Strategic Treasury Means Operational Excellence

Three fundamental drivers in wider society are also relevant to the way that treasury will evolve in the future. These are:

  1. Innovation and the ongoing need to pursue productivity improvements to sustain value creation.
  2. Individualisation and the move to more network-based societies.
  3. The integration of societies, including the implications that this has for financial risk management.

How do these drivers help treasury to develop a strategic outlook?

Treasury has a specific role to play in realising a company’s pursuit in ongoing productivity improvements. It is responsible for the design and maintenance of a group’s global cash management, working capital and payments infrastructure.

With this role in mind, AkzoNobel redesigned its infrastructure under a treasury transformation programme. The programme included revising its bank relationships, bank account structures and the treasury systems used to execute payments and process collections. The company tendered its regional cash management activities, which resulted in the selection of strong regional banks. The company has implemented centrally-designed bank account structures in Europe and the Americas, and Asia is currently in implementation phase.

The programme resulted in transaction cost savings of up to 80%, plus the rationalisation of the bank account structures and standardisation of the cash management practices. The company can now automatically sweep end-of-day cash balances where feasible and focus on effective investment of balances where it is not. In addition, AkzoNobel has installed treasury software for straight-through processing (STP) of payments and the automatic allocation of incoming receivables.

Operating in 84 countries means that the company has to adapt to local practices, rules and regulations. The central blueprint must be attuned to local circumstances; however, the company pursues the highest level of standardisation that is possible under these operating conditions. An example of this is the payment factory model developed for regulated economies. This year it went live in India and China. Once fully implemented the overall cost profile of treasury transactions is expected to be reduced by approximately €20m.

This is a great example of how treasury can contribute strategically in the area of cost management and operational leadership. So, while the topic is operational excellence, the implications are of strategic importance.

Other productivity improvements include pooling global treasury activities into a virtual trading room and implementing software that facilitates STP when executing a trade. AkzoNobel implemented FXall and Bloomberg’s FX<Go> for currency trading and MyTreasury for investing cash balances in money market funds (MMFs). The company is currently implementing an FX trading-on-behalf-of concept to support centrally currency dealing by its subsidiaries in regulated economies. AkzoNobel also looked at trading platforms for centrally executing trade finance instruments for its affiliates.

Organisational Set-up

The roll out of a global treasury infrastructure is no easy task and, together with the eliminating legacy structures, will take the company well into 2013. However, once it is in place, AkzoNobel, which historically had decentralised management structures and a highly fragmented infrastructure, will be able to run its global treasury activities more centrally than ever before.

This in its turn has implications for the development of the organisational set-up of treasury. Although AkzoNobel may not necessarily move to a completely centralised structure, I see examples where – once the infrastructure has been put in place to facilitate central execution – the organisation can move from a central standalone treasury centre that predominantly supports the top holding company to a central treasury centre supported by satellite regional treasury centres. From there it can develop a treasury centre that reaches out through its infrastructure to a network of focal points in the various countries where that group is active.

It is an interesting change that mirrors developing network structures in societies. AkzoNobel is momentarily in Stage 2 of its development, but I know of at least one peer company that has moved to Stage 3 and is highly networked. This advance, which brings together the need for local proximity, the operation of clear global standards and an efficient infrastructure, can be seen as a response to the pressures for realising the best of both worlds: local proximity and global efficiency.

Treasury’s evolution can be part of a wider company strategy seeking both the competitive advantage of cost management and the extraordinary flexibility and agility need for the customer interface. It is yet another example how treasury can contribute to the strategic agenda of a company, this time through the way its organisational set-up develops over time.

Risk Management

The third area of strategic treasury is that of financial risk management, which covers the spectrum from capital, liquidity, currency, interest rate to credit exposure management. It belongs to the core responsibility of treasury and is logically linked to any contribution treasury can make strategically.

The first point of departure is in the way that risk management is pursued. Whereas historically treasury relied on value-at-risk (VaR) and Monte Carlo simulations to come up with likely outcomes, this is no longer sufficient.

We experience unprecedented turmoil as a result of the on-going global financial crisis. In 2008 it caused extreme pricing of available capital or closure of markets altogether, while today it provides extraordinarily cheap funding for a corporate such as AkzoNobel. The interrelatedness of our world results in increasing levels of systemic risks that feed this volatility. What is required, therefore, is risk evaluation that is broader than that offered by traditional methods.

For example, extreme stress testing, scenario analysis and fundamental forecasting are now part of an extended toolset. Treasury needs to use these tools, with the aim of building scenarios of possible outcomes that are more reflective of the uncertain distribution curves faced today. AkzoNobel, for example, has used scenario planning as part of its funding strategy and extreme stress testing as part of its interest rate exposure analysis.

The second area of interest is holistic financial risk management, which is the comprehensive analysis of a financial risk category. What is meant by holistic financial risk management and why I classify it as strategic is best explained by two examples:

1. Capital risk management: Through the use of five-year group forecasting numbers, information on the maturity profile of AkzoNobel’s debt book and its desired level of liquidity headroom, treasury forecasts the company’s future funding needs. In addition, it considers the gearing headroom that AkzoNobel has, both in terms of the risks that the company wants to be able to absorb and the rating implications that lower or higher levels of net debt can have.

Treasury then uses this information to make recommendations to AkzoNobel’s board on timing and type of funding, as well as on other aspects of the capital structure, such as the dividend policy or the implications of a share buy-back exercise. The funding strategy is comprised of funding actions and scenario analysis on possible deviations from the group base case assumptions.

2. Interest rate risk management: This is realised by optimising the fixed versus floating interest rate profile of AkzoNobel, considering all relevant factors, such as debt book characteristics, and cash forecasting. Treasury evaluates the net impact that changes in interest rate level will have on its interest coverage ratios and considers material interdependencies with other parts of the group. An example is the relationship between inflation and interest, which tends to be a positive correlation. With all other things being equal, higher levels of inflation support higher absolute nominal contribution margins. This means that AkzoNobel is better able to bear the cost of a higher interest rate under such conditions.

Finally, treasury forecasts the impact of switching fixed positions to floating by modelling the implied forward rates and deducting from the constructed forward curve the historical forward premiums as established through data analysis. By considering the ‘riskiness’ of the current environment against what has been seen as an historical average level of risk over the measure period, we can adjust the actual risk premium deducted.

Through the use of implied volatilities treasury can then establish 95% likelihood intervals for the forecasted interest rate levels and consider, for different fixed/floating interest rate profiles, the impact of these on the interest coverage ratios mentioned earlier. As AkzoNobel currently has a highly conservative profile, the potential upside is that the treasury expects to be able to realise €25m in interest per year.


Treasury has an important role to play in the financial strategic agenda of a company. This manifests itself it the role it can play in operational excellence, the example it can set in implementing diffused organisational structures and the contribution it can make in dealing with the systemic financial risks that a company faces.



Related reading