Strategic Treasury Management: Outsourcing the Smart Way
The role of the treasury function has changed significantly over the last decade. The scope of the treasury function has increased across the organisation to include working capital, which has changed the very nature of its stakeholders and elevated its strategic importance to organisations. However, despite its enhanced importance, treasury functions have typically not been equipped with commensurately increased resources to help fulfil what has been required of them. This has presented a dilemma for treasury functions: how do they fulfil their strategic role whilst maintaining the increased burden of administrative tasks with inadequate resources? This article argues that the key lies in adopting an outsourcing solution that is flexible to an ever-changing environment and takes into account the complex internal and external interactions of the treasury function. Organisations adopting such a model referred to as the staged outsourcing model (SOM) are assured of gaining a competitive edge over companies who continue to try to resolve their challenges by adopting conventional limited outsourcing solutions.
Traditionally, the treasurer (or the treasury function) has been responsible for the cash and debt management generated through the company’s business. However, over recent years, treasury has expanded its responsibility to the management of the company’s working capital during the entire business cycle. The increasing responsibility of the treasurer has resulted in a shift in the very nature of the stakeholders that it interacts with. Whereas in the past, the relationships of the treasurer were primarily outside the company, i.e. banks and other financial institutions, today, the treasurer is increasingly finding it necessary to interact with internal stakeholders by virtue of its enhanced strategic role within the organisation which includes inter-company responsibilities. In his function, the treasurer plays different roles to different business units and subsidiaries.
Today’s treasurer has ties with payables and receivables management, credit control, accounting, purchase and order management, travel and expense management, etc. Treasury has a strategic impact on the company, through balance sheet optimisation, funding techniques, etc. and deals directly with the CFO and board of the company. Although the expansion of the corporate treasury‘s responsibility has facilitated greater creative thinking and raised the profile of treasury professionals, the job has become more demanding and presents a constant flow of new projects to improve processes and systems. In addition to the enlarged job description, the treasurer has to execute the job with the same or fewer resources.
In order to act on the strategic nature of the new treasurer, the treasurer will need to cut down on the day-to-day operational and administrative tasks, which are required by auditors, regulatory bodies and internal parties. In order to increase the time that the treasurer spends on strategic tasks, the treasurer will need to spend less time on repetitive administrative tasks. To achieve this prerequisite, the treasurer will need to either, increase headcount to perform the repetitive administrative tasks; or automate by acquiring a system to perform these tasks, or even re-organise the processes to create less administration.
Over the long-term, the investment and/or costs associated with each of the listed actions are significant. This statement conflicts directly with the statement that today’s treasurer has to perform all of the tasks with the same or fewer resources. To solve the challenge, the treasurer may need to look at an alternative solution for these challenges which companies are increasingly adopting, that of outsourcing.
Traditionally, the banks have played an important role in the treasury outsourcing market with different specialised services. However, this did not necessarily alleviate the onerous administrative burden for the treasury professionals. Indeed, in some cases, the administrative burden actually increased when dealing with banks as outsourcing providers.
Fundamentally, the problem lies in the fact that outsourcing is not a core competency of a bank. Other outsourcing providers include the typical IT-driven outsource providers, who will install and maintain the treasury system and infrastructure. However for the treasurer, this only addresses a small part of the problem, leaving the fundamental issue unresolved. The treasurer can still not perform all of the tasks that are linked to the function.
When you look at the construction of any organisation, three components are identified: people, processes and products. Each of the three components are easily identified, described and measured, which means that each of the components can be considered for outsourcing. A good outsourcing model must find a balance between these three components, which most outsourcing providers fail to do. Most outsourcing providers take the responsibility of one of the components that makes the outsourcing solution inflexible; therefore inefficient and useless.
In comparison to other outsourcing solutions, the staged outsourcing model is a flexible outsourcing model, which is based on the 3P-model and allows the outsource provider to respond to changing market conditions and business requirements. The SOM consists of six phases and starts with the scoping of the outsourcing requirement. This enables the customer to keep control of the outsource budget and allows a phased outsourcing solution, spread in time.
The service provider is able to demonstrate its skills and operational excellence and enables the customer to easily change provider whenever the service is not at a satisfactory level.
The first and most critical phase, the customer and service provider will need to work closely to identify the scope of the outsourcing requirement. This phase allows the service provider to get to know the customer’s treasury operations and its requirements better. Before the service provider can start with the analysis phase, the service provider will need to get a clear understanding of the current and future requirements and identify expected and confirmed changes to the customer’s treasury business. Through a number of workshops, the service provider is able to identify the business requirements and objectives of the customer’s treasury business. This phase usually takes one to two weeks, which enables the service provider to complete the SOM scope definition.
The service provider will need to analyse the customer’s treasury business, within the agreed SOM scope definition. The service provider will analyse the different processes and procedures, which are typical for the outsourcing scope. The service provider will perform the analysis from the 3P-model frame and will identify the current requirement of processes, indicate how the people operate and what kind of skills are required. The service provider will also need to identify what technology is used and how the technology interacts and interfaces with other systems (i.e. the customer’s ERP system). The analysis phase usually takes one to three weeks to complete, depending on the scope, size of the organisation and complexity of the treasury operations.
During the design phase, the service provider and the customer will work together to create an outsourcing model, based on the 3P-model, which is operational to the service provider and is trustworthy to the customer.
During the design phase, the service provider will need to present the technology that will be used to support the processes and procedures. The service provider will also decide and present an interface solution between the supporting treasury system, if one is required, and the customer’s other legacy systems. During the design phase, the service provider and the customer will agree upon a detailed operations manual that describes every process and procedure, followed by the service provider’s staff. The operations manual will also include a communication plan, which describes how both parties communicate with each other, depending on the process, procedure or situation.
The operations manual is a document that requires the sign-off of both the customer and service provider. The operations manual is translated into a service level agreement and multiple operation level agreements, which form the contractual basis of the outsourcing solution. The construction of the operations manual and different agreements can take from two to four weeks, depending on the complexity, scope and size of the treasury outsourcing requirement.
The implementation phase consists of three sequential steps:
During the first steps, the service provider will set up the technological solution and build the interfaces with other systems. The service provider will also identify the treasury professionals that are required to execute the processes and procedures, described in the operations manual. This step takes between six to 12 weeks, depending on the complexity and scope of the solution.
The service provider will prepare a number of detailed test scenarios. Staff members of both parties will participate in the test step and will execute the test scenarios, based on the operations manual. This allows the service provider and customer to tune and adopt the operations manual, where necessary. This step takes between two to four weeks.
During the acceptance test, the outsource solution will run in parallel with the existing systems and processes. At the end of the acceptance period, the customer will sign off for the solution, and the service provider will start the live execution of the system. This step can take several months, depending on the detail and confidence level of the customer.
The exploitation phase is the ongoing phase in which the service provider operates the outsourced treasury function, based on the agreed operations manual. During the exploitation phase, the service provider will come up with actions and ways to improve the efficiency and performance of the treasury outsource solution.
However, any suggestions or changes to the operations manual or treasury system will be discussed with the customer through the Change Advisory Board. The Change Advisory Board will recommend and decide whether a change can be implemented and when the change will become operational. The exploitation phase will last for the entire duration of the service level agreement and usually lasts for multiple years.
The support phase runs in parallel with the exploitation phase, but contains activities that are outside the scope of the operations manual. In order words, the support phase contains a number of additional services that are provided to the customer’s treasury function, but are outside the scope of the treasury outsource solution. The support service has the same duration as the exploitation phase. For example, whenever the customer decides to outsource the payment factory operations to a service provider, the service provider could support the customer with valuation issues on specific instruments that the customer wants to trade.
Due to changing market conditions and customer’s business requirements, the scope of the treasury outsource solution will change over time. In order to cope with these changes, the SOM is an iterative process of which each phase needs to be executed in the same sequence, as mentioned above. Each of the phases of the SOM should not impact the operations and processes that are being operated during the exploitation and support phases. The service provider should assign a dedicated relationship manager to each customer, who helps, advises and interacts with the client during each of the different SOM phases, but is not part of the operational team during the exploitation phase.
Each SOM should reflect a balance of the 3P-model with its three organisational components:
The service provider needs to provide a treasury solution from which the customer will benefit, and that:
The system must be flexible enough to allow the service provider to modularly provide the solution to multiple clients e.g. the system must be able to provide a front-to back STP solution, if required, but must also be flexible to allow for provision of only the accounting module.
The service provider does not only need to look at the system and its functionality, but also select its preferred vendor of choice wisely. A product provides the maximum flexibility, configuration and integration that a service provider would require to operate the majority of its treasury outsourcing solutions.
Vendors, such as SAP, have the advantage that a lot of customers have a SAP solution, where the corporate finance module allows full integration with the ERP solution. The service provider will need to identify the functionality gaps between the customer treasury requirements and the available functionality of the product. The service provider requires a strong partnership with its vendors in order to achieve the level of functionality it requires to operate the correct solution. To provide a balanced SOM, the service provider needs highly trained and experience treasury professionals that are able to execute each process and/or procedures, described in the operations manual.
If the service provider does not have these skills in-house, the service provider needs to prove a strong partnership with expert company’s that have the required skills in-house. The service provider does not only need staff to operate the treasury solution, but also requires professionals with hands-on experience in the treasury operations, who can translate and describe the different processes, as they exist in the customer’s treasury operations. However, the service provider should not only translate the processes one-to-one, but should amend and advise on the industry’s best practices.
The service provider should be able to demonstrate expert knowledge in the different areas of treasury management on the operational, strategic and technical level. If the service provider does not have certain expertise in-house, they should be able to demonstrate a strong partnership with other expert providers, which allows them to solve any treasury related issue.
The service provider should not only prove financial stability, but should also be able to demonstrate that the organisation is able to drive the business and commits to keep the in-house skills to the expert level. They should be able to assure the customer that it will remain in touch with market conditions and operate a best practice approach to its treasury outsource solutions.
The service provider should be very flexible in its outsourcing service offering, because every customer will have its own business requirements and its own systems. However, they should strive towards standardisation and use the industries best practices as often as possible. On the other hand, the service provider will need to understand the customer’s requirements and should be able to offer and tune the solutions to match the customer specific requirements.
The chosen treasury system should enable the service provider to implement a standard system configuration, but with minimal amendments to the configuration resulting in a bespoke solution.
The service provider should be able to demonstrate its independence, especially in relation to treasury systems, in order to provide its customers with the bespoke service, as described above. There are a number of important pitfalls, whenever the service provider supports or offers a limited amount of systems:
Even when the service provider has to find resources outside its own organisation, the service provider should remain the owner of the system and is accountable for the third party results. The service provider needs to prevent the customer needing to search for the responsible party of certain activities. The service and operational service level agreements should clearly state the responsibility and accountability of each party in relation to the other.
The customer should be able to trust its outsourcing partner, and reporting to the customer has to be complete, transparent and accurate. Most systems, on the market today, have built in audit trails for any transactions and the adopted system should allow a four-eye principle when entering and approving transactions.
The outsourcing solution will enable, even small treasuries, to introduce segregation of duties and allows the customer to keep control of its own treasury operations in its own hands. The customer is ensured that the service provider will act within the frame of the agreement and will execute any actions in accordance with the operations manual.
Whenever a customer’s treasury operates an international operation, the service provider should be able to provide localised support, which means that the service provider should be able to respond in the local language. Even more, the service provider should be able to demonstrate relationships with local banks and knowledge of local laws and regulations.
Since the treasury requirements of each customer can and will change overtime, the service provider should consider the customer as a partner, an important stakeholder, in its business model. The service provider will need to be able to respond to the different treasury demands, encountered by the client, which may vary from risk management to accounting or compliance issues. A service provider, who can act as a one-stop shop, will be able to assist and advise its clients in long-term issues and is able to create shareholder value through the customer’s treasury operations.
Both the customer and service provider should operate an RFP process in order to choose the best solution for their treasury demands. The customer should build an accurate questionnaire for the potential service providers, in order for the service provider to get a clear and detailed picture of the required outsourcing requirements. The customer should have a list of prerequisites and criteria available to score the service provider and research the service provider’s abilities and knowledge. The service provider will create transparency, openness and independency when it operates an RFP process to choose third party providers and a treasury system provider. This will enable the service provider to advise customers during the product selection of the customer’s treasury operations.