A Bird in The Hand is Worth More Than You Think
Birds are supremely good at maximising the value they derive from the energy they expend. What’s more, they are experts at risk-adjusted returns. This ability to make cold, calculated, balanced decisions has been honed over countless generations of evolution. It is the reason why, as I write this in a ‘cold snap’ in the UK in mid February, my garden is still full of songbirds. It is the reason why my cat is not fat from eating robins. (The fact that my cat is fat is quite another story. Her ability to maximise calorie intake by exploiting gullible humans is another example of maximising calorie intake.)
The blue tits in my garden change their feeding habits season by season, month by month, week by week or even hour by hour – always maximising their risk-adjusted calorie intake. If high calorie caterpillars are in season, they eat them. If I put peanuts on the bird table and on the windowsill, they’ll eat the lower risk nuts in the birdtable first. If I change the risk to reward equation by putting my cat in the garden, they’ll avoid the garden altogether. Unless, it is very cold and the high calorie peanuts become worth the risk (or if my cat falls asleep).
If only our cash and treasury departments were staffed by more blue tits. Blue tits are good at this calorie maximisation because those that were bad at it died. The cash and treasury management arena has been going through a cold winter for some time now – and the survivors will be those good at value maximisation.
In summer, when food is plentiful, it is easy to survive as a blue tit. Similarly, in times of rising stock markets, surplus cash, tax-driven deals and M&A activity, survival as a treasury is not the issue. It is when times are tough and free cashflow is at a real premium that treasurers and cash managers survive or perish. It is when choices are constrained by lack of investment funds that true ‘life and death’ decision-making becomes critical. Which do you do? Increase straight-through processing rates on payments by 5 per cent, implement a new treasury management system or fire two of your staff? Which maximises risk-adjusted value?
There is no short cut in making these decisions – but there is a clear process to follow:
All the facts – and the facts alone. No emotion, no pet projects, no constraints, no sacrosanct policies. The great thing about a tough economic environment is the opportunity to thoroughly review the ways changes can be made. Boards are now interested in re-engineering their payment processes (if they delivery real cost savings); they are interested in metrics that show efficiency improvements; they are interested in real trade-offs between interest, transaction costs and time. Make the most of it before the summer comes and the latest M&A deal means you don’t have any opportunity to present the true value of treasury to the company.
Be ruthless about the facts. Get them all on the table – volumes, margins, costs, transaction types, ‘Spanish customs’, end-to-end processes. Involve as many areas as possible to get the most comprehensive view available.
All ideas are valid at this stage – again involve wide input. A few banks have specialists who will assist this process. Once a list of options/opportunities has been compiled, evaluation can begin – but double-check – does this include all of the ideas? Does it include the mundane ones? You never know which will deliver most calories.
What are the rewards (or calories)? What are the chances of success? What are the risks? Score these factors for each of the options. Which comes out top? What is the real, risk-adjusted, net present value of a 10 per cent increase in the number of straight-through payments? What is today’s value of implementing an FX internet dealing system? Will this offer a greater return than eliminating cheques as a method of payment in the one subsidiary left to comply with implementing electronic banking?
This process can be iterated a number of times – the key output is a list of the best value maximising options. As a double check, be realistic about costs and risks – almost all projects’ costs and risks increase in implementation.
Simple really – but it is amazing how many projects fail due to an inability to focus or the temptation to constantly re-evaluate. Swooping over the cat’s head aiming for peanuts on the birdtable, is not the time to be stopping to re-consider the options. If investment and resource allows, spreading the risks through a portfolio of change activities is also wise. Having a number of food sources is a good survival strategy.
Measure the results, check your assumptions and revise future plans. Smart birds learn to go back to good feeding areas – and to avoid the poorer, riskier ones.
This may all sound relatively simple, but you would be amazed at the number of value-destroying changes that are made. I sometime see plans to implement cross-border concentration/liquidity management for tiny surpluses that don’t cover the transaction fees – let alone the staff time and cost in setting up and monitoring.
I have also seen companies shy away from tackling their millions of paper-based payments, which are seen as too difficult to re-engineer, but spending vast amounts on, for example, automating FX dealing when they only make a handful of FX deals per month. On the other hand, there are examples of forms spending huge sums on projects that bring a very small difference on straight-through processing, when effort would better be spent on internet FX dealing.
As a final example, outsourcing can provide great opportunities – but make sure the effort and risk outweigh the reward. The tools and options to implement changes are numerous – and lots of people are available to assist. The smart money and the key to survival is in making the risk calorie maximising decisions.
My challenge to everyone reading this article is to ask how your decisions measure up against those of the supreme value-based risk analysers, of the feathered variety, eating peanuts in my garden. Are your decisions based on life and death pressures to survive? Next time you look out of your window at the birds, challenge yourself as to your own value-based decisions through the winter. Will your treasury make it to the summer?