Fifteen years ago, treasury outsourcing was being presented as the golden opportunity for treasury management. Today, we see that the opportunity never grew to meet market expectations and some providers exited the marketplace for various reasons.
However, one group treasurer of a major multinational corporation with a turnover in excess of US$5bn and selling in over 100 countries worldwide, who uses an outsourced solution, recently said: “I don’t understand why many more companies don’t use the managed treasury outsourcing model. It’s cost effective, easier and someone else deals with all the technology requirements. I have more time to concentrate on the important strategic issues, so for me it’s a no-brainer.”
So what’s the real situation?
History and Expectations
Treasury outsourcing services were originally established at a time of significant treasury centralisation, the development of global financial service centres and the establishment of international and regional treasury centres in the Americas, Europe, Middle East and Africa (EMEA), and Asia. In parallel, the rapid development of treasury and banking technology was providing a technology platform capable of supporting treasury centralisation in specific locations.
The establishment of an International Financial Services Centre in Dublin in 1987 saw this location becoming the main globally recognised centre for the provision of treasury outsourcing solutions. Some activity in Singapore saw Irish-based service providers increasing available offerings. The large financial institutions, such as Citibank, Bank of America, ABN Amro and JP Morgan, led the charge among the banks by locating in Dublin and competing with independent service providers.
Citi, ABN Amro and JP Morgan have since left this market, probably because the market never grew enough to meet original expectations and also because the service sought by companies was different than expected. Outsourcing was very much seen by the banks as product expansion into their existing client base, aimed at providing more end-to-end standardised processing for customers. However, this is not what the corporates wanted. They were looking for customised solutions to deal with their own banks, policies, routines and for it to be integrated with their organisation’s culture and people. A mismatch in expectations resulted.
Outsourcing: A Misnomer
This mismatch in expectations and companies requirements for a customised solution led to a need to reposition the outsourced service model. Indeed ‘outsourcing’ does not properly describe the need. Outsourcing involves contracting of a business process or function. Treasury outsourcing would be better described as ‘managed treasury’, whereby it needs to go further and add value, not simply reduce costs and eliminate the routine. It needs to support the in-house treasury, allowing it to focus on key decisions and treasury priorities. A key ingredient of delivering a repositioned customised added value solution is the ability to understand treasury management from a corporate treasury perspective.
A further inaccuracy that has been dispelled is the scope of treasury outsourcing. Treasury is rarely fully outsourced, and it is essential that the company remains in control, takes the decisions and determines strategy, counterparties and risk management approach. The role of a managed treasury service provider is transaction execution, deliver the business process, reporting and accounting. This doesn’t preclude, however, the scope to independently advise and add value.
Real Reasons for Considering Managed Treasury
In the current climate there are two outsourcing models: one where an integral part of the treasury process is outsourced and the other where there is a ring-fenced reason for doing so.
Ring-fenced services relate to treasury activities that operate on a standalone basis, such as inter-company netting and inter-company administration. Andrew Goldie, managing director of Coprocess, provider of the Coprocess.Netting multilateral netting system says that “clients can save between 0.1% and 0.4% on their gross inter-company payments” from operating a multilateral netting structure. Netting easily lends itself to outsourcing, particularly where internal resources are stretched. Inter-company loan administration is often established in jurisdictions in favourable tax regimes and, subject to meeting tax and regulatory substance requirements, also lends itself easily to outsourcing, particularly where the company has no presence or expertise in the jurisdiction.
The model for outsourcing an integral part of the treasury process is now customised and modularised to meet specific requirements, the best examples being:
- A full suite managed treasury solution: the provision of front, back and middle office treasury services and a state-of-the art technology solution customised to meet a company’s specific needs.
- Back and middle office services: where the company’s in-house treasury runs its own front office treasury management activities in-house, while using the outsourced service provider’s treasury technology infrastructure and for treasury back and middle office services.
The reasons why companies consider managed treasury on an outsourced basis are:
- Cost: installing a cost-effective professional treasury with all necessary systems can be difficult. as many companies cannot justify the level of resources required to provide a best practice treasury control environment.
- Technology: outsourcing avoids the expensive investment in treasury technology and infrastructure. There is also a significant cost and effort required in retaining the technology resource expertise to maintain and operate the technology platform. In all likelihood, any company that has already invested heavily in a treasury management system (TMS) is less likely to consider the benefits of outsourcing, but conversely it is a real alternative for a company with a technology need or with legacy systems.
- Resources: for certain types and sizes of companies, attracting and retaining expert professional staff can be costly and problematic, and a back and middle office service can work in this circumstance.
- Control: for companies where there are control gaps, outsourcing part of the process such as the back office, immediately contributes to having a sound corporate control framework.
- Set-up: in a situation where there is a need to establish treasury capability quickly, for example in the case of a merger or divestment, outsourcing lends itself to a quick implementation timeframe since the technology infrastructure and resources are already in place.
Dead or Alive?
Evidence shows that a managed treasury (or outsourcing) works and works very well for some. Some of the misnomers of the past have been dispelled – the company retains decision making, and customisation rather than standardisation is the name of the game. In addition, ring-fenced netting and inter-company loan administration has benefits for all. However, it’s not for many, and unlikely to be of interest where expensive investment in technology has already been made.
Outsourcing is neither alive nor dead, but evolved.
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