Case Study: DAWN Integrates Outsourcing Services into Treasury Operations

The growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries.

Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution.

Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management – in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank.

The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development.

Basic Treasury Operations

DAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates.

DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.

The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts.

A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing.

The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web.

The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.

Technology Support

DAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system – a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management.

Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action.

Strategic Treasury Development

As the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services.

As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.

The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed.

DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.

Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities.

DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base.

Conclusion

Outsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development.

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