If you’re like most treasurers, you’ve heard the stories about companies that have fully centralised treasury in one global location, thereby producing dramatic improvements in liquidity management, enhanced controls over processes, and real, tangible cost savings. So, why shouldn’t your organisation replicate this approach?
As valuable as full global centralisation can be for some, it may not be right for your organisation. Determining the right degree of centralisation and structure for your treasury organisation requires an honest appraisal of your business requirements, your corporate culture, and the resources available to you.
There is a spectrum of centralisation choices, which can be grouped for discussion purposes into three broad categories: single global treasury centre, multiple regional treasury centres, and local presence. Most corporations end up with a combination of these models, but for comparative purposes, let’s start by defining them.
Single Global Treasury Centre
Only a handful of multi-national corporations have established an effective global treasury centre. All of their treasury personnel are physically located in one place – typically, but not always, at the corporate headquarters. The attributes of the global approach include a centre that operates around the clock, a global banking structure that ties together and satisfies global banking requirements, and global technology that enables visibility across global and local cash flows. A global centre is responsible for all significant treasury activities – corporate finance, short- and long-term funding, financial risk management, short- and long-term investing, global cash management, and all banking relationships.
The global approach does result in significant economies of scale, complete control over global treasury processes, and the opportunity for an overarching view of global liquidity and financial risks. This approach is most useful for an organisation that distributes its products internationally, but has limited or no production overseas.
However, the more complex and extensive the local financial requirements are, including payroll, payables, and multi-currency collections, the more difficult it is to consolidate treasury elsewhere. Without treasury personnel located in a country or region, it is hard to maintain knowledge of the local financial markets. Furthermore, a single treasury centre creates geographic and communication gaps between treasury and the local business operations. Employing such an approach may cause the treasury function to lack an understanding of business issues, liquidity requirements, and financial and operating risk dynamics.
Also, a global treasury centre approach requires heavy investment in technology and the banking infrastructure. Most companies that have established a single centre have one global bank that provides the glue across disparate banking practices and payment systems. But there are few truly global banks and you may not be in the enviable position of granting all of that desirable non-credit international banking business to one institution.
Finally, there are personnel considerations. If you have local or regional treasury personnel, they must be transferred to the central location, transferred to a new corporate function, or terminated – an option that has high costs in some countries with strong labour protection laws. And, if your company has operated in a decentralised fashion for many years, making such a dramatic change can have significant corporate culture implications.
Regional Treasury Centres
A common approach, the regional treasury centre is responsible for coordinating treasury activities across a defined set of countries. The responsibilities of such a centre are apt to include regional cash and liquidity management, regional banking relationship management, and regional cash forecasting collection and review.
Most large multi-nationals have established these operations in each major geographic region in which they do business – one to support Europe (and maybe, the Middle East and Africa), one to support Asia (and the lower Pacific quadrant), one to support Latin America, Mexico and the Caribbean, and one to support North America. Less frequently, a company will create a single western hemisphere centre that covers Canada, US, Mexico, Central America, South America, and the Caribbean.
The location of these centres varies depending on business structure, tax considerations, and the availability of qualified personnel. In Europe, the UK, the Netherlands, Belgium, Luxembourg, Switzerland and Ireland are most frequently selected. In Asia, regional treasury centres tend to be in Hong Kong or Singapore. For Latin America, many multi-nationals have selected Miami. However, some organisations make the location decisions based solely on where they already have personnel and an infrastructure to support the treasury activities.
In recent years, multi-national corporations have established shared service centres for regionally centralised accounting and financial activities. Commonly utilized for centralised accounts payable activities, shared service centres may be referred to as payment factories. In some cases, regional treasury functions are combined into shared service centres for ease of communication and to take advantage of existing infrastructure.
Local Presence
Local treasury or accounting and financial personnel – in each country in which a multi-national operates – are most common for those companies that (a) have significant needs in specific countries and a limited number of countries in which they have a presence, or (b) have experienced recent rapid growth internationally. The local treasury personnel typically report to a local controller or business manager and have a fair degree of autonomy over their local financial activities. The tasks performed at a local level include payables and receivables management, daily cash management, and local cash flow forecasting. By maintaining local presence, the treasury personnel can be responsive to the local management. However, this approach tends not to promote consistency and standards in global treasury activities. It also limits the ability of treasury to manage liquidity and risks on a global basis.
Combinations
The vast majority of multi-national corporations employ a combination of the approaches discussed above. For instance, most corporations operate with one global treasury operation that provides global guidance about treasury activities. This treasury group, which is typically based at headquarters, may not have all global treasury functions and personnel, but it is likely that several key functions are centralised there, including corporate finance, long-term funding, financial risk management, global bank relationship management, and global policy-setting. Such a headquarters treasury group will work with regional treasury centres where many of the execution activities take place, such as cash management, short-term investment, and short-term funding. Foreign exchange execution may also be delegated to the regional level, but the measurement and assessment of foreign exchange risks is most effective when centrally managed.
A common variation is to place local treasury personnel in specific countries where significant investment is being made or great financial volatility exists. These one-off local treasury sites may operate in conjunction with a regional treasury structure or even a single global treasury function. They provide on-site awareness in countries where change is rapid and the organisation has significant business and/or financial exposure. For example, many multi-nationals are establishing treasury operations in China to ensure that they are familiar with the many local financial regulations. These small local operations, often based in Shanghai, may be overseen by an Asian regional treasury centre. But, the local treasury presence assures the company that they are prepared to meet local business requirements as they arise.
Determining where your treasury organisation should fall on the spectrum of centralisation is a company-specific decision; no one approach is appropriate for all multi-national corporations. However, it is possible to provide some general guidelines. Centralisation should be pursued to enhance the treasurer’s ability to manage global liquidity and financial risks. But, as soon as centralisation hinders the ability of the treasurer and her staff to comprehend and anticipate the requirements of the business units or the implications of change in local financial markets, it’s gone too far. Don’t let the ideal of a global central treasury cloud the reality of your company’s situation and requirements.