Recently, the treasurer of a $20+billion multinational corporation asked Treasury Strategies to assist them in determining whether or not the company should centralize all treasury personnel and functions at its headquarters location. Faced with significant growth projections and a desire to increase the effectiveness of international treasury activities, this company is undertaking an assessment that more and more CFOs and Treasurers are considering. Why are organizations thinking about this question? What internal and external factors must be evaluated? And, ultimately, do the benefits outweigh the drawbacks of global treasury centralization?
Why are treasurers considering centralization?
Treasurers are thinking about this issue because the recent advances in technology and communication have raised the tantalizing possibility of efficiently controlling world-wide treasury activity from one global treasury center, giving the treasurer more control of his global processes, liquidity, and financial risks, and the possibility of reduced costs.
In fact, however, only a handful of large multinational corporations have centralized all of their global treasury functions in one location. Our annual Corporate Treasury survey found that 94% of corporate respondents rely on their regional treasury centers or local in-country financial operations to handle day-to-day cash management. The vast majority of multinationals have centrally located funding and financial risk management activities such as foreign exchange, debt issuance, and inter-company funding; our survey shows that over three-quarters of corporations globally centralize these activities.
To some degree, this reflects the evolutionary nature of treasury management. It also reflects the differences in executing corporate finance and cash management activities. Developments in technology and the global financial markets have made it possible for funding and hedging requirements to be collected and executed centrally. Given the opportunities for cheaper and more effective management of these functions when handled centrally, most multinationals employ a professionally trained corporate staff to execute the transactions for the entire company and then to distribute internally the required funds or hedging.
In comparison, it has not been as easy to centralize the daily operational tasks of maintaining bank accounts, monitoring cash inflows and outflows and investing short-term funds. There are external legal, tax and banking issues, and internal political/personnel issues that constrain centralization. Many established companies with existing financial operations in multiple countries find vested local interests that resist centralization efforts. As a result, up to this point, most companies have established regional centers – not global centers – to coordinate and perform international cash management activities. This has become most common in Euroland where the introduction of the euro has led to the opportunity for concentration of euro-denominated funds. The concept of pan-regional cash management activities has extended to the Asia-Pacific and Latin American regions, however the hurdles in these very heterogeneous regions are more pronounced.
What internal and external factors must be evaluated?
In considering the establishment of a global treasury center, a number of internal and external factors must be evaluated and addressed.
Internal Factors
- Corporate culture: In decentralized companies, local and regional staffs take great pride in the fact that they manage all aspects of their business. It takes a great deal of education to convince local managers that the centralization of support activities such as tax, accounting, and treasury is more cost effective, will increase their profits, give them access to more consistent and professional thinking in these areas and free them up to focus on growing their businesses. This task is easier in companies in which the headquarter staffs have already established good working relationships and trust with regional managers by having provided help and leadership in the areas of managing liquidity, financial risks, working capital, and in general financial and banking matters.
- Business maturity: Similar to cultural issues, the age and established nature of the businesses will drive the relative difficulties of centralization. For local financial managers with pre-existing bank relationships and financial processes, there is more reluctance to giving up those activities. However, both of these issues – culture and maturity – are ones that many multinationals have already grappled with as they have converted from in-country operations to regional structures. Once that shift has been accomplished, the conversion to a global structure is likely to be easier.
- Business composition: The composition of the businesses will impact the ease with which a more centralized approach can be implemented. If the businesses are primarily wholesale in nature, the challenges associated with local remittances are less daunting than in a retail operation. Also, if a company is primarily distributing product internationally and has limited manufacturing or other local operations, the requirements for local banking relationships will be more straightforward.
- Technology: As in the case of many business issues, the availability of global technology supports the opportunity for global centralization. Technology can facilitate the collection and dissemination of information, thereby increasing the transparency of cash flows and enabling one central group to manage liquidity globally. Effective technology can also strengthen financial controls – a key consideration given recent legislative and regulatory focus. However, an important note – do not oversimplify the difficulty involved in finding and implementing the right technologies. For most companies, there will not be one system that solves all of their global treasury needs; technological support for centralization may take the form of several systems supporting different elements of treasury processes.
- Need for local contact with business units: All treasury departments should be in regular contact with their business units. But, by centralizing globally, local contact with business units is more difficult and requires more travel on the part of the treasury staff. As a shift to centralization is considered, the local business units will need to feel that an effective communication mechanism is in place for their issues and opportunities to be heard and addressed.
External factors:
- Tax: The impact on taxes company-wide needs to be given careful consideration when developing global mechanisms to facilitate liquidity, inter-company funding and cash repatriation. Taxes will be a key consideration in determining the most appropriate legal and operational structure to employ. And, if your company already has a tax efficient entity in a jurisdiction with minimum employment requirements that are being satisfied by treasury personnel, those requirements will need to be satisfied by other staff if you centralize all activity at another location. More indirect, but just as important is the potential difficulty of staying on top of local tax issues if all activity is centralized. These concerns may be effectively mitigated through the efficient use of internal and external tax counsel.
- Legal structure: The legal structure of your company – including the entity which employs treasury personnel – will need to be considered.
- Regulatory limitations: Specific regulatory issues may need to be addressed. For instance, if you have hired local treasury staff that are subject to long-term employment contracts, these may require special arrangements. Also, regulatory limitations on banking arrangements may require ‘work-arounds’ that your staff and your banks will have to address.
- Limited availability of global banking capabilities: There are few banks that have deep and broad global banking capabilities. Similar to the technology factor, you will probably need to rely on more than one bank to satisfy all of your local, regional and global banking requirements. The coordination and flow of information and cash among the banks in your network will require careful planning.
Do the benefits outweigh the drawbacks of global treasury centralization?
Of course, the answer is…it depends. It is clear that advances in technology and the ongoing, if slow, homogenization of the world’s tax, accounting, and legal structures are reducing the obstacles to centralization. Whether the benefits outweigh the costs will depend upon the individual company. Ultimately, your company will need to make its own decision about whether a globally centralized treasury is the best approach for you.
During the consideration and implementation of such a move, you should be prepared for politically-motivated arguments against the change, high investments in technology, extensive involvement of your tax, legal, and accounting groups, and the need for creative banking solutions. And, after centralization is completed, you will require increased travel and communication with local business units to ensure that you are keeping abreast of local issues.
However, if you are interested in improved control over liquidity, cash positions and financial risks, a consistent approach to your financial processes (a clear benefit in the age of Sarbanes-Oxley), and potential economic benefit, a centralized global approach may be just what you need.