Managing a Treasury Organisation in a High Growth Environment
When it comes to challenges, the treasurer’s role has many, from effectively managing liquidity in a global marketplace to identifying and hedging risk, each treasurer has some variation of cash-flow to protect every day. For those who enjoy being a steward of the company’s financial capital, it can be a fulfilling role. But the job has added challenges when a treasury organisation manages in a high growth environment. In this scenario, there is always more work than headcount to support it. Often, it is not until cash balances become significant or foreign exchange risk meaningful that a high growth company realises it may have underinvested in the area. For the new founded treasury organisation, inadequate resources, coupled with rapid growth domestically and abroad make it both an exciting and stressful experience.
eBay’s treasury organisation has experienced a high growth environment. It took eBay eight years since its founding to reach US$1bn in revenue. Just one year later, this amount doubled with FY03 revenues at US$2.2bn. However, eBay realised early in its life that a treasury organisation was an important part of the finance team and staffed for it. Within a year after going public in 1998, eBay hired a treasurer and assistant treasurer (an analyst was added in 2002) to handle the basics, including daily cash management, financing and investing needs, insurance matters and opening new bank accounts to support international expansion. Because of the rapid growth environment, long hours were commonplace. One problem in high growth environments is that growth always seems to outpace hiring. Also, for a variety of reasons, including burn-out, and for some lucky ones, stock options that pay out handsomely, turnover can be high putting more pressure on the remaining team.
In late 2002/early 2003, just as eBay reached US$1.2bn in revenue, the treasury team witnessed a turning point. Members of the small team left or moved into new roles, and a new treasurer and assistant treasurer were hired. Between 1998 and 2002, eBay had expanded from one major business unit in one country, to two major business units in 29 countries. eBay acquired PayPal in late 2002 and along with it came three new treasury roles to create a total team of six. But the acquisition of PayPal also brought a lot more complexity and responsibility. To meet the new challenges, the treasury organisation decided to set a three to five-year mission and developed certain goals which it needed to accomplish in order to get there. The mission was to build sustainable infrastructure and processes, prudently manage financial and operational risk, enhance cashflow and provide the capital structure necessary to support the company’s goal of pioneering new communities around the world – built on commerce, sustained by trust and inspired by opportunity.
To achieve its mission, treasury determined that it had to complete the following:
While most treasury organisations have similar goals in mind, the difference between one that is mature and one that is not, is that much of this does not exist for a young treasury organisation, so it has to develop and build as quickly as possible. It should be no surprise that building and developing a team is the first priority above all, for without it, none of the remaining goals are possible. Because eBay had to build most of its treasury functions from scratch, it had to hire people who could not only manage the day-to-day tasks (and be flexible to do so), but also plan for the future. Other key requirements included being a subject matter expert and able to manage in a fast-paced, multi-tasking environment. Of course, any CFO will require that the treasury organisation substantiate each new position by showing its added value. Using benchmarking to compare the desired headcount to revenues for other companies who have achieved similar revenue milestones can be helpful in validating positions. Depending on each company’s needs, common starting positions include treasurer, assistant treasurer, risk manager, cash manager and one to two analysts. Based on benchmarking, a treasury organisation for a company with US$3bn in annual revenues will employ five to eleven people, with the average being around eight.
With a team in place, the next challenge is to keep up with the rapidly changing environment. In order to execute effectively, it is necessary to closely monitor business strategy and align treasury plans. This is particularly important if a company is expanding its business model internationally. A treasury organisation must ask itself how it will support these growing responsibilities. Does it need to set up regional treasury centres for example? Before making any decision, eBay met with members of its largest European subsidiary to assess its needs. It seemed that cash and investment management were being handled sufficiently from the US, reducing the short-term need for a local presence. However, the international team needed help managing the accounts payable processing which lacked a single bank solution and automation for a growing shared service centre. Automating the payment process and selecting a global bank provider would also help treasury since it occasionally found itself making A/P payments because of lack of wire and ACH capabilities in the shared service centre location. As a result of the investigation, the USbased treasury team partnered with the international group to select a single bank to process payments leveraging the company’s ERP system and ACH file processing and reconciliation capabilities, saving time for everyone.
As the company grows internationally, so does the risk it faces. Treasury organisations in high growth environments must effectively identify and manage both financial and operational risk as the company evolves. To combat this challenge, the eBay treasury organisation hired two people with significant experience managing interest rate, foreign exchange and operational risk. To manage financial risk, one must identify and understand the company’s exposures and create appropriate policies to manage its debts or investments and foreign exchange needs based on the company’s risk taking philosophy. Because risk can be complex and not always transparent, the lessons learned from other, more mature companies can be a great learning experience that provides a jump start in designing effective hedging programmes. In the treasury environment, it seems that peers from more mature companies are often willing to help those in younger companies get to grips with the broad issues and considerations. This support is invaluable and very much appreciated. Once the risks are identified and understood, training of other team members across the company is important to educate and design effective hedging programmes.
Operational risk, which is managed through internal risk mitigation programmes and insurance, is also an area not to be underestimated. Many young companies operating in high growth environments do not initially hire dedicated risk managers. However, this should be frequently re-evaluated for there is opportunity in hiring early for this role. Dedicated risk professionals can offer significant value in ensuring that:
Additionally, hiring a forward thinking risk manager early in the company’s life can help establish a foundation for the management of risk under an enterprise risk management framework. This includes evaluating and quantifying risk across the organisation. In addition, it may be advantageous to establish a captive to help source insurance more cost effectively and to better manage self-insured programmes. Operational risk needs to be understood at all levels of the organisation through outreach and training.
Besides headcount, the most important tool that a treasury organisation can leverage to keep up with the pace of work is a focus on process improvement and automation through technology. This is often difficult in a company’s early years when there is little time to complete assigned tasks, let alone plan and execute a technology solution. At some point, however, the high growth company will become too big and must have systems and procedures in place to be able to continue to scale efficiently. To minimise the pain of this transition, having a road map in place early can be advantageous. Thankfully, high growth companies today have it a lot easier than those of the past because of the internet and efforts of early treasury, bank and other organisations to build scalable web-based tools. There are a lot of well-developed treasury technology solutions that can be employed with minimal effort today.
To create a roadmap, a treasury organisation should define its biggest needs in terms of volume of transactions and time it takes to complete the related processing tasks. For eBay, automating the investment, wire processing, and insurance programme areas were priorities because of the amount of time it took to complete assigned tasks. For investments, the treasury team was fortunate to find a cost-efficient, completely outsourced and web-based investment tracking, accounting and compliance solution which could be implemented with minimal internal IT resources in less than two months, with the help of the outside vendors. This freed up about five days per month of an analyst’s time to focus on other things. In the risk management function, eBay leveraged its broker network to manage its insurance summaries online and implemented web-tools for certificates of insurance and surety bonds. This gave our head of risk management more time to negotiate broader insurance coverage at more optimal cost points and to begin setting a foundation for managing risk under a company wide enterprise risk framework.
One big issue for treasury continued to be all the wires that needed to be processed for a number of nontreasury related activities. The treasury organisation determined that if it could automate the preparation, approval process and communication to the bank, it could save up to four hours of an analyst’s time per day. With automated accounting once the payments were made, further savings would be achieved for the accounting department. This tool, which leverages some purchasing technology the company recently implemented, will roll out in phases, with preparation of each wire by an initiator (not treasury) and approval now live. Automation is making rapid progress but challenges resulting from a lack of IT headcount are common and delay progress. Being resourceful is key. When eBay could not get enough resources to build its internal treasury web-site, IT helped organise an afternoon of training for the entire team and now everyone in treasury, including the administrative assistant, can update content on our website.
The nirvana of any treasury organisation, and the CFO who oversees it, is having real-time visibility of information on financial and operational exposures, and treasury’s daily activities, to mitigate these exposures and enhance cash-flows. This, however, takes maturity of the company’s processes, systems, exposures and people. For any company operating in a high growth environment, this will take time to fully achieve. What eBay’s treasury can be proud of is how much it has accomplished in such a short time period. There is no doubt that new challenges and opportunities will continue to keep the treasury organisation as busy as it was two years ago when eBay reached US$1bn in revenues. FY04 revenues are due to be announced any day and the company guidance is that they will exceed US$3bn. For eBay’s treasury organisation, whose employees now have an average tenure of 18 months, the experience of managing in a high growth environment will give them confidence that they can continue to execute into the future.