US Domestic Cash Management: Where is the Support?

The challenges and opportunities faced by US corporate treasurers are significant. They include:

• ever greater concerns about operating and financial risks and the increased regulation to deal with those risks;
• the need for more effective approaches to working capital management and cash forecasting;
• expanding payment channels.

The difficulty of meeting these challenges and taking advantage of the opportunities is heightened by the fact that treasurers face serious constraints on human and technological resources. We explore how treasurers are grappling with these issues and how they look to their bankers to support them.

The Discussion

 

Susan Skerritt, Treasury Strategies: Research performed by Treasury Strategies confirmed that corporate treasury departments are shrinking, with many large companies in the US having fewer than 20 people dedicated to the treasury function. Treasurers are being asked to do more with less. What are you doing to address constrained resources in your treasury organisation?

Scott Krohn, Ford Motor Credit: Our combined Ford/Ford Credit Treasurer’s office has 100+ employees. The efficiencies we’ve achieved in the past couple of years have been primarily in the treasury operations/cash management area, and these efficiencies have been primarily systems-driven in terms of requiring more of our banking partners to feed into our treasury systems as opposed to relying on multiple bank proprietary systems and interfaces. The more we streamline into our treasury workstation, the more straight-through processing we can drive throughout the system ranging from treasury processing to back-end automation of accounting. As treasury as a whole is required to do more with less, the more efficiencies we can drive in operations helps the overall cost equation as well as potentially freeing up resources for growth areas in treasury – which lately in our business has been in the assetbacked financing area where we have grown to meet our funding plans.

Skerritt: Tony, Iron Mountain has a smaller treasury organisation. What are you doing to address this issue?

Tony Piazza, Iron Mountain: At Iron Mountain, we have been rationalizing and streamlining our treasury operations as well as utilizing technology which has allowed us to do more with less. Last year we re-engineered our US cash management structure, which simplified the structure and allows us to manage the growing treasury operation without adding resources.

Bob Hemstreet, Textron: There are 19 people in our treasury group for a $10 bn company. In my group, operations, there are five of the19. We’ve actually pushed back onto our division some of the work that had been centralised in the past, in particular the initiation of wire transfers and ACH payments. At first we were concerned about them doing things like that, but then we realised that there wasn’t any more risk involved than what they were doing already in terms of making cheque payments, for example. We’re looking for, and we have looked for, opportunities to do away with things that we were doing that were no longer necessary.

Maggie Lagana, Thomson Corporation: We have used technology repeatedly in many areas of treasury that we have inherited. We recently took on working capital management and managing a commercial paper programme. We could not have done this without technology and we did not add resources, bodies. Additionally, we pushed back on to our subsidiaries the wire transfer process. Corporate was initiating all payments and it really added no value for us to do this. We were like glorified key-punch operators. So we used technology to develop a remote site capability with our current treasury workstation so that our subsidiaries would be able to input all of their transfer and payment information directly. We now simply release payments because we know they’ve been properly authorised at the divisional level.

One place where we could probably use a little help, but we’d need additional resources for this particular part of treasury, is the planning and analysis of cash flow. That’s always been something that we’ve had a very difficult time getting our hands around. The markets have changed, payment terms have changed and the customers have changed over time. This has created a bit of an uncertain area for us in the past two years.

Skerritt: Many corporations are grappling with cash flow forecasting; in fact, based on our research the majority of companies report that their forecasts do not meet acceptable parameters of accuracy. Let me turn to the bankers on this question of resource constraints. Chris, are there ways in which Bank One is or could be helping its clients to deal with these constraints?

Chris Skaar, Bank One: It is important to listen to the issues that our customers have and try to develop solutions that are responsive to their needs. Most of the issues are around project-related work and handling the day-to-day treasury operations transaction processing. Technology is a critical part of many of these solutions, and there are a number of tools we can provide.

Decentralizing the approval process for wires is one example. Most banks have introduced Internet solutions that allow companies to distribute that capability to many decentralized locations while maintaining centralized control. There’s a lot of work that’s being done
around Internet solutions to improve the workflow process in treasury. My question is: how far will corporate treasury areas go to outsource the things that they do? Our view is that leaders in corporate treasury functions want to focus on strategic decisions; these are decisions that help grow revenue, reduce expenses or add to improved customer satisfaction or improved supply chain management. And yet there’s an awful lot of operational process within the treasury function tying up their time. Is there a way for your banking partners to automate that activity, freeing up time for the treasurer to focus on more strategic issues?

Skerritt: Jim, has PPL Corporation outsourced any of its treasury functions?

Jim Pennington, PPL Corporation: We have not and the reason is because our treasury is really the kind that I call the tip of the iceberg our focus is on managing cash, doing the borrowing and placing the investments. I’m not comfortable outsourcing that part.

Lagana: At Thomson we don’t outsource anything in the treasury area, the reason being that with outsourcing, you still own that process, and if that process doesn’t go as planned you have more issues with an outsourcer than you would have with it being insourced.

Dan Rosenstein, Deutsche Bank: How do you define outsourcing? I would say that some of you are already outsourcing. A lockbox can be viewed as a form of outsourcing, and a data entry lockbox could be viewed as a form of outsourcing too.

Pennington: In the past, we have outsourced our payroll tax payments and we have let another firm take over the filing and payment of those payroll taxes because, guess what, it got so complex we said to ourselves: “You know what? Why should we handle this in house?” It wasn’t a technology issue, it was a process issue. And I would say that there are other opportunities within the greater umbrella of treasury, whether it’s payroll, whether it’s remittance processing, when you can cross over and say: “My investment in technology has crossed over to where I can’t compete and I’m going to outsource because somebody can do it better, cheaper and faster”. You can’t look at it just from a cost perspective, you need to look at what’s strategically best for your organisation and prioritising what you should be focusing your resources on versus trying to do everything.

Greg Cicero, Mellon Financial: Talking with our clients we find that most of them are on a continuum in terms of their outsourcing momentum. Even when you [the corporate] consider a specific product such as retail lockbox as an opportunity outsourcing, 10 or 15 years ago the vanilla payment was really the only thing being outsourced. All the exceptions – such as “no docs” – were returned unprocessed to the company. So, our sense is that the more tried and proven the provider is, the more comfortable the corporate will be in terms of saying: “Okay, you’ve got the right controls in place, you’ve got my confidence level at a point where we can outsource another function to you or perhaps we can more completely outsource a specific product”.

Skerritt: Michael, Wachovia was one of the leaders in outsourcing; the bank provided the first treasury outsourcing service in the United States. Do you have some perspective on this?

Michael Daley, Wachovia Treasury Services: The real question from my perspective is that the banks are sitting over here saying: “It makes sense for us to outsource processes or services other than the traditional retail lockbox”, and the corporates are saying “Look, I want my bank to provide these traditional services and I may not want this business outsourced”. Understanding that gap is really where the opportunities lie. From a bank’s perspective, our corporate clients want us to save them money and make them more efficient. To do that, we bring automation and technology to bear. But, in doing so, we affect our revenue streams, so the question then becomes: “Is there anything else that you’d like to give us to keep our revenue streams going so we [the bank] can be successful?” That’s the gap we’re trying to close as providers.

Bank Revenue Streams

Skerritt: Michael has opened Pandora’s Box talking about bank revenue streams and I would like the corporate representatives to respond.

As we talk about technology and improving efficiency, I’m sure the corporate representatives expect that costs are going to come down, but from a bank’s perspective, a bank is looking at declining revenue streams that need to cover some significant fixed costs. From a corporate perspective, how do you view this? Do you recognise the issue that the banks face and how would you suggest that the banks deal with it?

Pennington: As the environment changes for payments coming in, payments going out, and credit for

financing different aspects of the balance sheet, the challenges for the banks and other financial institutions is to come up with new products.

Rosenstein: It is critical for banks to hire the best people in the market, be it in customer service, data integration and implementation or in the account management and sales group. The theory is that you grow to like the customer experience so much that, over time, as you use additional services other than the one that got you in the door, you’re willing to pay more for that.

It’s also important that banks improve products. As products become commoditised, and as the margins slip, the banks need to develop new ones. This includes the ability to image things other than just cheques, such as a purchase order, your bank documentation, documentation from another bank. We’re providing that, and hopefully you’re willing to pay for that.

Piazza: I was just going to say the same thing. A lot of the banking products, in our view, are like commodities, so when we did our RFP and moved our cash management services what we looked for was a bank that would be a partner with us, add value and therefore differentiate themselves. It was important that the bank we selected had the ability and expertise to help us drive towards certain enhancements in our cash management process and structure.

One of the things we were looking for was image lock box. We were a paper shop and we wanted to drive towards image cash applications. All of the banks we spoke with could provide image lockbox however, what we looked for was a bank/partner that had real expertise in this area and would consult with us and lead us to where we wanted to be. We wanted an institution that was there because they had either led the industry in image lockbox or had the right people and expertise to do so. We were willing to pay a premium for that type of institution and service, so I think that’s what it is.

In a business where the products are like commodities, to the extent that banks can show corporates that they are their partners and can add value, this is where coprorates would be willing to pay more. To us, service is more important than price. If you ever have a problem, the service is what you pay for and you want it to work when you need it. You also want people that can help lead you, grow your business, and make you more efficient, versus somebody that’s just keeping up with the pace, but not getting you anywhere. This was a big factor in our decision when we selected banking partners.

Lagana: I have a couple of comments on that. One key word that you just mentioned, Tony, was ‘consulting’. Any bank can provide lock box, it’s a commodity item. I don’t think any bank is that much better than another as far as the major lockbox players are concerned. I’m going to look for a bank that’s going to give me value in two ways. It has to be a credit relationship, it has to provide a good service, and they have to be consultants for us. They have to do that willingly and knowingly, and it has to be part of the service. It’s not something I want to pay for, because any bank can do it for me, any bank would love to have the business, it’s just something that’s going to have to come with it.

Hemstreet: First of all, we want our banks to like the relationship, so we clearly are willing to pay but we’re willing to pay a fair price, and the bank, in order to be a cash management bank for us, has to be a credit bank, and that’s just a rule. What don’t expect our banks to just try and sell us the next cool thing. We expect them to understand our business, understand our needs and help us become more efficient and drive down our costs. So the comment you made about being partners, we do deal with our cash management banks as partners, and as such we expect those banks to be helping us make ourselves better.

Lagana: One other comment though, I think that as treasury professionals it’s our job to know what the latest technology is and we should know that before the bank tells us what it is.

Rosenstein: Customers know the technology as well as banks do, and in some cases maybe even better. Perhaps we’ve seen a company in a situation similar to yours and developed a valueadded solution to meet their needs. This experience allows us to deliver the industry best practice to you. Banks need to hire people who are capable of delivering this value and hopefully that is the incentive for you to pay a premium for the services. This includes the customer service representative in the back-office that you talk to on the phone. Some banks have sorely neglected personalized customer service as a result of outsourcing and assigning 1-800 numbers. We believe very strongly that having an experienced customer service group underpinning our products is as important as having good sales people.

Daley: We want a strategic partnership and we want to be aligned with the customers that are going to be aligned with us and we extend credit to. Pricing is always going to be out there and I think we will see pricing rationalised based on what’s happening with the payment trends, and then we have to displace cost. We, as these things are shifting around, have to do a good job of displacing cost.

Cicero: This brings us back to the earlier question about outsourcing when Susan asked how we make and recoup our investments as cash management providers. Now the argument on the table is: will the corporate community look more and more to displace their “fixed” cost structure with a “variable” cost structure? Who’s going to make the next investment? Are you, as a corporate, going to make the investment in the next processing platform, or will you look for a cash management provider to do that and to leverage that against a multitude of customers. Investments may be impractical for one customer, but we can certainly justify them over several customers to make it work. For us, to invest in new products and technologies there must be a continued, growing comfort level among companies to outsource key, but not core, functions. Just like our corporate partners, we are always balancing the risk/reward propositions that are inherent in investment decisions.

WCM

Skerritt: Let’s turn to working capital management. As a result of constraints on available credit and liquidity in the external markets during the past couple of years, companies have been increasingly thinking about ways to reduce working capital. The dilemma that most treasurers face is that working capital is impacted by many areas across the company. To what degree does your treasury department influence working capital and how do you do it? Maggie, I’m going to turn to you because you specifically mentioned the role that your treasury group plays in working capital.

Lagana: At Thomson, treasury’s recently worked with the CFO to develop matrices for consistency in DSO and DPOs, and treasury became the official voice in setting the targets relative to the matrices developed. It’s not an exact science. We try to average the statistics but seasonality determines a lot of changes here plus we have four distinct market groups which all have a different business model related to their particular customer. You have to understand what the business is, who the customer is and how to develop the model. As a result of treasury becoming the so-called ‘official voice’ for working capital management, we’ve seen significant improvements in the DSOs and the DPOs for the organisation.

Pennington: That’s very interesting. Working capital is both an art and a science but one of the things we’re making much more of an effort on is cash flow. Free cash flow is king, and we’ve tried to push some of that back to our business units by saying: “You have a lot more input and control over your AR than you think. When you’re negotiating contracts, what type of terms are you giving your customers”. In a capital-intensive business we put a lot of money into inventories on the utility side. So we’ve got to make these people aware of the fact that their investment in inventories and, hence, working capital, is extremely high and translates into free cash flow and ultimately cash flow for the corporation. Now, again, I agree that the dictates have to come from the office of the treasurer and CFO, but we’ve got to work in partnership with them so that they understand what impact they have in those areas.

We formed a group not too long ago whose focus is on that liquidity management. I’m more responsible for daily liquidity and for disaster, but his group is more focused on the forecasting of liquidity, what’s our cash balance going to look like? What’s free cash flow going to look like? Rating agencies and investors want to know that and with some of the crunches we’ve had, it’s extremely important.

Incentive schemes

Skerritt: One technique that several organisations have put in place is a compensation incentive scheme to drive working capital behaviour. I’m curious whether any of the companies represented here have done that or have implemented other techniques to improve working capital management.

Pennington: Our programme has really been driven by senior management, principally by the COO, and it’s amazing how the behaviour has changed in the last six months. Our inventories have gone down and we’re doing a much better job of collecting our receivables than in the past.

Piazza: At Iron Mountain, our CFO has been very focused on working capital in the last year and a half. It is tough to manage because it is not one department’s responsibility, everybody in the company impacts it and therefore holds some responsibility for it but until you educate them they may not understand their role. Incentive compensation has made a huge difference for us when we want employees to focus on something. We have change the focus of our incentive compensation to drive certain aspects of the business thorough out the life cycle of the company and it always creates results.We have undergone a transition from an acquisitive company to one focused on more internal growth.

One hundred percent of the employees at Iron Mountain participate in some form of incentive compensation, even the AP clerks. They’re incentivised on various metrics, so they participate in making things work efficiently. If you treat them as processors, that’s what they’ll be. But if you educate them to understand the impact that they have on the organisation as a whole, you get a lot better results.

Hemstreet: We think we’re going to fix our problem by going to shared service centres. We’re implementing one now in the US and if that’s successful we’ll go outside the US, because we can control that environment much better than the current environment.

Piazza: Divisional shared service centres have made a big difference for us.

Skerritt: Working capital management tends to be an internally-focused discipline, but are there ways in which the banks could support corporations in accomplishing their goal of more effective utilization of working capital?

Cicero: DSO is clearly something that our clients expect us to help them improve. We offer numerous products but the question is: what do we do from an efficiency perspective and what kind of tools do we provide to make it easier for you to do your work? For example, we’ve introduced image technology that enhances your ability to apply receivables more quickly and we have rolled out technologies such as intelligent character recognition to improve service quality so that a corporate can apply cash more quickly and more accurately. So technology is really helping us tackle some of the last dollars out there that haven’t been captured in a more automated fashion. From a treasurer’s perspective, there’s been a focus on corporate efficiency, so we’ve looked at how our customers are investing their short-term operating cash. Many corporates have asked us for more efficient and diverse ways to self-direct their short-term cash. In response, we developed a web-based liquidity management service that allows clients to purchase and redeem online a wide variety of money market mutual funds and fixed-income securities.

Daley: The people we send out to call on you need to be educated about working capital management solutions so they don’t just sell you a lockbox or an electronic service. The education process is taking place on the banking side of the industry as well as the corporate user side. For example, we see the payment processing business going through dramatic changes. We continually have to re-educate ourselves as to how we think about the treasury services business.

Payment channels

Skerritt: Let’s talk about payment channels. In a competitive sales arena, more and more companies that sell to consumers, in particular, have to offer credit card and other alternative payment mechanisms. Chris, would you comment on how you see payment channels expanding?

Skaar: We’ve seen a dramatic shift in payment alternatives and channels. A lot of it has to do with the trends we’re seeing around decreasing cheque volume, greater use of credit and debit cards, and consumers’ comfort with use of phone and web payments. With the various payment alternatives and channels available, not only can we help drive efficiency and cost reduction, we can help our customers’ businesses by making them easier to do business with and improving customer satisfaction.

The other thing that struck me is that some of the new payment alternatives, such as accounts receivable conversion (ARC) and point-of-purchase transactions, have created more convenience for customers. All of a sudden we’re making payments electronic, and the consumers are not doing anything differently than they used to do. They’re still writing a cheque; it just happens to get converted to an electronic payment at some point in the clearing system.

Daley: We’re finally starting to see the paper to electronic shift in the payment business. We’re also seeing an increasing number of non-dollar payments in the middle market as well as the large corporate, and that’s added another dimension to the good news story for the banks and our customers. It’s interesting to note that in some cases, companies have not moved to echeck because they don’t want to deal with migration to electronic transactions. I do think Accounts Receivable Conversion is a transition strategy. It could be a 10-year transition strategy, but when the large payment banks are fully capable of electronically exchanging cheques for clearing and those types of things, I think you’ll see this business balance out where the clients want to go.

Skerritt: Jim, how is the conversion from paper to electronic payments affecting PPL?

Pennington: From our perspective, it’s partially a generational issue, and what I mean by that is that the older kids don’t use cheques any more, everything is paid for by debit card. We try to offer as many channels for those customers to pay as possible, and convenience fees are a way of steering customers into payment channels that they like, and are most efficient for us.

Rosenstein: We’ve seen some companies make it less convenient for their consumer clients to opt out of initiatives like Accounts Receivable Check (ARC) Conversion by putting in a non toll-free number. e-cheques have grown by 154% to 1.3 billion. So banks must provide corporates with the ability to offer these payment channels to their client bases.

Skerritt:We’ve actually been focusing on consumer to business. Some of the corporations here have a business-tobusiness orientation. Check 21 could facilitate business to business payments by converting cheque payments into an electronic form, but it is behind the scenes. Do you see that it’s going to impact you and, if so,how?

Lagana: It’s going to impact both sides of your business. It’s going to impact your payables and your receivables, because your payments are going to clear that much faster than your receivables. But the net effect is that there’s really no impact at all. I’m going to give a little here but I’m going to take a little there.

Skaar: The thing we have to keep in mind is that the process associated with truncating a cheque and creating an image replacement document (IRD) is expensive. Obviously, the dollars have to be rather substantial in order for an IRD to be an optimal solution, and I think there are limited situations where it can apply. It could apply in lockbox, but companies must look to their bank or service provider to help them make a decision about what the optimal clearing mechanism should be for a particular payment. For example, if a cheque comes in for a commercial payment, it could clear as a cheque or it could clear as an IRD. If it happens to be a retail item, it could clear as an electronic check or be converted to an ACH debit. But I think it really comes down to how the service provider structures the solution with the customer to make the decision for the optimal clearing approach for the individual item.

Cicero: I would expect to see some sort of “least-cost routing” software engine that analyzes each item’s profile and determines the optimum method or mechanism to clear the item. I think the IRD factor is interesting in terms of handling exception items, or very large dollar items, but I don’t see how IRDs are going to solve a long-term problem in terms of reducing the cost of cheque clearing.

The state that we need to get to is actually exchanging the MICR information and images of the cheques. To be successful, we need to get to a point where the majority of banks are participating in this type of exchange.

Daley: Check 21 enables you to handle exception items in an electronic world of check clearing. We’re going to have electronic cash letters, so a corporate can give us an electronic-cash letter or a mixed-cash letter – and this is where it gets complicated. That mixed cash letter, based on what you just said, Greg, could be paper-end points and electronic- end points. The question is then how are you going to produce all that paper again from an electronic file and send it back out? That doesn’t displace the cost.

So we’re going to have image-cash letters for corporates that the bank will then turn around and clear electronically. What this ultimately means to the corporates is that they’ll continue to push the banks for lower service charges to clear electronic cash. And there’ll be a point where you can give me a cash letter without having to provide any physical evidence. The customer can just transmit a file and the bank will clear the transactions, handle any exceptions and print IRDs. At that point, it will be full electronification, which will give corporates the lower price points.

Rosenstein: Another example of price driving behaviour is attempting to eliminate paper by making it expensive to process.

Payments to electronic

Skerritt: We’ve been talking about conversion of paper to electronic in the bank clearing and settlement process. Let’s step back to the supplier-customer relationship. How successful have companies been in changing the behaviour of their customers to pay them electronically?

Hemstreet: I don’t think we’ve been successful at all. We have certainly tried but there is still a preference for paying by cheque, and I think part of it’s the flow. We’re going to continue to work the issue but frankly, we don’t pay electronically anywhere near as much as we should either.

Piazza: Iron Mountain has not been successful in this area either. We have not embraced the concept as a vendor ourselves. I don’t believe it is the banks’ clients that need the service sold to them it’s their clients’ customers that the banks need to sell the service to so that they are willing to participate in such a service. The problem is that there is no standardisation of the service, so although it may sound like a great idea, if your customer has to go to 400 sites to be able to pay its bills for multiple vendors, they are not going to adopt it. The problem with that service is that it’s the customers that are not embracing it. They want to pay by cheques because it is easier to do, so it’s not going to be successful until this dynamic can be changed.

Rosenstein: Well, customers can continue to pay by cheque, but they can still be invoiced through the internet and at least have them tell you when they’re going to pay you and what they’re paying you for. Your largest clients may use EDI which takes a bite out of your paper receivables. Another piece is taken out with electronic bills, whether it be a payer-based model for vendors or billerbased model for customers. A marketing strategy focuses on taking an additional bite out of another segment. There’s no one answer that will serve all of you and all of your customers equally well. When using ARC a consumer’s cheque is made electronic without the consumer really understanding what that means. It is up to you, the corporates, to educate your consumers. What is that going

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