Cutting costs, optimising returns and adding value enterprise-wide are just some of the challenges facing corporate treasurers, writes Naveed Sultan of Citigroup Global Transaction Services.

Today’s corporate treasurer faces an unprecedented number of challenges. As globalisation extends the company’s footprint, so it tests the treasurer’s ability to control and optimise working capital. At the same time, new corporate governance requirements, most notably Sarbanes-Oxley in the US, have materially reinforced the need for oversight and accountability within the treasury function, while competitive pressures make the drive for process and cost efficiencies constant and ongoing.

Treasurers are also confronted by a fast-changing banking environment. In Europe, the move to the euro, coupled with the more recent EU accession of 10 central and eastern European countries, has been accompanied by structural changes that will increasingly transform the eurozone into a single, domestic market. The STEP 2 initiative to create a pan-European automated clearing system for low-value payments will, over time, allow clients to make payments across Europe through a single account in a uniform format at a common price.

Similarly, far-reaching changes are occurring within the US payment system, where two new moves have been made to expedite cheque clearing. The first – Automated Receivables Conversion – is used to convert consumer cheques received in lockboxes across the country to Automated Clearing House (ACH) debits. The second, dubbed “Check 21” and effective from October, is expected to accelerate the use of image exchange in cheque clearing. Citigroup is working with customers to help them to capitalise on both initiatives.

How have treasurers responded to all these challenges? Most obviously, there has been the well-chronicled shift to shared service centres (or sometimes “payment factories”) and the increasing use across Europe of pooling structures and hub accounts. The expansion of the eurozone has served to accelerate this process and we have seen a move to shared service centres in Hungary and the Czech Republic in particular.

The centralisation of treasury functions has been accompanied by a demand for more automation and standardisation. Clients are consolidating providers and demanding a single data stream for multiple countries and products. Enterprise Resource Planning (ERP) solutions, backed by web-based online banking systems, are increasingly the cornerstone on which the information flows are built. Treasurers want a combination of control, visibility and optimal returns.

Five priority targets

In a recent survey, Citigroup asked corporate treasurers to list their goals in order of priority. They said that they wanted to:

  • gain transparency and enhance controls to meet corporate governance requirements;
  • optimise returns on liquidity in today’s low interest rate environment;
  • enhance working capital;
  • reduce costs;
  • add value to the corporation through innovation.

While the triple mantra of centralisation, automation and standardisation is supportive of all those priority goals, it is worth asking what specific moves treasurers are making, and how they are achieving their targets.

Transparency and control

Online banking systems, such as Citigroup’s Citidirect, have materially improved treasurers’ ability to access real-time account information worldwide, consolidate the information and act on it. Real-time information is also a powerful tool in the forecasting process.

But many large multinationals still deal with multiple banks in different countries. This makes establishing a global picture of cash and borrowings more difficult, undermines control of working capital and complicates the forecasting process. To overcome this problem, Citigroup is developing a treasury portal through which clients will be able to aggregate data from multiple banks and analyse their global, regional and local cash and borrowing positions in real time. The result will be complete visibility and account transparency.

Optimising returns on liquidity

Citigroup deploys a range of sophisticated techniques – domestic, cross-border and regional target balancing, as well as pooling and automated active investments – for concentrating clients’ excess liquidity and optimising the return on their cash. By using automated end-to-end liquidity and investment structures that offset debit and credit balances, treasurers can optimise the use of their funds across a region by maximising returns and minimising interest expense.

In the investment area, the use of automated investment services is expected gradually to replace the more time-consuming process of calling a desk for a price.

Citigroup’s web-based investment service offers a real-time rate feed, immediate trading and confirmation and straight-through execution. The service can be customised so that only those investments that conform to a firm’s investment policy are included. This facilitates risk control and ensures subsidiary compliance with investment policy. At the same time, there is a clear audit trail to follow.

Enhancing working capital

One of the most direct methods of managing working capital is to improve the cash conversion cycle. Companies that sell directly to their end-customers do so through multiple channels and need multiple instruments to collect the funds.

Citigroup has responded by developing a service that enables communication over the web – by interactive voice response or by calling a customer service representative – and which also permits payment by credit or debit card, ACH debit or other method.

In many cases, clients choose to outsource collections handling and receivables reconciliation. Citigroup collects receivables for clients in more than 60 countries, providing payment information in an electronic file format that clients can upload into their ERP systems. In one instance, a specific application of receivables reconciliation achieved a match rate of 99.7% on a transaction volume of 400,000 items a week, allowing the client to reduce the headcount in accounts receivable from 80 to 15.

Reducing costs

Convergence of industry communications standards around SWIFTNet is helping to promote more straight-through processing and therefore drive out costs.

Treasurers are similarly automating their own functions and are increasingly turning to solutions such as electronic invoicing and payment. Many have cut costs further by using card programmes for travel and entertainment and purchasing. Highly successful in the US, purchase card programmes are starting to catch on in parts of Europe – the UK, Ireland and Germany in particular.

In the case of commercial cards, corporations are increasingly turning to a single issuer to administer their programme globally. The administrative effort becomes easier, while the corporation gets a clearer view of spending data that allows it to negotiate better payment terms.

Adding value to the corporation

One benefit of web-based banking systems is that they have reduced the cost of interaction between client and bank. That, in turn, has increased the attraction of outsourcing non-core functions to an agency treasury provider. The effect is to give the corporation access to the scale economies of a global provider, free up capital that would otherwise have been invested in treasury workstations and technology, and permit senior executives to focus on strategic issues and build value for the business.

For example, Citigroup recently set up a centralised European treasury for a big US group with 15 European affiliates. Citigroup has taken on the administration of inter-company loans, has implemented both a cash-pooling and inter-company netting structure across Europe, manages all transactions and the associated settlements and confirmations, and provides a full management accounting service. The saving to the company – in terms of people and systems – is €1.3m per year over five years.

In another case, a large insurance group outsourced the administration of a newly established proprietary trading operation to Citigroup. With a need to keep the business separate from the company’s existing treasury operations, the alternative would have entailed a costly investment in technology, people and processes.

The value added need not be within treasury. For a client in the pharmaceutical industry, Citigroup applied its expertise in developing secure systems to create a unique tool that enables research and development collaboration across the web. The move came out of conversations that began with our contacts in treasury. The result was to add material value at a commercial, and not purely financial, level.

Naveed Sultan is head of cash, Global Transaction Services (GTS), EMEA, Citigroup

The benefits of outsourcing

How outsourcing a company’s treasury management system allowed it to adapt to changing requirements and allowed the in-house treasury team to devote time to strategic issues.

The Challenge: A European-based chemical company generating $6bn of annual sales, with a string of global affiliates, decided that its head office treasury operation was under-resourced in terms of both people and IT. With controls stretched, there was exposure to all manner of contingencies. Upgrading the treasury management system would be expensive. Additional staff resources would be required to permit segregation of duties between administration and controls, and there would be a need for enhanced IT support. The company turned to Citigroup for an outsourcing solution.

The company had a number of key objectives. It wanted to:

  • eliminate operational risk as an issue for the existing back-office personnel;
  • minimise the risks implicit in the existing (and minimal) IT and technical support area;
  • introduce new efficiencies and move towards straight-through processing (STP);
  • enhance controls while maintaining existing flexibility;
  • retain the strategic treasury function in the corporate head office, but eradicate the more time-consuming, and largely manual, tasks associated with the existing operation.

In evaluating the proposed treasury management system, the company wanted optimal functionality, comprehensive controls and a full contingency/disaster recovery facility. It also wanted it to be implemented as quickly as possible in order to minimise the perceived exposures that it faced. For Citigroup, there were added challenges because the customer’s requirements expanded following the mandate. There were very specific reporting requirements that would require a high degree of customisation. And the project included the installation of third-party electronic banking systems – and their integration with the customer’s ERP system – within a very tight timeframe.

Solution: The client company and Citigroup agreed the precise scope of the services to be offered, and both established project management groups to work to a clearly defined plan and timetable. Citigroup then set about implementing what amounted to an in-house bank structure.

In the first phase, it took on the administration of all inter-company loans and set up a two-tier cash pooling structure. This involved the pooling of the company’s euro funds across Europe, with a further global overlay involving multi-currency zero-balancing accounts. Citigroup also took on the administration of FX and interest rate dealings, together with the associated settlements and confirmations.

A company-wide netting structure was introduced to settle inter-company payables and receivables on a monthly basis across the current account structure (reflecting the cash pooling). By eliminating inter-company cash transactions, the effect was to cut transaction charges, reduce risk and remove the administrative work associated with transaction queries.

The new structure was then built into Citigroup’s treasury management system, and a tailored reporting service developed according to the client company’s requirements. This was then integrated with the company’s electronic banking and ERP systems, while at the same time third-party electronic banking systems were installed and training was provided for the client’s staff.

Citigroup provides an ongoing management accountingservice that includes mark-to-market revaluations of all outstanding financial contracts and transaction information relating to activities outsourced through group subsidiaries.

Verdict: The company has derived a number of direct financial benefits from the new treasury structure. Improved inter-company loan administration has allowed it to make more efficient use of longer-term cash balances, while the pooling structure put in place has significantly reduced transaction and interest charges.

Citigroup estimates that the annual saving to be substantial.

But the overall savings from outsourcing are much larger. Allowing for the licence and implementation costs of a new, mid-to-upper range treasury management system, and adding in the cost of the extra personnel that the company would have had to hire, the savings rise to around €1.3m a year over five years.

Meanwhile, as the company has acknowledged, it has gained new flexibility, as well as the ability to adapt to changing requirements. It enjoys new functionality across time zones from having a web-based front-end system at its disposal. And instead of spending its days pulling together data, the in-house treasury team now has time to devote to strategic issues – such as its banking relationships and long-term funding structure.

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