Gearing up for Centralisation: The Next Level is Within Reach
While organisational centralisation is a concept that is well understood, its practical application faces many challenges that often lead to a slow progression towards fully centralised management models. Transition can take different forms and can proceed at a different speeds, depending on the corporate organisation. This article explores the alternative options for centralisation as well as the approaches to consider for their successful and effective implementation.
Each of these factors, and their interaction and influence, determines the degree of appetite for, and choice of, centralised structures. The challenge is twofold: on one side there is the complexity in the determination and acceptance of the business case on an enterprise-wide basis; on the other, the level of effort and type of incentives required to overcome the negative connotations or implications resulting from the change in management process.
Centralisation is commonly associated with a number of strong benefits that range from pure cost savings to control improvement, full compliance with corporate policies, process standardisation, increased productivity and expertise consolidation. The counter-arguments often relates to the perceived loss of proximity to the local business or practices, the transfer of responsibility and autonomy, the potential degradation of service quality and the diminished competence in specific areas.
When organisations embark on a feasibility study for a centralisation project one of the most challenging steps is to map the project objectives against the organisational model blueprint and all the relevant internal and external factors, in order to derive an evaluation of the best execution strategy. The broad range of centralisation models and structures that corporations have adopted so far shows there is no single rule or solution that applies to the whole corporate universe. However, the use of and reference to centralisation terminology requires some qualifications:
A company’s specific situation will determine the benefits within reach, the challenges it faces and therefore its approach. For some, the realistic goal might not be full centralisation, at least not in a short time frame and with limited resources, because the rest of the organisation might not be ready for such a change.
At the same time the aim can change as enterprises evolve continuously. Individual business as well as firm-wide initiatives, driven by cost efficiency, process integration or performance visibility, generate new centralisation-fostering opportunities. This is particularly important for treasury, as typically it is one of the corporate functions that tend to centralise faster. The reason lies in the nature of the treasury activities, which require significant investment in people skills and a robust underlying technology to efficiently capture and process the flows of information from within the organisation as well as from the financial markets and rapidly convert them into decision-support aids.
At the genesis of the centralisation trend the effort and investment to create a new infrastructure were relatively high and could only be afforded where critical mass was available or sophisticated competence required. Regional Treasury Centres (RTCs) and later Shared Services Centres (SSCs) came into fashion, assisted by favourable fiscal regimes which become popular locations for those entities.
The aim of these internal infrastructures has been to institutionalise both mandated execution as well as functional consolidation within the organisation, and to achieve economies of scale and the widespread adoption of better and common business practices. RTCs tend to be focused on decision-making activities such as financial risk analysis, management and administration, liquidity management and investment or funding strategies, while SSCs are more dedicated to administrative and processing tasks in the broader finance space (e.g. accounts payable and receivable management, accounting, commercial collections and disbursements processing, etc.).
Organisations lacking critical mass, investment resources or the concerted internal support have historically concentrated on more opportunistic approaches, and centralised selective activities and tasks matching their threshold criteria, such as multilateral netting, group funding, FX hedging, intercompany lending, etc. The centralisation was achieved primarily by utilising technology and/or services that was provided by a third party, either a cash management bank or an outsourcing provider. This approach traditionally only addresses treasury and cash management requirements, and often only at a group level, leaving treasury with the challenges to interact effectively with the rest of the business.
Over the past decade functional (or full) centralisation has experienced a strong acceleration thanks to rapid developments in application technology and communication protocols. By breaking down some of the barriers to effective exchange, access and circulation of data and information, the functional distribution of tasks and activities can be designed in a more flexible manner. Business applications can be deployed as single global installations and accessed remotely and securely. They can interface more easily with other systems and integrate a number of independent or standalone processes. The combination of these features takes centralisation to a new level of sophistication and at the same time makes it more accessible and appropriate to a broader number of organisations.
The challenge for treasury has always been the process interdependency with a number of other business areas. The design and performance of a centralised treasury is itself dependant on the centralisation initiatives and directions in the underlying business operations. In a simplified description, a modern centralised treasury model is structured around three main building blocks:
Each block can be a separate and stand-alone infrastructure or can be combined with another. When one is missing, then some of the most relevant activities can be performed in one of the remaining blocks. For example, if a SSC infrastructure exists, the payment factory element is usually incorporated in the SSC environment and the IHB structure utilised as the integration layer with treasury. Conversely, in the absence of a SSC, the role of the payment factory and IHB becomes more critical, firstly as the centralising infrastructure for disbursement and collection activities, accounting and exception management, and secondly as the main interface with treasury as far as cash management and transactional/cash flow exposure are concerned.
With technology as the enabler, payment factory and IHB infrastructures have become a critical component. Flexibility in their design and configuration allows them to fit into a number of different organisational scenarios. Depending on the circumstances, tasks and activities can be distributed between a central support centre and the remote units, assuring adequate distribution of process ownership, control and visibility to all the interested parties even in a still decentralised business environment outside treasury.
Complementing the building block options available to foster treasury centralisation and greater integration and synchronisation with other enterprise-wide initiatives, there are alternatives to consider for an optimal and effective execution of a centralisation strategy.
The traditional choice of in-house development has been facilitated over the years with the expansion of a specialised market for both technology applications as well as service provision. A typical in-house treasury consists of internal staff, IT infrastructure sourced from specialised treasury and IT integration vendors and other third-party applications and services for market information or banking services, as an example. Further opportunities exist for the technology components to be licensed on a different basis, such as ASP, to dilute the investment cost over time. This approach results in an environment which is totally controlled in its characteristics as well as its future development course. Unfortunately it is also constrained by the available budget and characterised by relatively high running costs relative to the limited transaction volumes processed.
The alternative to internal development is outsourcing, which is an established and fast growing market (i.e. Agency Treasury Services). The key features of outsourcing can be summarised in the provision of a complete infrastructure composed by an integrated IT environment, full operational services, support services and expertise, all governed by service level parameters. While some of the outsourcing providers have concentrated on supporting existing clients’ processes, others, such as JPMorgan, have focused on building an infrastructure that can not only support but also drive further process centralisation and process improvement and create a stronger framework for third-party service provision. By leveraging their expertise and investing in sophisticated infrastructures, it has been possible to develop methodologies to facilitate the transition and transformation of processes and practices into the new environment, hosted and managed by the service provider.
Organisations today can benefit from the availability of these alternatives and evaluate how they can best benefit from them in the short to long term. The implementation of a new treasury centre or payment factory does not necessarily have to result in a heavy drain on internal financial or human resources which might lack availability, expertise or the capacity to deal with the change management implications. A full package is available externally from specialised providers, from business requirement analysis to service design, service configuration, implementation, operating and customer support, resulting in a very compelling alternative business case.
Full treasury centralisation is today more accessible than ever. The traditional centralising structures are still the preferred options, but payment factories and IHB are becoming more critical as the integration layer between treasury and the rest of the organisation. Furthermore, strategic outsourcing is lowering the investment and project risk barriers and can significantly reduce the execution time of a centralisation initiative if not even leap-frog some of the intermediate phases.