Li & Fung Limited is a supply chain solutions provider headquartered in Hong Kong that has mainly US and EU brands and retailers as its clients. After a period of strong expansion, the company needed to consolidate its bank accounts and redesign its existing liquidity structures to make better use of its internal liquidity. The company’s treasury partnered with HSBC to achieve this and now has real time control of its cash, as well as assuming a strategic rather than transactional role within the organisation.
Li & Fung enjoyed a period of very strong growth in the late 1990s and early 2000s, which coincided with the company making a large number of acquisitions. As a result, there was insuffi cient time to integrate all the bank accounts of those acquisitions into Li & Fung’s treasury environment. This caused a proliferation of bank relationships and accounts, with some individual entities having more than 50 bank accounts.
Furthermore, the acquired entities operated on a standalone basis with their own balance sheets and P&L accounts. This meant these entities’ cash balances were only eff ectively available to themselves and could not be used as part of any internal funding structure, which gave rise to unnecessary borrowing costs.
Other Li & Fung entities that were not run on a standalone basis participated in a regional cash sweep to a header account in Hong Kong, which delivered a degree of cash concentration. However, the fact that it was only a physical concentration had the disadvantage of creating intercompany positions/loans that necessitated the calculation and application of the appropriate interest, which was often done manually. Accounting had to be maintained for all these positions, which had to be monitored to ensure there were no issues in relation to transfer pricing.
The company also maintained two single currency notional pools in Singapore (in USD and EUR), but had further cash balances in other currencies, such as HKD, CNH, GBP, SGD and AUD, which did not participate in these pools and so remained idle.
Finding the optimal solution
In order to address these challenges, Li & Fung’s treasury undertook a comprehensive analysis of its Asian bank accounts in 2017. The objective was to determine how many accounts were needed, and therefore how many could be rationalised. It had already been agreed that incorporating the remaining accounts into a physical sweeping mechanism would be a suboptimal solution because of the associated intercompany accounting overheads. It was consequently determined that any bank accounts remaining after the rationalisation process would be incorporated into a notional pooling structure.
In order to choose the best possible notional pooling solution to deliver on this strategy, Li & Fung’s treasury undertook an RFP process with its main relationship banks. In August 2018 it decided to adopt a solution proposed by HSBC that consisted of two linked notional pools in Hong Kong and Singapore.
Apart from the general advantages of automation, visibility and efficiency implicit in HSBC’s proposed solution, two specific components were key to the company’s decision:
- Using two pools as suggested by HSBC meant that unnecessary proliferation of bank accounts could be avoided. If only one pool was implemented in Hong Kong, Singapore-incorporated entities would be required by regulation to open non-resident accounts in addition to their domestic accounts. This made having a Singapore pool for Singapore entities that was automatically linked to the Hong Kong pool a more elegant and efficient solution.
- As part of its proposal, HSBC suggested a daily automated ‘drain the pool’ functionality, whereby the balance in the Singapore pool would be automatically calculated and swept to the Hong Kong notional pool. This had an important practical benefit, because Li & Fung’s Singapore treasury team is considerably smaller than its team in Hong Kong. This ‘drain the pool’ mechanism would therefore avoid overburdening the Singapore team by concentrating the funds with the larger Hong Kong team, who would be able to handle all the required cash projections. (The Hong Kong team also had access to all the necessary banks to raise same day funding if required, or to place deposits.)
“Our recommendation to Li & Fung that they deploy two linked notional pools illustrates our commitment to offering solutions that are tailored to specific client circumstances, rather than merely being generic,” says Lance Kawaguchi, Global Head – Corporates, Global Liquidity and Cash Management, HSBC. “Through our long-established consultative relationship we had the necessary deep understanding of their operations to be able to deliver on this commitment.”
The solution went live successfully in November 2018. In view of the difficulty of persuading customers to change the bank account details to which they made their remittances, Li & Fung decided to run the process of bank account rationalisation in parallel with the implementation of the notional pools. It therefore included existing bank accounts in the pools, gradually replacing/supplementing these with the new bank accounts once sufficient customers had started remitting to them.
The new Singapore multicurrency notional pool includes USD, EUR, GBP, HKD, CNH, SGD and AUD, while the new Hong Kong notional pool uses USD, EUR, GBP, HKD and CNH. More than twenty Li & Fung entities participate across the two pools.
The available balance in the Singapore pool is automatically calculated on a daily basis and swept to the Hong Kong notional pool via the ‘drain the pool’ functionality. Li & Fung’s treasury also has access to a liquidity dashboard from HSBC’s Liquidity Management Portal that enables it to track the aggregate balance in the Singapore pool in real time. This means that it is easily able to decide if there is sufficient surplus cash available to warrant initiating an additional manual transfer in order to make an overnight deposit before the cut off time.
Major benefits gained
The combination of the bank account rationalisation and the new notional pooling structure has delivered multiple practical benefits for Li & Fung. An obvious example is the high degree of automation now achieved, which has replaced the repetitive manual transactional activities associated with the previous liquidity management processes. At the same time, the removal of numerous unnecessary bank accounts and their associated processes has resulted in streamlined and efficient new bank account and liquidity management structures.
The advances made by Li & Fung illustrate how corporates in Asia have gained significant momentum in improving the efficiency of their treasury functions
The funding of deficit entities and the investment of surplus cash have been considerably enhanced by the automated sweeping between Hong Kong and Singapore. This enables the Li & Fung treasury team in Hong Kong to deploy funds to best effect - such as by zeroing any deficits across its partner banks and individual accounts - which has saved on overdraft costs and boosted investment returns.
Treasury itself has also benefited directly from the changes. The removal of repetitive transactional and manual activities has freed up personnel to engage in value added activities. Along with the better quality information now available, it has enabled them to boost cash forecasting accuracy. Treasury recruitment has also benefited because suitably-qualified millennials in Hong Kong and Singapore are attracted by the intellectually stimulating and interesting roles now available in Li & Fung’s treasury, resulting in greater numbers of high quality applicants.
These advances have also delivered some substantial quantitative benefits. More than 300 bank accounts were closed during the rationalisation process, resulting in total maintenance cost savings of USD1.5 million. The ‘drain the pool’ functionality has enabled treasury to invest surpluses more effectively, delivering an increase of USD0.75 million in investment income. Similar gains have been achieved on the deficit side, with a reduction of USD0.5 million per year in interest costs on unnecessary borrowing. Finally, the new solution has also saved Li & Fung’s treasury a minimum of three hours per day that was previously expended on repetitive manual transactions.
“The advances made by Li & Fung illustrate how corporates in Asia have gained significant momentum in improving the efficiency of their treasury functions,” says Suraj Kalati, Global Head of Liquidity and Investment, Global Liquidity and Cash Management, HSBC. “With new developments in the treasury digital space and optimisation, corporates can benefit from automating their liquidity management requirements.”
It is worth noting that all these benefits were achieved without disruption to the business. Li & Fung’s treasury was careful to engage with sales, procurement, accounting, auditors, business finance, tax and other teams within the company when determining the new liquidity management structure. One illustration of this was the decision to initiate the new liquidity structure with existing bank accounts and only transition new accounts into the structure after a critical mass of Li & Fung customers had adopted the new accounts’ remittance details. This avoided any potential AR upheaval and any need for corrective manual intervention.
A project that combined the simultaneous rationalisation of bank accounts and the implementation of a completely new liquidity structure was undoubtedly extremely ambitious. But this only makes the unqualified success Li & Fung achieved all the more impressive.
“Importantly, the new liquidity management structure, plus the adoption of HSBC’s digital reporting dashboard from the Liquidity Management Portal, has not only given Li & Fung complete visibility and control of its cash in real time,” says Denis Savastano, Group Treasurer, Li & Fung Trading Limited. “It has also transformed its treasury into a strategic player.”
This is because the decline in treasury’s transactional activities after the completion of the project has enabled it to play a far more directly supportive role for the company’s business. It now has the time, data and tools to concentrate on refining its forecasting and associated analytics. It can undertake multi-timeframe forecasting as a matter of course, as well as sophisticated scenario analysis - such as modelling the impact of base rate changes on interest cost savings and deposit returns. The net result has been greater forecasting accuracy over the entire maturity spectrum, which has in turn improved the deployment and management of cash across all timeframes.
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Published: January 2020
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