A function best left to the experts

Multinational companies must have an effective treasury operation, but is it a core function that must be run in-house? The answer to this question was almost always yes, but it is increasingly becoming no.

Globally, around 400-500 multinationals outsource their treasury operations, typically to one of the three banks that dominate this market: ABN AMRO, Citibank and JP Morgan. The treasury outsourcing concept is 10-15 years old, but it has been slow to develop. Now there is more interest, driven by three key issues.

The first driver is regulation. In the past, a corporate treasury department could easily take positions in the market with its own funds, but this activity has been constrained because of more regulation, such as the Sarbanes-Oxley Act in the US, designed to reduce the incidence of corporate scandals.

New accounting regulations, such as IAS 39, which sets out rules for the recognition and measurement of certain financial instruments, will add to the problem.

The second driver is cost. Restricted activity is making treasury more of a cost centre than a profit centre, and has led many companies to look at how to reduce costs.

The third issue is complexity. Treasury management is increasingly reliant on more complex systems, software and processes that are harder to run.

The solution

A solution to these problems is to outsource treasury operations to a bank that has the expertise, technology and critical mass to take them all in its stride.

Anne Collard, head of treasury services consulting group for Europe, Middle East and Africa at JP Morgan, says: “Corporates are increasingly realising the benefits of an outsourced treasury function, and we are now experiencing significant and sustained growth in this market.”

Ms Collard adds that typical services offered are administrating intra-group loan portfolios, cash concentration structures, multilateral netting processes and foreign exchange and interest rate risk management programmes.

An outsourcing provider will also invest surplus cash, draw down funding, monitor daily balances, consolidate cash forecasts and provide accounting reports on behalf of the client.

The technology behind these services is crucial to their success. JP Morgan uses treasury management software provided by the US’s Wall Street Systems, while ABN AMRO and Citibank use software from France-based Trema. Trema’s Finance KIT is a web-enabled treasury management solution that integrates all business functions across front, middle and back office.

David Guest, ABN AMRO’s head of treasury solutions, says: “Our service really is a technology-driven offering. We focus on developing a straight-through-processing environment with maximum automation, so we can build scale to make our platform work. If we have one platform in place operating across a large number of treasury environments, we can create economies of scale and pass the saving on to clients.”

A peculiarity of treasury outsourcing is that the three leading banks providing it base their services out of Dublin, though they each have sales and support offices in other countries.

Favourable tax regime

Stellan Rĺberg, Trema’s director of treasury outsourcing services, says this has its origin in the favourable tax regime established by the Irish government when it set up the International Financial Services Centre in the late 1980s.

“Although the tax regime is not quite as favourable as it was, the expertise of the people managing these outsourced services is now firmly established in Dublin,” says Mr Rĺberg. However, the total hegemony of the these banks may be coming to an end. “Other banks in Europe have started to get interested in providing treasury outsourcing, especially in the Nordic region,” says Mr Rĺberg.

They have noticed the growing demand and want a piece of the action. “One reason for this demand is IAS 39, which will become a requirement for companies from January 2005,” says Mr Rĺberg.

Mr Guest says the next phase of growth will be driven by customers choosing to keep their treasury front office in-house, but outsource their middle and back offices.

“This will give treasurers full control, with the option to outsource their complex and costly systems and processes,” he says. “This model is in pilot stage at the moment.”

Ms Collard says that treasury outsourcing is developing into financial outsourcing, where a broader range of services can be offered to clients, such as in-house banking.

This is interesting because it entails a bank encouraging a multinational company to outsource the running of its in-house bank back to a bank.

It may seem circuitous, but it can work for both parties: the company achieves margin savings and gains more control by having an in-house bank, but by outsourcing the difficult bits it allows the bank to claw back some of the business it had lost.