German Treasury Survey: Wrestling with the Value Added
During the last couple of years PricewaterhouseCoopers has conducted several surveys about corporate treasury in different countries. This is our first survey covering corporate treasury aspects in Germany. The survey was designed in cooperation with the Verband Deutscher Treasurer e.V. (VDT). In addition, questions of the European Association of Corporate Treasurers (EACT) were included. With this survey we wanted to get an insight into the treasury operations of German companies regarding organization, processes, risk management and deployed IT-support. Furthermore we wanted to identify trends within corporate treasury.
To tackle the complex challenges of internal and external influencing factors, German companies have adopted the global trend towards a centralized treasury. More than 50 per cent of treasury organizations regard themselves as service centers. As a service center their function is to manage financial risks and liquidity within predetermined guidelines and simultaneously add value to the business and contribute to the company’s objectives.
The added value expected from the treasury is quite complex. It involves cost efficient processes for administration and transactions as well as financial risk management according to predetermined benchmarks and the company’s risk appetite. To make the value-added visible, performance measurement and transparent reporting are essential.
The perception of treasury by senior management is strongly connected to the presentation of the value-added. Less than two thirds of participants believe that senior management understands the role of the treasury.
This highlights one important challenge: measuring the treasury requires a clearly defined treasury strategy, as well as well-defined measures to ensure the transparency of compliance and performance. These criteria have to support both operations and reporting to senior management.
Although more than two thirds of participating companies claimed to measure performance in a qualitative and/or quantitative way, only 52 per cent measured the value-added. Similar proportions apply to respondents’ measurements of the effectiveness of their strategy. Interesting in this context is the fact that some companies do not measure their performance but nethertheless characterize their treasury as a service center. Performance measurement is a key criteria of the treasury “service center” model. If one takes the global trend towards service centers into account, more than one third of companies have redefined their treasury organisations to implement all the criteria of a service center.
There is no clear trend regarding indicators for performance measurement. However, the costs of cash management (55 per cent), competitive bids (25 per cent), net interest expenses (34 per cent) and net hedging expenses (25 per cent) are commonly used indicators. These numbers also show that performance measurement is applied only for easily determinable indicators and does not cover all treasury activities.
The relatively underdeveloped nature of performance measurement for value-added is clear when looking at reporting issues: only 28 per cent of participants included performance measurement in the reporting. It is no surprise that one third of treasurers are not satisfied with the recognition of treasury by senior management.
For more than three quarters of participating companies, the CFO is the most important addressee for treasury reports. The board of managers and the board of directors are directly informed in 60 per cent of companies. If one takes the elements of the reporting into account, it is arguable if the board of managers and the board of directors can accurately assess the financial risks in approximately 50 per cent of cases.
The survey shows that most participants have treasury guidelines in place but much fewer have defined their objectives and strategy. To define a strategy and derive objectives is the task of senior management. Senior management has to provide human resources and monitor guideline compliance. At this point the connection to a smooth reporting process is obvious. But it also raises the issue of internal controls within treasury.
Regulations such as the German KonTraG (Law on Transparency and Control) and the Sarbanes-Oxley Act have defined explicit standards: senior management has to establish guidelines, processes and controls to be able to ensure that all activities in the company – treasury included – are carried out in accordance with the company’s objectives. This is the only way to implement value and risk oriented corporate management.
Corporate governance and strengthened internal controls will have an important impact on processes and reporting in treasury operations.
It is commonly acknowledged that a separation of duties is the basis for internal controls. But the survey results show that a huge number of companies have yet to fully adopt the segregation of duties. Forty five per cent of respondents either did not know or did not apply the German MaH – the minimum requirement for trading activities of banks which applies in a similar manner to corporates and which explicitly requires the segregation of duty. This is clearly a challenge for both senior management and the treasurer, as regulations by law as well as the pressure from stakeholders and the capital market is likely to increase.
As an intermediate conclusion, treasury in Germany may be addressing the challenges, but there is still much work to be done.
At this point one has to look more closely at the IT-issues concerning treasury. Best practice treasuries have implemented a conceptual framework for their treasury which covers strategy, policies and operations. For many treasuries a treasury management system (TMS) is an integral part of this conceptual framework.
But still treasury is an organizational unit which has traditionally not been subject to major IT-reengineering projects. How else would one explain the relatively low degree of automation and system integration: spreadsheets are still the most popular IT-solution ; 43 per cent of participating companies use spreadsheets for their risk managements and 60 per cent use spreadsheets to evaluate the hedge effectiveness according to FAS 133/138 and IAS 39. Similar figures pervaid other areas: 53 per cent produce their liquidity forecast manually, as do 45 per cent for control limits. Sixty four per cent carry out performance measurement manually as do 51 per cent for their regular reporting. These results are quite amazing because all aspects of financial risk management are affected. These are the activities with both high risks but also with the highest potential for value-added. The highest degree of TMS-support can be found for repetitive activities like transaction capturing (56 per cent), confirmations (49 per cent), in-house banking (43 per cent), reconciliation of bank accounts (64 per cent), electronic payments (81 per cent) and position tracking (57 per cent). The figures refer to companies already employing TMS for these activities.
It is obvious that a high degree of manual activity within certain treasury functions has several disadvantages: the ability to react to unexpected shifts of the market is restricted, while manual preparation of relevant information may take crucial time. Additionally, decisions may be based on outdated or incomplete data.
There is also a risk that implemented and documented processes and controls may not be applied in some cases. This risk can be reduced significantly with IT-supported workflows ensuring segregation of duties and other organisational procedures. This reduces the operational risks for senior management as well as for the treasurer.
The answers of the participating companies clearly show that IT is a driver as well as an enabler for changes in treasury operations: 59 per cent identified the integration of treasury into the business processes and the aligned IT-implementation as a major future challenge. In this context, Internet and web-tools play a central role.
Beside unsolved questions of accounting issues regarding IAS 39 / FAS 133, IT within treasury may be one reason for the limited use of complex financial instruments for risk management. Without adequate IT support, complex financial instruments cannot be used effectively. In principle, treasury should only use instruments which can be handled by every element of the business. This affects the processes of trading, capturing, confirmation and settlement, but also accounting. Treasury has to develop its own accounting in addition to the accounting department. The average support of the accounting department is stated as 6,1 (scale 1-10, 10 = very good) confirming that the requirements of treasury are not being met. Another issue is the increasing importance of risk management. Besides marked-to-market valuation, international accounting standards have a significant impact on risk management because correlated financial risks cannot be evaluated without observing the impact on the balance sheet and profit and loss statement. Therefore, accounting standards have an increasing impact on the design of treasury strategies and processes.
In FX management (transaction risk) stand-alone instruments prevail. The frequently discussed integrated risk management scenario, where different financial risks are considered to be in correlation, is not common practice. But even if not commonly applied, one third of participants accepted the increasing importance of an integrated risk management strategy.
Participants already see new challenges for the treasury on the horizon. As banks become more and more restrictive on credit issues the importance of liquidity management increases. This is especially relevant for companies which have no access to alternative credit sources due to their size. The emphasis will therefore shift to classic in-house financing. The keywords here are working capital management. Seventy six per cent of participants expect increased activities in working capital management for the treasury within the next three years. The utilization of treasury resources and competences in all monetary processes of the company is a great challenge but also promises high potentials for value-added.
The results of this survey suggest a stronger emphasis on treasury activities in German companies. They show that there is hidden value-added within treasury, which may contribute to the achievement of overall company objectives. However, there are some prerequisites: only the definition of strategies and objectives, as well as the allocation of adequate resources and instruments, can enable the treasury to contribute to the bottom line and report this contribution in a transparent manner.
Carsten Jäkel is a Manager at PricewaterhouseCoopers’ Corporate Treasury Solutions Group in Germany.