The Essence of Netting – and Drilling Holes

Companies operating in this market date back to the
late 1980s and early 1990s. Banks offered netting activities as an additional
service to their clients and other market companies evolved over time from
client-based to cloud-based solutions. All have tried to attract more attention
to this topic. However in recent years more banks have ceased to regard netting
as a core activity so now only a few banks and market players are left. What is
the root cause of this attitude? Is this the result of proclaiming the wrong
message? Or is it just a matter of changing perspective?

Let’s take a few
steps back

How has the market evolved over the past 20 years? Today the
role of treasurer and chief financial officer (CFO) is every bit as subject to
external influences as it was 20 years ago. Globalisation and new interacting
possibilities made the world more transparent, and the financial toolkit more
extensive. In the five financially-challenging years since the 2008 crisis the
core focus of many multinationals has shifted more towards cost control and –
pressured by circumstances – less towards revenue growth. As a result, corporate
financing roles increasingly embrace internal financing possibilities.
Optimising the allocation of financial resources and discovering the best ways
to finance your subsidiaries have moved several rungs up the priorities ladder.
So from a market perspective Intercompany Finance has gained ground.

All
books on the table

But if we open the book of intercompany finance there
are many different chapters that attract one’s attention. To name just a few:

  • Foreign exchange (FX).
  • Liquidity management.
  • Interest.
  • Administration.
  • Forecasting.
  • Bank costs.
  • Basel III.
  • Tax regulations.

Added to these, intercompany
finance has its own peculiarities, some of the many examples being:

  • Lack
    of process ownership.
  • Lack of dispute management.
  • System
    integration challenges.

So clearly the agenda of today’s corporate finance
executives is full, if not overflowing. So how can attention still be drawn to
netting? As it’s clearly of mutual interest to both the financial people as well
as to the market players, the focus should be on getting the message across in
the right way. Perhaps we should take a look at this from another angle and
change perspective again.

Understanding the customer

“People don’t
want to buy a quarter-inch drill, they want a quarter-inch hole,”
runs the
celebrated remark by Theodore Levitt, marketing professor at Harvard University.

Selling ideas, or products or services is all about understanding the true
needs of the client. All possible means should be utilised to fully fathom them.
So when a customer enters the hardware store and asks for a drill, it’s not the
drill he desires but the hole it can produce. But what material does the drill
need to penetrate, how big does the hole need to be and how deep? To fully
comprehend what your customer’s needs are you will not get away with referring
to the ‘drill bargain department aisle’. You’ll need to find out what the
desired outcome should be.

Making latent needs manifest

So it’s not
so much the netting principle itself that needs explaining. It’s all about what
the benefit of netting is; namely saving time and money. And the outcome of that
is that it provides opportunities for treasurers and CFO’s to re-invest that
time and money. What the financial department would really want is to have
enough time to do their job. Netting can pave the way to ensuring you can spend
enough time on your top priorities. So netting should become the obvious answer
any time that financial people ask: ’How can we make sure we have enough time
and money to do our jobs?’

Combined effort

The bottom line is that
if netting requires more attention, then a combined effort of market players,
treasurers and CFOs must provide it. We all need to find out what the real needs
of the company are and position netting in the right way to fulfill those needs.

To some netting might seem like a drop in the ocean, but from another
perspective it could provide the beginning of a new pool that develops into a
new ocean over time.

Conclusions

  • Netting is nothing new.
  • Many different risk areas determine today’s financial agenda.
  • People
    don’t want a quarter inch drill, they want a quarter inch hole.
  • We need
    to sell what a customer wants, not what he asks for.
  • With the right
    perspective a pool can become an ocean.
  • Netting solutions save you time
    and money.
  • These savings enable you to run your business.

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