Achieving Simplicity in Treasury

Springtime in Paris provided the perfect backdrop for this year’s Global Corporate Treasurers Forum Europe, held on 7-8 April at The Ritz Hotel. Treasurers from across Europe, not to mention further afield, came to meet with their peers and discuss a large range of treasury best practices.

The key theme at this year’s forum was ‘Simplicity in Treasury’. This was selected by the Steering Committee of group treasurers who developed the entire programme for the event. Treasurers are seeking to bring simplification and clarification to every area of treasury management in order to be more effective and better support the core business. The keynote presentations, panel debates and workshops were designed to provide practical examples of how business processes can be transformed and simplified.

Banking Relationships Under Scrutiny

How can treasurers simplify their banking relationships without compromising on efficiency? This topic was touched on throughout the two days of the Forum. On the opening morning, a panel session examined the techniques being used to manage banking relationships from treasury representatives from around the world. To begin, the panel outlined their main banking requirements. Linda Williams, group treasury back office manager with UK-based travel operator Thomas Cook, explained that her company needed a range of banks to service their specialist financing needs, including aircraft finance. When it came to choosing core banks, Williams noted that her focus was on matching the core banks to the group’s geographical spread, rather than rewarding existing banks with ancillary business. She added that the need to refinance often meant Thomas Cook had a preference for global banks.

Craig Busch, group treasurer of Australian engineering firm Worley Parsons, said the group relied on a ‘local/global’ banking model. He explained how he has to ensure that there are banks with a sufficient credit rating across the group’s 42 locations, while at the same time he uses a small core group of banks to manage financing from Worley Parsons’ Sydney headquarters.

Ricky Thirion, vice president, treasury with Etihad airlines, and the current gtnewsGlobal Corporate Treasurer of the Year outlined the challenges of establishing banking relationships in a company that is only seven years old and has been faced with the credit crisis in that short time. His focus has been on broadening and deepening bank relationships from a low base. “We have had to rely heavily on our partners in the region,” he said, adding that getting finance in such a rapidly growing company has been a challenge requiring strong relationships. In terms of banking mix, Thiron said that Etihad tried to choose a balance of traditional and Islamic banks. In addition, the company is a state-owned business, and Thirion explained the responsibility the company had to help local banks develop their capability.

Providing the perspective of a state-sponsored institution, Denise Laussade CTP, director of treasury operations for Purdue University in the US, explained the different set of challenges she faced when choosing banks. Her institution funds research teams in a variety of remote global locations, and so the safety of these staff using the banking facilities is a top priority, even more so than cost effectiveness.

The panel discussion highlighted the variety of different considerations treasurers around the world face when choosing their core and supplemental banking relationships. But how can treasurers refine their bank relationships and drive down fees in the process? This was a theme that Michel Bekkers, group treasurer of adidas, tackled in the opening keynote presentation on day two of the Global Corporate Treasurers Forum Europe.

Bank rationalisation

Using the main theme of the event – simplification – Bekkers contrasted the pre-credit crisis corporate to bank dynamic and cash management needs with the current situation. “Life after positive carry is about simplification and rationalisation,” Bekkers explained, adding that, post-credit crisis, he is of the view that having fewer banks is better. Bank financing has played a large part in this, due to how much more expensive this has become. Bekkers pointed out that the capital markets can issue corporate paper at much more attractive price points, while adidas has cut the number of financial institutions that it holds credit facilities with to 15, down from 25.

Bekkers encouraged the audience of treasurers at the Forum to benchmark informally, comparing bank fees in order to be on the front foot when it comes to the next round of negotiations. Delegates were also urged to push back where banks insisted that no customers ever queried fees. This struck a chord with several treasurers in the room who, during a Q&A session with Bekkers, confirmed that they had been stonewalled by their banks when querying fee structures. If this can happen to companies like adidas, who have an €12bn turnover and gross margins of 48%, then it is clearly a major issue for treasurers to address today.

Banks versus non-banks

From cash management to payments, supply chain finance to treasury technology, suppliers are competing for treasury business. If treasurers are hitting obstacles from banks – such as in the fee structure debate mentioned above – what alternatives exist? A panel discussion on the second day of the Forum examined alternatives to banks, as well as the areas of treasury management where they might be useful. Can using non-banks in some areas simplify treasury, or would this in fact add an additional level of complexity?

Paul Stheeman, a treasury consultant, suggested that he would like to stick with his current banks, as they have the legacy experience, but it would be useful to review where non-bank offerings could be useful. He listed areas such as product sales, shared services and payment cards as being some of the areas where non-banks might be able to add to a company’s hybrid mix of financing.

Following Stheeman, delegates heard the bank perspective from Robin Terry, managing director and head of sales in Europe for HSBC’s Payments & Cash Management business, part of the Group’s Global Transaction Banking division. In many ways this panel appearance could have been a poisoned chalice for Terry, but he immediately set out his stall, saying: “There’s room at the table for everyone.” Terry made the point that financial institutions are good at some things, but are not market leaders in other areas – citing technology as an example.

Another area of competition between banks and non-banks is supply chain finance. Enrico Camerinelli, senior analyst with Aite Group, and gtnewscontributing editor, made the point that there is a difference between the financial supply chain and supply chain finance. The former is the banks’ bread and butter, but in the latter, non-banks don’t seem to be subject to as many regulatory restraints, which could give them a competitive advantage. Camerinelli also pointed out that siloes within a bank can frustrate corporates, who will need several services from a bank – payments, cash management, funding, etc. The lack of a coherent and co-ordinated approach from banks can leave corporates looking for other options.

A corporate perspective on the debate came from Laurent Hendrickx, European treasurer at Guardian Industries. When asked if there was an element of ‘credit crisis backlash’ from corporates towards their banking relationships, Hendrickx agreed. He pointed out that many corporates are currently in a defensive position, and that he now has to perform know your customer (KYC) checks on his own banking partners. Hendrickx said that, by contrast, many non-banks are running ahead of the curve – citing the greater activity of non-banks in the new asset class of carbon emissions as an example. Stheeman agreed, pointing out that as more banks focus on their core markets, there is more scope for non-banks to step in the areas designated ‘non-core’.

Keeping Your TMS Simple Yet Efficient

In a keynote presentation on day one of the Global Corporate Treasurers Forum Europe, Bas Rebel, executive consultant at with the consultancy Zanders, looked at best practices in the implementation and maintenance of treasury management systems (TMS). Rebel began by noting recent research conducted by Zanders and gtnews which found that around half of the respondents were disappointed with the user experience they had with their new TMS, a similar number found that the TMS implementation was not handled within the agreed budget, while two-thirds described the process as failing to meet compliance control.

Faced with this, how can treasurers ensure they have a successful implementation and maintain an efficient TMS? Rebel said that planning is critical here – treasurers must have a clear idea of the TMS functionality they want to have in up to three years time. It is also important to be realistic about how long an implementation process may take. Some risks are inherent to TMS implementation projects, such as milestones in related projects or delays in project decisions. It makes sense to have a pessimistic outlook on the timing of an implementation and all areas of implementation need to be defined and agreed by all project protagonists at the start. This includes the timeline of the implementation, staffing requirements, and the budget in both a project and operational sense.

A delegate asked Rebel a question regarding the role of the treasurer in the TMS implementation project team, suggesting that the treasurer should not be project manager of this process. Rebel agreed that a more project-orientated member of staff should head up such a project, but made the point that it is important for the treasurer to have full input into the project, as this is key to ensuring that the final result is an efficient system working for the full benefit of the treasury department.

Getting to Grips with Compliance

What regulatory changes can corporate treasurers expect, how and when should they comply and how could they influence the decision-making process? This question was addressed by a panel discussion on day one of Global Corporate Treasurers Forum Europe. Etihad’s Thirion commented: “Regulation is, at the very least, a necessary evil. The biggest mistake is to think ‘it won’t affect me’. It will.” Thirion specifically pointed to the fact that treasurers need to consider regulations that, while not currently affecting them, could do in the future depending on corporate strategy. “We do a relatively significant amount of work in Islamic finance and have to be compliant with Sharia law. Consider that it might be a market for you in future – for example, there are huge pools of capital in Malaysia you can tap,” said Thirion.

Charles Taylor, chief operating officer (COO) and chief financial officer (CFO) of the International Centre for Financial Regulation, echoed the fact that regulation was certain to increase and that treasurers would be affected, in the shape of increased fee, since it was unlikely that banks would allow the price of regulation to affect their margins. Looking at the regulators themselves, Taylor noted that there was a need for them to have a clear understanding of what they were hoping to achieve rather than merely focus on proposed outcomes. A straw poll in the room showed that none of the delegates had responded to the regulatory consultations currently underway, which led Taylor encourage treasurers to get involved with the process. “Consultation responses can and do change the outcome of regulation. Do not be a passenger. If you don’t get involved, you’ll only get what you deserve,” he warned.

Fellow panellist James Phillips, senior regulatory strategist at Lombard Risk, focused on how to achieve best practice in managing new regulation with an organisations’ existing infrastructure. Phillips said that putting stress tests in place to examine the impact of worst-case scenarios, including risks stemming from intra-group lending and currency volatility, would only be of use if companies acted on the results.

Economics Outlook

To put the treasury focus of the event into perspective, Global Corporate Treasurers Forum Europe also heard from two economists who provided insight into what corporates can expect from global markets over the next 12 months.

On the afternoon of the first day, Paul Mercier, principal adviser in the Directorate General Market Operations at the European Central Bank, provided a lively commentary on the actions taken by the Eurosystem in response to the credit crisis, the recent sovereign debt crisis, while also outlining the possible course of action for the future.

Mercier explained how, after the collapse of Lehman Brothers, investors became more aware of the risks that exist in the markets, and tried to then allocate risk to certain countries. According to Mercier, everything was still under control at this point – but when the Greece prime minister, George Papandreou, announced that some of the government’s debt figures were wrong, the European sovereign debt crisis began. The ECB has, so far, injected €1 trillion into European economies to try and counter the sovereign debt crisis. However, with the news last week that Portugal is close to following Greece and Ireland in requiring a bailout, what effect has this inflow of capital had? Mercier made the point that, while the sovereign debt crisis does look bad at the moment, it would perhaps have looked much worse without the financial assistance.

Looking to the future, Mercier mentioned a number of parties that should look at their involvement in both the credit crisis and sovereign debt crisis and take some responsibility. While he outlined the responsibility that banks have for what has happened, Mercier equally admitted that the warnings the ECB issued were not strong enough. Looking at the beginnings of the credit crisis, Mercier also said that people who took out sub-prime or other borrowings that were beyond their means to repay should take a share of the responsibility too. The ratings agencies were described as being “slow and wrong”, casino banks’ disregard of the risk they were putting onto the system should have been better regulated, while European governments had to accept that the EU Stability and Growth Pact is a necessity.

Mercier concluded his presentation by stating that there has never been an example of sustainable growth with inflation, ever. “Those who say that is possible are wrong,” Mercier said.

Clearly price stability is important for growth, but where in the world is this possible today? This theme was picked up by Mark Berrisford-Smith, senior economist at HSBC, in his keynote presentation that closed the Forum on its second day. Berrisford-Smith paid particular attention to globalisation, setting out the challenge for the next decade is that the ‘globalisation benefits all’ message is now very hard to sell. “This only works in a time of high employment. You will see nothing like the previous level of outsourcing in the next decade,” he explained to delegates.

Berrisford-Smith described the global economy as being a story of two halves. While eastern economies are experiencing good growth, western ones are struggling – healing slowly but not at the same rate after this recession than after previous ones. “This gives rise to the paranoia – there’s dawning realisation of what globalisation really means,” he said.

Looking at different regions in the world and it’s clear that Asia is the driving force of global economic growth. “Don’t worry about the decimal points: China can not only tell you what happened last year but this year and the next as well,” joked Berrisford-Smith. The important point to take from any figures out of China is that its economy is still growing. So much so that Latin America has ‘joined the party’ of economic growth on the basis of the huge demand its raw materials that China has.

Turning to the Middle East, and specifically the popular uprisings that have happened in a number of countries, Berrisford-Smith commented that this has put US$10-15 on oil price on a permanent basis. The question he asked is whether this political turmoil is a brief awakening or instead the start of something similar to what happened in eastern Europe in the late 1980s? If it is the latter, it will be a long time before that process is complete. In terms of oil, Berrisford-Smith noted that Libya doesn’t actually produce any more oil than the UK.

Moving to the west, and Berrisford-Smith painted a fairly bleak picture for the US. He described how the private sector just about able to take up the current slack in terms of the unemployment rate, but made it clear that the country is still running on borrowed time when it comes to sorting out its deficit. Meanwhile in Europe, as ECB’s Mercier covered, the sovereign debt crisis has hit economies hard. However, Berrisford-Smith pointed out that there has been a good recovery in the eurozone core – Germany. Germany’s ‘short-shift’ move during the recession (offering staff shorter contracts rather than having to lay them off) was very successful, meaning the country was able to move very fast when the recovery came. Berrisford-Smith explained that there are now only 150,000 of the original 2 million employees remaining on short shift contracts, and that Germany is now driving eurozone exports.

The issues discussed at Global Corporate Treasurers Forum Europe, in the presentations, panel debates, and closed workshop sessions, demonstrate that while the credit crisis has passed, its legacy is still affecting the daily life of the treasurer. Banks are still charging considerably higher fees, while many are retranching their businesses. The regulators are slowly but surely pursuing the banks, who in turn look likely to pass costs on to their clients. All the while, economies in the west are looking relatively stagnant, while those in the east seem to offer reward but equally bring risk. Against this complicated background, treasurers are seeking to simplify their processes in the quest for efficiency. By sharing their own experiences and best practice, delegates at the Forum in Paris have equipped themselves to begin this journey.

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