The nature of treasury is changing and expanding, covering areas such as risk management, accounting and compliance responsibilities among many others. But the downside of adding more areas to the treasury function is that treasurers spend too much time on repetitive, non-core activities, when instead they could be concentrating on projects such as bank account review and rationalisation, which could make significant savings for their company. In this situation, outsourcing certain functions could help add efficiencies to your treasury.
In his article Eight Myths of Accounts Payable Outsourcing Addressed, Robert W. Stasik, at The Bank of New York Mellon, weighs up some factors about outsourcing to consider: “What is the cost benefit of returning 30 minutes to your field personnel, or of negotiating better supplier terms because your bills are paid on-time and accurately? What is the cost of having to deal with a fraudulent payment?” As well as cost savings, outsourcing could create benefits such as better discount management, better controls and a more satisfied supply chain.
It is not just treasuries that are considering outsourcing to deliver efficiencies; banks are also involved in seeking outsourcing benefits, as Santosh Patnaik, at United Bank of India, covers in his article Outsourcing in the Banking Sector: Problems and Prospects. As banks continue to strive for maximum efficiency from technological advances and consolidation, they are seeking new ways to improve earnings. “Outsourcing has become a way of moving banks’ scarce resources away from trivial operations to value-added services, such as business strategy and execution, new opportunity identification and pricing, business results and interpretation, and M&A planning,” explains Patnaik.
What Functions Should You Outsource?
Deciding which functions to outsource can be a critical decision, allowing the bank or corporate to focus on the activities they excel in, or to create new efficiencies in functions that are currently lagging. As United Bank of India’s Patnaik explains, “the distinction between core and non-core functions is slowly diminishing, thereby increasing the number of functions that could be outsourced.” This is similar to the ‘treasury outsourcing/general outsourcing’ distinction mentioned earlier and highlights that no function should be considered as ‘untouchable’ in the quest for efficiency.
An example of a treasury function that could be outsourced is given by Dan Gill, at The Weiland Financial Group, in his article Outsourcing of Treasury Expertise. Gill identifies the task of verifying and analysing bank fees as being a prime target to be outsourced, as they have to be monitored but this can be time consuming. “Bank fees are just paid, or even debited directly from the bank account,” says Gill. He continues, “Today’s banking world involves greater controls and increased compliance requirements. Nevertheless, bank fees are simply paid, as the process often happens outside of the normal accounts payable (A/P) arena.” If these fees are paid without proper monitoring, your company will lose out. Using an outsourcing expert to handle your bank fees could result in the errors being eliminated, which in turn could aid your next round of bank service price negotiations. These are the sorts of benefits that outsourcing can bring to any area of treasury, providing the conditions are right for it.
Methods of Outsourcing
One perception of outsourcing is that it is the process of moving certain functions abroad (offshoring) in an effort to reduce labour costs. While this is true in some cases, the variables in outsourcing are much more complicated than purely ‘move service abroad, make savings’. Bank of New York Mellon’s Stasik describes the five basic elements of the A/P process as:
- Mail receipt and scanning.
- Data capture.
- Exception management.
- Customer and vendor service.
Most, if not all, of these elements have seen an advance in technology – or rely on communication – to be successful, something that Stasik argues will not happen if they are offshored. “Consequently, while other disciplines are ideal fits for arbitrage (e.g. IT programming), a good A/P process is not ripe with elements of labour arbitrage. And, when you consider the additional oversight necessary to manage processes across geographic borders, the potential cost savings quickly become cost elements,” notes Stasik.
This is a theme also picked up by Mark Vengroff, at Vengroff, Williams & Associates, in his article Why Offshoring and Customer Facing Functions Just Don’t Mix. Vengroff starkly warns, “For customer-focused functions, specifically within the finance and accounting sectors of business and within areas such as accounts receivables and collections, the benefits of offshoring can come with a hefty price tag. Namely, the most priceless commodity a company has, its reputation.” Particularly in customer-facing functions, offshoring is landing companies in trouble with their clients, and no amount of savings in labour costs is worth losing customers.
The option that Vengroff offers as an alternative is ‘onshoring’, which involves outsourcing activities to non-metro areas in the same country as the clients – where labour, technical and other operational costs are low. “Like offshoring, onshoring is targeted at reducing costs. Rather than moving jobs to foreign countries, the jobs are ‘moved’ to providers with the operational excellence to reduce costs through technologies and improved skill sets.”
Good treasury outsourcing providers are staffed by treasury professionals, usually people who have then made the step to become an expert in one specific field of the subject. They should also have state-of-the-art treasury systems to back up this expertise. As The Weiland Financial Group’s Gill says, “When these systems are combined with an expert user who performs that function exclusively, BPO becomes much more than a cost savings tool. It now allows businesses to perform a function – which may have been ignored in the past – in a highly effective and efficient manner.”
In the realm of A/P, some outsource providers specialise in paper processes, while others focus on e-invoicing solutions. Common consensus says that banks will need to pay attention to both of these areas. Bank of New York Mellon’s Stasik makes the following suggestions to take into account when selecting an outsourcing provider:
- Before you sign on with a particular provider, be sure that you understand their guiding principles of operations – their focus and their strategy.
- Look for a provider whose A/P solutions cover the entire A/P process from invoice receipt through matching and verification, exception management, payment authorisation, analysis and reporting and record archiving.
- Try to find a solution that is scalable, so you only pay for what you use.
Most of these tips are as equally applicable to bank outsourcing as they are to treasury outsourcing.
Pitfalls of Outsourcing
To have a coherent and successful outsourcing policy, planning is crucial. You need to decide if outsourcing is right for you, work out which functions would benefit from outsourcing and select the outsourcing provider that best matches your needs. To not thoroughly research all of these areas could prove to be costly in the future, as United Bank of India’s Patnaik describes: “Poorly planned deals have grave shortcomings – companies overestimate the economic benefits of the deal, fail to establish the right baseline for price negotiations and performance tracking, or are not fully prepared to manage the transition and post-deal situation.” Lack of corporate satisfaction was highlighted in a recent Cap Gemini Ernst & Young study that found only 54% of companies are satisfied with outsourcing – which is a huge drop from the 80% figure of 10 years earlier. This suggests that some companies are going into outsourcing deals with unrealistic expectations and poor planning. By properly planning for the outsourcing handover, the timeframe of the outsourcing deal and creating a workable exit strategy, corporates and banks will ensure that they are not caught out at any part of the process.
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