Case Study: The Management of Hubbell Inc’s Global FX Exposure

Hubbell Incorporated has been in the happy position of
enjoying strong growth over the last five or so years. This result has been
achieved primarily through a series of corporate acquisitions, some of which had
international – namely, non-US-affiliates. International business now represents
almost 20% of Hubbell’s consolidated business volume in its core manufacturing
field, which reported a US$3bn figure in fiscal 2012. This represented an
increase from the previous single digit rates of international business. Such
growth presented the finance and treasury functions with new challenges,
including identifying and managing a sharply increased global level of
operations and a diversity of foreign exchange (FX) exposures. 

In
addition, we were confronted with the technical complexities of exchanging
critical financial information with a single instance of SAP and other legacy
accounting systems, explains Hubbell’s Howard Wardlow. This was the means by
which we had to measure the FX exposure across the group. Without action, we
were potentially at significant risk of suffering unanticipated FX losses, since
the global exposure was not fully visible. Also, we lacked the essential
analytical and reporting tools to manage and interpret the data, which was
originating in a complex pattern, in all areas of the group. Clearly, we needed
to take swift and effective action, to achieve a significant enhancement in the
quality of our corporate FX exposure management, and of the related management
reporting.  

FX risk had grown sharply across the entire Hubbell
organisation. The largest exposures were in the currencies of Australia,
Brazil, Canada, China, the eurozone (primarily through commercial exposure to
Italy), Mexico, Switzerland and the UK. This mix shows how broadly Hubbell was
exposed to some of the world’s most volatile trading currencies – and the scale
and complexity of the FX exposures was growing. 

The sustained
consequences of Hubbell’s elevated levels of FX exposure were obvious: the
consolidated corporate profit and loss (P&L) statement reported, on average,
US$2m of FX volatility in recent years. This metric provoked a much closer look
at the FX area. We had been used to successfully managing the demands of the US
domestic economy, but now we were experiencing significant buffeting from the
more complex weather of the global marketplace. It was clear that we needed to
develop the capabilities and sophistication of our treasury and finance
operation as quickly and pragmatically as possible, to enable us to forecast,
measure and manage this currency risk. If we did nothing, we knew that the risk
of a sudden significant US dollar (USD) FX loss hitting the corporate P&L
statement was unacceptable to senior management, and we must therefore act.
 

Momentum for investing in the essential process change was growing
within the Hubbell treasury and finance operation. We measured that even a 50%
global FX exposure mitigation would have a positive impact on our P&L. Our
team’s analysis had brought us to this confident and clear conclusion, but at
this initial stage, we did not yet know the real extent of our global exposures.
So we had simply established that we were flying relatively blindly, above this
unpredictable and stormy global ocean, as it was driven by the forces of
international politics and economics. 

The one thing we did know clearly
was that we absolutely had to put in place an effective global process for
dependably measuring and reporting Hubbell’s global FX exposure. This meant
efficiently identifying, harmonising and validating the disparate accounting
data across our complex international business. Converting validated GL data
into a single trusted truth would comprise an essential first step towards
optimising FX exposure management for us. So it was clear not only that we had
new, intensified levels of FX-related P&L volatility to manage: we could
also confidently predict that this situation would continue to grow in
complexity and risk, in direct proportion to Hubbell’s international business
growth and diversification. In the practical environment of international
commerce, determining the true nature of the accelerated and amplified risk was
becoming an increasingly challenging issue – and one of increasing importance to
the growth and profitability of the organisation.  

It is important to
recall that these business challenges at Hubbell were taking place against the
backdrop of the emerging global financial crisis and the nascent eurozone
crisis. This environment obviously contributed to FX market volatility, but it
also meant that successful companies like Hubbell had to battle with a widening
range of additional and generally adverse financial conditions, including
tightening credit availability and the widespread deterioration of
counterparties’ creditworthiness. 

Problem analysis

Looking for resolution of this FX exposure management issue, the Hubbell
treasury team quickly identified the primary business issue. It was based on the
simple fact that we did not have the necessary time or resource capabilities to
aggregate, validate and analyse the complex constituent data of the current
commercial situation to have proper visibility of the company’s consolidated
corporate FX exposure. When we analysed the question in more detail, including
through conversations with our peers in large and successful US multinational
corporations, we found that international business issues require quite high
levels of analytical expertise and experience to be brought to bear to help to
identify a cost effective – and, most importantly, business effective – solution
for major pain points.  

No two corporate treasuries are exactly the
same, and the methods and solution that have worked so well for us may – or may
not – fit every case. For those confronting similar situations, I would simply
counsel the thorough testing and application of any potential solution’s
methods, value propositions and assumptions in your unique operating
environment. Test the solution’s capabilities against your realities; and verify
your findings against the experiences of respected peer group users. With the
approach we took, we were able to validate, verify and test our selected
solution in a matter of weeks, and this up-front investment was well repaid
through a very successful outcome.  

Like most multinational corporates
(MNCs) which have grown through active merger and acquisition programmes, we
faced the difficult challenge of identifying, harmonising and validating a
plethora of raw GL data so that FX exposures and risks could be effectively
managed for the expanded – and expanding – organisation. And we had to ensure
that all current finance controls and reporting functions continued to be
properly performed as we addressed this new currency risk issue. We were
operating a substantial cash management and cash accounting operation, and the
integrity of these vital treasury processes needed to be secured as we developed
our FX exposure risk management resources and capabilities. 

In a
realistic internal risk assessment, we concluded that we simply did not have the
necessary in-house experience to design and deliver an optimal solution.  No one
had set up such an FX programme from scratch before. In addition, the continuing
rate of corporate growth demanded that we should build or buy an effective
solution as quickly as possible. With a little investigation, it became very
clear to us that the most cost effective and lowest risk approach was to select
a proven and well-referenced third party solution. 

Solution
selection

Hubbell organised expert project teams for selection
and enrolment, involving key people from treasury, financial planning and
analysis (FP&A) and IT. The make-up of the teams was designed to ensure that
all the relevant business areas and issues were properly represented, and that
all users would experience joint ownership of the resulting solution. The
selection team was eight strong, and comprised:

  • A director of
    financial planning and analysis (FP&A).  
  • Manager of
    FP&A. 
  • Director of finance and treasury. 
  • Vice president
    (VP) and treasurer. 
  • VP and corporate controller. 
  • Senior
    financial analyst. 
  • SAP FICO lead. 
  • Financial institution (FI)
    support analyst. 

We sought to achieve a balance between senior
executives, middle managers and expert users on the Hubbell team. 

The
team identified and evaluated three alternative solutions. We employed a
rigorous selection process to maximise confidence that we would be able to
recommend to management a vendor and solution which would represent the lowest
level of risk and the greatest potential contribution to Hubbell’s financial
operational excellence globally.  

Eventually, Hubbell selected FiREapps
FX OnRamp. FiREapps FX OnRamp is designed specifically for treasury and finance
organisations seeking to quickly establish an institutionalised FX risk
management programme for the first time. It combines a pragmatic and proven
three-step methodology with cloud-based applications that enable treasury and
finance teams to easily harmonise and validate disparate GL data from their
underlying systems of record so they can effectively analyse their complete
portfolio of exposures on demand. That accurately describes our priority FX
exposure management solution objectives; and that’s exactly what we accomplished
in practice. Working closely with the FiREapps team, we had initial exposure
visibility from our core SAP system in weeks, and rolled in our remaining
systems within the two quarters we had planned for.  

Enrolment

Hubbell and the FiREapps team jointly
planned and executed our enrolment plan, on time and within Hubbell’s original
budget, within two quarters. ‘Enrolment’ is the technical term FiREapps uses to
describe the solution rollout for a client. As a Software-as-a-Service (SaaS)
application, FiREapps does not require traditional software implementation and
integration projects; instead they provide enrolment services to help their
clients get up and running quickly without the need for hardware or IT
development. 

The joint team maintained continuity by appointing the same
executives as the selection team, minus the vice presidents, to deliver the
solution. Additional members of subsidiary IT and Finance were involved in the
rollout, as we have non-SAP systems from which we required trial balance
extracts for a complete analysis. Using the standard templates provided by
FiREapps limited the IT resource requirements to about eight hours per
enterprise resource planning (ERP) system – making it practical and cost
effective for us to gain full visibility into our enterprise exposures. 

The actual enrolment exercise comprised of the following three-step
process: 

  1. FiREapps FX experts worked with the Hubbell team to
    identify all sources of balance sheet exposure across all corporate entities,
    and across all extant currency pairs.  
  2. FiREapps provided a standard
    template for gathering and uploading GL data from SAP, and also from the various
    other ERP systems that are in place across the Hubbell global organisation. The
    technology had to handle quite a complex systems and operating
    environment. 
  3. Hubbell started working with FiREapps reports and
    analytics within weeks. The information was reported in local, transaction and
    reporting currency detail, enabling the Hubbell team to take informed decisions.
      
Benefits analysis

The really
critical benefits we realised from the FiREapps FX OnRamp solution include: 

  • Identification of our FX exposures on demand, eliminating many sources
    of delay and human error from the data gathering process. 
  • Institutionalised data integrity processes. Pre-built FiREapps templates
    provide a standardised and secure mechanism for treasury and finance to
    automatically extract and upload GL data from SAP and other ERP systems.
    Together with proven validation analytics, this facility measurably improved
    data integrity – and more importantly, user confidence in making FX exposure
    management decisions based upon real-time analysis of a single, complete and
    trusted view of enterprise exposures.  
  • The FiREapps reports and
    analytics installed provide the Hubbell treasury and finance team with its first
    clear view of all currency exposures across several key dimensions, including
    corporate and legal entity, monetary asset and liability class, and general
    ledger account in local, transaction and reporting currency detail. Hubbell’s
    quality of FX risk management and overall financial operational excellence is
    therefore significantly enhanced. 

Over time, we have found that
the structured data extraction which is possible with the new system via
templates, allied to its robust data integrity checks, rules-based exposure
definitions and management of new static data, provide us with a very robust
platform. The treasury, accounting, and FP&A teams can depend on the quality
of the information and analysis with which they are being presented, and they
can therefore confidently focus on their value-adding tasks of financial
scenario analysis, decision support and reviewing strategy and results with
senior management.  

Some additional benefits that Hubbell has achieved
through deploying the FX OnRamp solution have accrued once a baseline of
understanding about the balance sheet exposure was successfully established. As
part of the enrolment process, FiREapps risk analysts worked with the Hubbell
team to further define the associated FX risk, and to examine various internal
and external approaches to manage it cost effectively. The vendor’s analysts
effectively communicated their expertise to the Hubbell teams, enabling us to
achieve a significant improvement in the quality of our risk management
operations.  

The Hubbell team basically had zero experience with setting
up or even running a hedging programme so FiREapps help was greatly appreciated.
The implementation team from the vendor walked us through the whole process, and
have been very responsive to our requests. I personally have a much better
understanding of the FX process and what is considered an exposure and why.
FiREapps’ expert input has greatly increased our understanding of the process,
and of what we need to analyse and review in order to maintain an effective
hedging programme going forward. I would highly recommend FiREapps and the
implementation team of Karli Vold and Fikre Bizuneh without hesitation. 

Additional benefits we have realised include: 

  • Establishment of a
    benchmark for the company’s FX risk. This is based on FiREapps’ proprietary
    Value at Risk (VaR) tools, working with complete, accurate and timely data
    inputs. Hubbell gained a solid understanding of the relationships between their
    internal financial processes, and how they contribute in practice to increasing
    or mitigating FX risk.  
  • Identification of new ways to reduce or
    eliminate exposure and risk organically by cleaning up intercompany flows,
    closing out open accounts payable / receivable  (A/P and A/R) positions, and
    converting non-functional currency cash balances located in foreign bank
    accounts.  
  • Visualisation of currency flows and hedging scenarios via
    simulated ‘what-if?’ trading operations and the use of FiREapps’ patented CoRE
    analytics to fully understand the potential costs and benefits of adopting
    different exposure management hedging strategies. This helps Hubbell to identify
    and implement the optimum hedging strategies that comply with commercial
    requirements and with treasury risk management policy. 

Hubbell
has significantly enhanced the quality and effectiveness of its FX exposure
management programme in just two quarters last year with an effective team
effort. In essence, the company’s FX risk analysis capability has been
transformed from a base position in which the team were unaware of the specifics
of the organisation’s FX exposure, to today’s reality in which the Hubbell  team
– and their management – enjoy the benefits of a new, best practice information
management, analysis and reporting environment, leading to effective hedging
decisions. The organisation is on its way to significantly reducing its risk of
incurring unanticipated FX losses, and is better protecting the value of its
foreign currency earnings and profits.  

We can now see and understand
the exposures, including ones originating from new international acquisitions.
This enables us to quickly identify adverse transactional exposures from balance
sheet accounts. We are effectively managing currency pair risk in compliance
with treasury policy, according to our pre-defined cost/benefit parameters.
 

Next Steps and Conclusions 

Looking ahead, we
can now build on a sound basis to make more advanced developments in our FX risk
management strategy. The patented FiREapps CoRE Analysis tool empowers us to
evaluate risks against costs, and to make quick, informed decisions on whether
to hedge – or not to do so. We are using a highly automated and standardised
data extraction process, which minimises the initial enrolment and on-going
operational burden to the businesses; in essence, the business units send us
files of the required data, and we take it from there. 

Traditional
integration approaches in a complex systems environment like ours can be very
demanding for various technical and operational reasons, and hence we really
appreciate the automated processes we can now use to extract the necessary
information from across the enterprise on demand. Furthermore, we are looking to
extend the benefits of the FX solution for the management of transactional
exposures in the future. 

I would recommend that corporations who are
wrestling with the complexities of FX exposure management consider what we have
managed to achieve at Hubbell, and see if such an approach would add value to
their treasury and finance operations.  

 

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