managers, controllers, CFOs, etc. Vendors and banks have indicated that over the past year or so, treasury has begun to play a huge role in an organisation’s decision to purchase such solutions. In many cases, treasury is even the group that initiates the relationship.

Conclusion

The financial crisis has taught the treasury community a variety of lessons – prime among them is, again, that information is power. To be successfully leveraged, however, information must be easily accessible, accurate, and available on demand. This often requires the use of various treasury technology solutions, many of which have yet to be deployed by most treasury groups. As corporates of all shapes and sizes emerge from the crisis, many will take advantage of their new-found roles of influence and implement solutions that support them in a variety of tasks, most significantly visibility into global cash and liquidity positions, risk management, and working capital management.

1 Aite Group research.

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