Treasury centralisation and outsourcing has been a realistic alternative for treasurers for more than 10 years. While the ideal treasury structure is one bank and one automated system, in reality there are a number of factors that can and do shape the practical processes, location and behaviours of today’s effective treasury function.
Treasurers face numerous dilemmas in selecting the optimal degree of centralisation and outsourcing, and one size by no means fits all. They must ensure that processes are in line with the company’s strategic intent and tactical performance at that time.
Centralisation is, of course, a broad term that can be achieved in a number of ways. This can be by geography; by product line or division; by client type – making a distinction between corporate or consumer; or by taking advantage of shared service centres (SSC) and payment factories.
Benefits of Centralisation
Centralisation has been driven by the tangible benefits that it provides. Some of these include:
- Greater transparency: a centralised system provides a framework to ensure that all transactions are visible, giving a true, complete overview of business.
- Centralisation also allows for improved cash flow management through total liquidity visibility and viewing of the net result as an asset.
- Speed of consolidation: a centralised system provides real-time information consolidation and presentation.
- Evaluation: a consolidated system facilitates the accurate measurement of treasury effectiveness and highlights key areas that require greater focus.
Generally, these are linked to greater economies of scale, with a higher efficiency and a short payback period, as well as a significant positive project net present value.
Key Drivers for Change
Technological developments have played a significant role in the move towards centralisation, as they provide a reliable mechanism to capture, transfer and analyse data. However, such developments have introduced new risks which the industry cannot ignore.
As a result, treasurers are increasingly expanding the scope of their responsibility to ensure they know and understand the material impact of these changes. The full risk treasury capability can include responsibility for all financial risk management including cash, trade, foreign exchange (FX), commodity, pensions, insurance, and some even have responsibility for corporate finance.
Against this backdrop the choice of location to centralise is an important decision, and one that can prove somewhat complicated. There are numerous factors to bear in mind before a well-informed course of action can be determined. Some of these include:
- Economic and political factors: the outlook stability and the level of taxation.
- Regulatory framework: central bank reporting requirements and labour laws.
- Regional variation: language barriers and time zone factors.
- Talent: the availability of expertise.
- Control: exchange control concerns and repatriation risk.
Making the Choice to Outsource
The number and size of treasury outsourcing companies has grown significantly over the past decade. Favoured locations for outsourcing services include Ireland, serving European treasuries, and South Africa, serving the whole African continent.
There are aspects that are driven by the company’s structure, culture and the defined role of treasury, as well as external factors. Cultural nuances can be complex and entrenched and can include an individual’s previous experiences of outsourcing, the preservation of intellectual capital and, in many cases, a view that treasury is a competitive advantage which should be kept within the company.
In addition to the factors considered for treasury centralisation, treasury outsourcing brings more dilemmas. These include:
- Reputational risk: this needs to be managed in the event of outsourcing underperformance.
- Skill retention: if not carefully considered it can make the practical unwinding of an outsourcing agreement difficult.
- Safety of proprietary information: there are concerns of the real – both from a commercial and client perspective – and the underlying commercial viability of these service providers.
Where to Next?
In the short-term it is likely that the current economic turbulence will keep treasurers fully focused on tactical treasury management. The distraction inherent in process changes will be a low priority as the treasurers’ critical role will be central to the success or failure of companies in the testing months ahead.
At this time reducing risk in all aspects of the business, including the reduction of the inherent risk accompanying change will be front of mind. In the medium-term, when stability returns, it is certain that the trends of process optimisation will continue, continuing to focus on the driving of efficiency and effectiveness in the actions necessary to manage day to day treasury business.
Increased confidence in outsourcing is expected. This confidence will come from familiarity, as well as the evolution of the outsourced treasury business model. We expect to see provider consolidation with the emergence of a handful of global full service treasury outsourcing companies. These companies will benefit from economies of scale and scope.
It is likely that outsourced treasury companies activities will become more directly regulated by the well known financial markets regulators. While we do not expect banks to increase their offering of branded outsourcing we would not be surprised to see banks taking significant minority equity investments in these leading outsourcing companies. This would give the banks direct access to treasury decision making processes, the companies capital to build the robust infrastructure required to ensure excellent client service, as well as satifactily adhering to regulatory requirements. Accountancy firms may well become leaders in this market as their reputation, for highly skilled staff and process, are well known. In the global drive to reduce risk and increase regulatory oversight accountancy firms may well find that the treasury outsourcing services become as large as their auditing practices.
Treasury centralisation and outsourcing are here to stay as value enhancing alternatives to treasurers around the world. With increasing economic uncertainty and decline in risk appetite, many treasuries are actively investigating alternative outsourcing solutions to both enhance existing treasury business models and create value for shareholders.
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