The current trend of increasing automation and data exchange in the commercial world, often referred to as Industry 4.0, promises numerous productivity gains1. However, while Industry 4.0 may be taking off in the commercial side of the business, many corporations have yet to emulate it in their treasury operations. This is important if the corporation is to achieve end to end gains across the entire enterprise. However, as Jeroen Bakhuizen and Sandeep Uppal, Global Co-Heads of International Subsidiary Banking and at HSBC explain, Treasury 4.0 is readily achievable if treasury centralises in a manner that will provide the interconnected visibility and free flow of data already emerging in Industry 4.0.

    Treasury centralisation: why?

    The pressure to transition to Treasury 4.0 comprises multiple discrete drivers. One of these is the level of global interest rates driving cost control. According to PwC's 2018 "Treasury function of the future" report, “a prolonged low interest rate environment means cost containment is one of the keys to survival”2.

    This has not gone unnoticed in many boardrooms, where CFOs (and by implication also treasurers) are now expected to deliver increasing efficiencies. There are numerous routes to this goal, but centralisation underpins many of them. A case in point is the move to consolidate financial processes in shared service centres (SSCs), rather than having replication of those processes across multiple local offices. Furthermore, these centralised processes also need to be automated wherever possible, to reduce manual activity and thereby also costs and the potential for operational errors. Personnel freed from repetitive, low value, high volume tasks can then be redeployed to more productive, value-added activities.

    Apart from reducing administrative costs, centralisation also serves to reduce financial costs. The key element here is visibility of corporate cash. In a decentralised environment, global treasury has imperfect visibility of cash and may even be unaware of the existence of multiple local corporate bank accounts. As a result, sub-standard investment returns and/or unnecessary borrowing costs arise – a problem that can apply across all sizes of enterprise from large multinationals downwards. However, once cash management is properly centralised, treasury has both visibility and control of corporate cash globally, which facilitates far better decision making and the efficient application of cash to where it can serve the optimal purpose.

    In doing so, treasuries are also adding a degree of future proofing; as new technologies/products arise they need only be implemented once at a central level. Furthermore, if all data (such as cash information) is already centralised, the maximum benefit from new technologies/products can be more easily realised. The same applies (with some caveats depending on jurisdiction) to international expansion, so that a centralised treasury is able to support new entities from inception by leveraging its greater visibility and control of cash and liquidity.

    Apart from potentially improving investment returns and reducing the need for externally funded working capital, centralisation offers a range of other benefits. Hedging and management of FX exposure can be significantly improved with centralised visibility, thereby reducing both risks and costs. Similar benefits apply to the administration of bank accounts because centralisation also allows the number of bank accounts to be reduced, thus saving on maintenance charges but also reducing the number of personnel sending/authorising payments and thereby also reducing the risk of fraud and cyber-crime. Not only can more rigorous controls be applied to the payment process in a centralised environment, but it also becomes easier to test and report on the effectiveness of those controls.

    Centralisation enables the adoption of standardised payment messages, leading to more efficient reconciliation and increased straight-through-processing rates. It also makes the enforcement and refinement of treasury policy more straightforward, so there is the opportunity to improve the working capital position by consolidating days payable outstanding terms and reducing days sales outstanding.

    The global perspective

    There are various ways in which leading corporates are choosing to centralise their treasury operations, but there are some common themes. A popular strategy that seeks to take maximum advantage of time zones, while also reducing concentration risk, is to establish regional treasury centres (RTCs) in Europe, North America and Asia Pacific. The exact country chosen in each region is typically on the basis of market sophistication and which jurisdiction's regulation permits the widest range of operations. This RTC will often be accompanied by an SSC in a neighbouring country that has a lower cost of labour, but that may lack the infrastructure and skilled personnel to support a treasury centre.

    When determining a regional treasury centralisation strategy, each region has its individual characteristics that are worth considering. Europe is generally highly supportive of treasury centralisation, with standards such as SEPA and ISO 20022. In addition, regulation – such as Open Banking and GDPR – are effectively enforcing more consistent standards for making payments and storing data. Popular European treasury centralisation models typically involve a treasury centre established in Ireland, the Netherlands, or Luxembourg, with an accompanying SSC in a location such as Poland or Hungary.

    In North America, the US's exchange, currency and banking restrictions/regulations usually make it a more popular location for SSCs rather than treasury centres. Nevertheless, the opportunity to centralise certain functions, such as liquidity, is still used by various corporates. Meanwhile, the level of digital transformation underway in MENAT means the number of SSCs located in the Middle East is expected to rise in 20193.

    In Asia Pacific there are various countries with restricted currencies that limit the extent of centralisation because they preclude certain activities, such as pooling. Nevertheless, both Singapore and Hong Kong are popular as a regional treasury centre base for corporates looking to expand their operations in the region. Apart from a pool of suitably skilled labour, both jurisdictions offer tax incentive packages to encourage corporates to choose them as a location for treasury centralisation. A typical Asia Pacific centralisation model is a treasury centre in Hong Kong or Singapore, accompanied by an SSC in India, Philippines or Malaysia.

    However, regardless of which locations a corporate chooses for its treasury centralisation, one of the most critical success factors is choice of banking partner. A successful centralisation project, whether regional or global, requires considerable local knowledge for each jurisdiction involved, ranging across various disciplines, including regulation, business practice and local payment systems (plus the opening of possibly numerous bank accounts). In addition, the completed centralisation project also needs sufficient inherent flexibility to enable the treasury to adapt as necessary to future changes in any of these environmental factors, plus any geopolitical shifts.

    While it is theoretically possible to gather all this information by interacting with multiple local/regional banks, it is extremely impractical given the limited resources usually at treasury's disposal. The logical course of action is to partner with a global bank that has a comprehensive physical network presence across the countries involved in the project and can provide the necessary intelligence in a consistent manner irrespective of location. Taking this step may necessitate starting a new banking relationship, but if that relationship can deliver all the knowledge and functionality needed for a successful centralisation project, then that change will be worthwhile, which is a point some CFOs readily acknowledge:

    "Whilst we enjoyed a long and good relationship with our previous bank, its focus became more local than global", says Richard Adams, CFO of global creative agency Imagination. "We needed a truly international banking partner with a significant global network and a future thinking approach to support our business."

    A further reason some corporates prefer to work with a global bank is to reduce their exposure to cyber-attacks and fraud. If they choose instead to deal with multiple banks then, in addition to the complexity and inconvenience (eg multiple security tokens and logons), they open themselves to multiple points of exposure to cyber threats.

    For a corporate to maximise its return on Industry 4.0, it needs to invest in Treasury 4.0 to support it.

    Treasury centralisation: how?

    Stages

    The centralisation of treasury is a process unique to each corporate and can be completed progressively at a tempo best suited to the individual circumstances. However, the various individual stages involved tend to follow a common sequence and require varying levels of investment in technology, people and processes:

    • Consolidation of bank accounts
    • The establishment of an SSC to perform low value, high volume repetitive tasks and provide common services across subsidiaries (eg HR activities, payroll).
    • The creation of a regional treasury team to begin delivering cost savings by realising synergies and laying sustainable foundations for further centralisation.
    • Establishing a separate legal entity, such as a regional treasury centre or in house bank, to optimise cash, FX exposure and bank exposure. Also to provide financial services to the corporation in the form of intercompany loans, cash concentration, intercompany invoicing and payments on behalf of (POBO).
    • Instigation of a payment factory that prepares and submits payment files to partner banks for processing on behalf of business entities. (A payment factory typically requires an SSC to have been established already.)
    • Expansion of:
      • Operations, such as receivables, supply chain finance
      • Geography, such as adding other regions or instituting a global treasury centre
      • Technology, such as next generation virtual account (ngVA) management, or implementation of application programming interfaces (APIs)

    Best practice

    Just as there is usually a common sequence to the stages of treasury centralisation, there are some common best practices that if observed will increase the likelihood of success. One of the most important is to have a clear view of what the corporation is trying to achieve with the project. What are the projected benefits? How will it facilitate long term strategy? How much inherent flexibility will it deliver if business strategy or its own operating model needs to change in the future?

    This stage is critical, not only because it can help shape the actual implementation process, but also because it will need to be communicated clearly to all those likely to be affected by the project. If a project will involve personnel in significant extra workload or temporary disruption, they will need to be clear on why this is worthwhile. A bank with extensive experience of treasury centralisation can assist here by demonstrating the potential benefits based on its involvement in previous projects.

    It should also be able to assist with the choice of location for the treasury centre. While this may not be implemented in the early stages of centralisation, it needs early consideration as the chosen jurisdiction will have specific tax, regulatory, legal, accounting practice, time zone, language and maintenance cost requirements. These may have an impact on earlier aspects of the project that could be costly/difficult to change later.

    This need for engagement applies all the way to the boardroom, particularly since a realistic budget for the project will be needed. That budget needs to be fully secured before the project starts, as the absence of this is a common cause for project delay. A related need is having committed personnel resources for the project that will remain committed for the duration, as a common reason for project delay/failure is resources being diverted to other activities. A centralisation project can take several years, so the importance of this commitment should not be underestimated.

    Technology obviously plays a critical role in treasury centralisation projects, but it is ultimately something that enables the solution. The actual solution is the implementation of optimal processes. It is all too easy to fall into the trap of using technology to automate fundamentally flawed processes. Therefore, designing the best possible processes is an essential first step before using technology to implement them.

    A related technology caveat relates to existing projects, especially ERP implementations. Trying to start a treasury centralisation project on top of an ongoing ERP project is a high risk strategy. Too many moving parts and potential conflicts, to say nothing of possible resource constraints. Some corporations have successfully combined both, but generally the safer alternative is to centralise treasury after any outstanding ERP project is completed and bedded in.

    Documentation

    One irony of treasury centralisation projects, which typically have a reduction in paper processes as an objective, is the amount of up front documentation involved. This may require signatures and ID from individuals scattered around the globe, so the logistical challenge should not be underestimated. This is particularly true of any items relating to banks' know your customer (KYC) documentation. Regulatory compliance is obviously mandatory, so any KYC requirements must be fulfilled in a timely and accurate manner. It's worth noting that centralisation of treasury operations often necessitates establishing a separate legal entity (which will transact on behalf of other legal entities within the corporation) for which a bank may need additional KYC.

    Fortunately, dealing with a global bank with a strong physical network can make documentation requirements far less onerous. Personnel can submit ID and signatures at local offices quickly and a global bank should ideally have put considerable effort into making documentary processes as consistent and painless for clients as possible. It will also have instituted platforms for the electronic submission of documentation (where this is permissible by regulation).

    Bank expectations

    Local and global expertise

    Choice of bank can have a major impact on the success of a treasury centralisation project. So what should corporates be expecting their partner bank to offer as part of the implementation? In any project that involves more than a few countries (or where even a few countries are in diverse locations) the extent of a bank's physical network (and the local knowledge therein) increases in importance, as does its ability to aggregate that network to deliver effective geopolitical and macroeconomic insight.

    However, the way in which a bank leverages its network knowledge to benefit the client in a centralisation project will actually have a greater bearing on the project's outcome than just the scale of its network. Key to its effectiveness is how local expertise and knowledge within the bank network can be channelled through a single point of contact at the client's central treasury location (or in the same time zone).

    A related point that is potentially even more important for effective execution/coordination is whether the bank is able to align its coverage team across geographies to match that of the client. This is not a trivial task, because while corporate treasury typically has a direct line management model (local reports to regional, which reports to global) the bank will have multiple disciplines (eg network, product, credit) involved at each level. A bank that is able to coordinate its resources in this fashion can substantially enhance the execution of a centralisation project.

    Effective channelling of bank expertise across disciplines can be an invaluable part of the client's project planning, as information on what is or isn't possible in a particular jurisdiction can be integrated at the outset. However, local knowledge – especially if it incorporates elements such as long standing local regulatory relationships – can also be invaluable for anticipating possible future change, which can (if practical) then feed into future proofing the plan. This could range from possible US corporate tax changes that might trigger large scale repatriation of offshore liquidity, to potential regulatory shifts in large developing markets.

    Too many options?

    A significant change in the last few years has been the proliferation of payment, receivable and liquidity management mechanisms. In the past, a treasury might only have to think about ACH, wires and cards. Today, there are almost too many options, with burgeoning faster payment systems, multiple card sub-types, mobile wallets, new fintech payment networks and gateways, among others. On the receivables side, ngVAs now offer considerable potential efficiencies, while new automated tools for real time liquidity management have also emerged.

    A crucial point for corporate treasuries is that banks should be able to combine a deep understanding of the corporate's business flows to help guide it on which of these mechanisms might be most appropriate for it and that could be used to best advantage within its centralisation project.

    Technology

    A bank's existing technological capabilities are of course important to a corporate client, but the long-term picture is even more critical to the ongoing success of a treasury centralisation project. How much capital is the bank committing to technology investment? A well-capitalised bank will be better placed to make the necessary investment, but is that investment being directed into areas such as APIs that will continue to benefit the client in the future?

    A related consideration is the expertise of the personnel supporting that technology on the bank side, not just in day to day operations, but also in areas that might directly affect the implementation of a corporate's centralisation project. Can the bank offer qualified in country technology specialists for ERP and treasury management systems or SWIFT? In the local language? If it can, any necessary changes/additions to corporate technology as part of a centralisation project are more likely to be effective and non-disruptive.

    Conclusion

    For a corporate to maximise its return on Industry 4.0, it needs to invest in Treasury 4.0 to support it. Centralisation of treasury functions is core to this transition and applies across a surprisingly broad size range of corporations, from substantial private businesses right up to global multinationals. While treasury centralisation is by no means a trivial task, it is readily justified by the possible cost savings and efficiency gains. However, perhaps more important are the strategic flexibility gains it can deliver that can help to ensure that future corporate sales growth and geographic expansion are facilitated, rather than impeded.

    Realising these benefits via effective treasury centralisation depends upon meticulous planning and execution. A practical reality that bears on this is that most corporate treasuries are very lightly resourced and simply do not have the necessary bandwidth to assemble all the necessary data to make an informed judgement in house. Under these circumstances, a consultative relationship with a well-capitalised bank that has a proven commitment to technology investment can be a vital factor in driving a successful centralisation and Treasury 4.0.

     

    Disclaimer

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