Cash & Liquidity ManagementPaymentsPayments OutsourcingHow Technology is Changing the Arguments for and Against Treasury Outsourcing

How Technology is Changing the Arguments for and Against Treasury Outsourcing

To remain competitive, companies must manage efficiently across every aspect of their operations. Within corporate treasury departments, the emphasis is on streamlining and automating financial processes to free up those two valuable commodities: time for decision making and working capital trapped in the business.

In this context, the cost and deployment of treasury technology is high on the agenda. Here, we consider how technology, and in particular the availability of web access to treasury software, is changing the arguments for and against treasury outsourcing.

Control considerations

The advent of web-based technology in treasury management systems (TMS) has been an important catalyst for treasury outsourcing. Previously the biggest obstacle to outsourcing part or all of the treasury function was the treasurer’s fear of losing control over the treasury function; but a web-based outsourcing provider can deliver full visibility to the client over outsourced activities, as well as the activities of subsidiaries, ensuring control is maintained.

In fact, I would suggest that in many cases the control over the treasury function is actually enhanced through outsourcing, especially if the company does not already have access to a web-based treasury management system.

But control means more than just visibility. A web-based TMS facilitates performance measurement, tracking of competitive quotes and Value at Risk measurement which can be used to maximise treasury performance in a fully transparent environment.

But why don’t corporates just go out and buy their own web-enabled TMS?

Cost factors

The obvious answer is costs. Software licence fees for a sophisticated TMS can range from EUR250k to EUR500k for a EUR1-2bn turnover company.

Implementation can add another 100% depending on the level of customisation and interfacing required.

Maintenance will normally come in at 20% of the licence fee per annum, but can be more depending on the level of sophistication required and the disaster recovery specification.

The TMS ‘cost-pyramid’ does not stop there. Corporates are also faced with consultancy fees, selection costs, process re-engineering and documentation. With a selection and implementation timeframe of 12 to 18 months, it is important to consider the impact on (and cost of) internal staff. Our experience shows that it will normally be necessary to dedicate one or more staff full-time to ensure a successful implementation of a TMS in-house.

Other on-going cost elements include internal maintenance, upgrading costs and development requirements due to changes in both internal and external environments.

Implementation Risk

As indicated above, one of the most common reasons for the failure of software implementation projects is a lack of dedicated human resources, so it is essential to allocate full-time resources from the outset. This may then require the employment of temporary staff for a substantial period of time.

These risks are inherent in TMS implementations whether in-house or as part of an outsourcing arrangement, but when an outsourcing solution is selected, this implementation risk is off-loaded to the provider.

Core competences

Outsourcing decisions always involve a consideration of what is or is not a core competence of the corporate. In a treasury context, this has usually been translated simply into which trades are ‘strategic’ and which are ‘non-strategic’. However you look at it, the management of technology should not be a core competence of the treasury department, while the management of the specialised applications required for treasury may also be beyond the scope of the corporate IT department.

The technology needs of the corporate treasury drive towards outsourcing the selection, implementation and maintenance of a TMS. The fact that TMS management is a core competence of the outsourcing providers compels them to continue to deliver state-of-the-art technologies to remain in business. In the corporate world, future budget requests to reach or maintain best in class status may not be met with the same support, especially during a cost squeeze.

As treasury management systems become more sophisticated and costly to maintain, it is likely that treasurers will turn increasingly to outsourcing providers for ongoing access to the best technology as well as to perform routine, non strategic treasury functions. This will allow the treasury organisation to focus on its core competencies of managing the company’s financial flows, associated risks and overall working capital.

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