The business priorities and practical ways of working of treasurers and accountants point to the divergent technology needs of each party; in its underlying philosophy, focus and functionality the technologies adopted by each differ. An objective comparative analysis of the benefits for a large corporation of deploying a specialist, best of breed treasury management system (TMS), versus using the treasury module in a wider enterprise resource planning (ERP) system will inevitably highlight the differing demands of groups of users. In my experience, such an exercise will point to the TMS as the better technology option for a corporate treasury to choose. Where an ERP is already in place, however, treasuries need to find the best way to use it, integrate it with specialist treasury systems or otherwise make the most of existing investments.
I am naturally taking the TMS perspective in this blog as that is my experience, but I will go on to suggest that, generally speaking, the optimum solution for accountants and treasurers, and for the greater organisation, is a collaborative coexistence between the TMS and ERP technology systems. Working together is always good and the same goes for technology.
The Treasury Perspective
I have never met a treasurer who said that they preferred using an ERP treasury module to a TMS. Some of the reasons given may reflect perceived (and perhaps outdated) ERP inadequacies, but I think they also stem from a fundamental difference in the business requirements and ways of thinking of treasurers and accountants. The reasons given often reflect relative solution costs – and virtually always the contrasting core design and functionality of the alternatives.
ERP implementations (and upgrades) are expensive and time-consuming, and deploying, integrating and operating a modern TMS is a much less elaborate exercise. The TMS is built for purpose, and its implementation requires relatively little expense and effort, generally requiring parameter-driven configuration, combined with report and interface modification to meet specific needs in these areas. This TMS flexibility may be regarded as a type of customisation, without the need to develop, and test new code. Accordingly, treasurers tend to prefer TMS solutions that are implemented to reflect their business priorities, reporting imperatives and general ways of thinking and working.
Treasurers must be forward-looking in their daily operations. The core disciplines of treasury are concerned with evaluating and managing ‘possible’ future events, as well as working with current cash and risk positions. The treasurer must understand future possibilities that may or may not in fact materialise, relating to the uncertainty of commercial and financial market events. For example, a treasurer might decide or be required by policy to hedge some proportion of the costs of investing in a major foreign project, to protect future cash flow and profitability. Having executed the hedge, the treasurer then needs to identify and plan for a range of possible events that might impact this situation. If, in time, the timing and shape of the transaction were to change, the treasurer must swiftly evaluate the impact of this, and modify the hedging program to keep the risk within corporate policy limits. This is classic TMS risk management territory; the analytical capabilities of the TMS will have helped the treasurer to understand the financial impact of scenarios with different levels of probability of actual occurrence, to plan effective mitigating actions – and to execute them effectively when necessary.
Equivalent types of analysis can be applied to many other aspects of treasury operation, such as the complexities of managing the future funding portfolio against different market, credit and liquidity risk scenarios, and the demands of managing a long term investment portfolio. The TMS is designed to bring clarity to these fuzzy situations, so that the treasurer enjoys the benefits of analysis based on complete current information, combined with quantifying the potential effects of a range of uncertain and different future possibilities.
Risk: TMS and ERP Systems Can Work Together
One area where treasury and accounting overlap is in hedge accounting, which includes requirements for prospective effectiveness testing, often including credit valuation adjustment (CVA) to reflect hedge counterparty creditworthiness changes – and hence changes in hedge effectiveness. These risk management functions are the conceptual domain of the TMS, and the common solution is for the TMS to perform the necessary calculations, and to transmit the results to the ERP to make general ledger postings.
These examples illustrate the difference in priority and perspective between the accounting and treasury professional disciplines. Accounting is concerned with the complete and accurate measurement of the historical and current situation, and generally looks to the future just in the simple terms of the known quantities represented by committed payables and receivables. In contrast, the treasurer must struggle with less tangible probabilities and possibilities, and must understand the potential implications of unexpected and perhaps extreme events, so that he or she will be able to plot an effective course of action were such events actually to occur. The ERP system is a key source of valuable information to the treasurer; but a specialist TMS is needed to complete and add to that base information, so that treasury thought and action can look forward as necessary to achieve successful financial management, through market volatility and commercial uncertainty.
TMS and ERP are certainly interdependent. The boundary between them is broadly defined by the two-way information flows that are implemented in more integrated corporate treasury operations. In summary, the TMS needs information about known future payable and receivable cash flows for its forward cash positioning and forecasting functions. Here, the data from the ERP is enriched with bank balance information and treasury position and transaction cash flows, and often also with commercial cash forecasts from across the organisation.
The Domain of the ERP
At the other end of the treasury process, the TMS feeds the ERP with accounting journals, relating to treasury cash flows, including opening and closing foreign exchange (FX), equity and interest rate deal flows, facility draw-downs, interest and dividend payments, option premium flows and derivative settlements. It also feeds treasury accounting calculations, such as interest accruals and FX mark-to-market revaluation and hedge accounting adjustments. All these treasury generated quantities are inputs for the enterprise’s general ledger – the domain of the ERP.
In passing, it should be mentioned that most TMS’ include treasury nominal ledger and (primarily for North American treasuries) cash accounting functions, and perhaps some limited general ledger functionality to accommodate the reporting needs of subsidiary finance companies. These functions fulfil the specific operating needs of some treasury departments, and are not remotely comparable with the scope of ERP ledger solutions, which serve the enterprise. This apparent overlap can result in some confusion, but deeper investigation ultimately reflects the TMS/ERP division.
I have, I trust, established some of the key differences between TMS and ERP treasury solutions, explaining why professional treasurers generally prefer to deploy a specialist TMS to help them achieve best practice operational and risk management results, while being cognizant of the role of the ERP.
Those treasuries which do use ERP solutions often do so as a consequence of IT policy; if the company has made a major investment in an ERP, at the corporate level they will want to use (or justify) this investment by imposing as broad a use of the ERP’s modules as possible. This position is sometimes tested by treasuries being asked – or instructed – to test an ERP treasury module before resorting to the TMS marketplace. My experience is that the TMS is almost always the ultimate choice.
I believe that TMS and ERP solutions are in fact complementary, and not competitive. They can – and do – feed each other with mutually essential information, exchanged through robust and secure data exchange integration. In this way, through intelligent implementation, the TMS can reasonably be regarded as a specialist module of the ERP, and vice versa. The end result is that the treasury team can use the best tools available to manage current and potential treasury risk, and the accountants can enjoy the benefits of working with up to date treasury data in the ERP system.
TMS versus ERP? It’s not a contest, it’s a professional collaboration.
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