Evolution Towards Treasury and Payments Centralization
Many companies, along with an increasing number of bank and third-party service providers that facilitate centralization, are accelerating the trend towards centralization of treasury and payments-related activities. Take, for example, the global pharmaceuticals company that established a single global payments factory in the UK or the global transportation services company that set up regional shared service centres in Europe, Asia Pacific and the Americas and consolidated regional payments in those centres. There is also the $5bn European plastics firm that established a global shared services centre to handle treasury operations as well as the full order-to-cash and purchase-to-pay cycle processes.
This trend began with the establishment of the first shared service centres (SSCs) in the 1980s, which were established by the largest multinationals that had the treasury and payments transaction scale to justify the hefty costs of centralization. Cost efficiencies are still a key driver behind today’s accelerating centralization trend. Based on Treasury Strategies’ research, however, the following drivers are just as important, if not more so, for some companies:
There are a handful of companies, such as EDS (a technology services company), that have globally centralized their treasury activities at corporate headquarters and/or a global SSC. More companies have globally centralized payables in a SSC and the majority of companies fall somewhere along the spectrum between the two extremes of full centralization and decentralization.
The trend to centralize has not, however, extended to the receivables side of the equation. Even those companies that have globally, or even regionally, centralized treasury and payables have had far less success in centralizing receivables/collections due to the local communications and efforts required.
The responsibility for international treasury and related activities are typically coordinated between corporate headquarters, regional treasury staff or SSC, and the local in-country staff. As shown in the first chart below, functions typically centralized at corporate headquarters or in a global SSC include FX execution and risk management, internal and external funding, liquidity management and bank relations. Either regional SSCs or local treasury operations most often control day-to-day cash management, cash forecasting, and payables and receivables management.
Source: 2005 Treasury Strategies US corporate treasury researchBy looking at how these typically local activities have changed over the years,the trend towards centralization is evident. Treasurers reported greater control of these activities in 2005 than in 2004. Although it is not likely that company headquarters are actually performing these day-to-day functions remotely, they are requiring more information and exerting greater control over procedures than in the past.
Source: 2005 Treasury Strategies US corporate treasury researchThe primary driver of centralization through payment factories/SSCs has traditionally been an economic one. Centralization has offered the following benefits:
Centralization facilitates the implementation of best-in-class processes and the creation of centres of excellence. In a decentralized environment, the tools, volumes and concentrated focus are either not available or not justified based on the smaller scale of operations. At the local level, treasury activities are often only a part of a single individual’s responsibilities whereas in a centralized environment one or more individuals are able to devote their full attention to an activity, applying more sophisticated tools and technology and developing greater expertise.
In recent years, companies have focused more attention on working capital. Cross-departmental working capital committees have been created and, in some cases, responsibility for the full order-to-cash and purchase-to-pay cycle processes have been centralized under one management team, often treasury. This focus is driven by the recognition that efficient working capital processes represent a source of cash, reduce reliance on external funding and provide liquidity insurance in a rising rate environment.
SSCs provide a perfect environment for the centralization of working capital processes and facilitate the re-engineering of those processes to achieve the greatest efficiencies. Centralized reporting enhances forecasting and liquidity management. Centralized access to customer invoicing and payment habits improves credit decisions, and centralized payables management facilitates standardization and extension of vendor terms.
While the chart above indicates that treasury controls payables and receivables in only 26 per cent of companies, this has increased from 14 per cent in 2004 and reflects a stronger working capital focus.
As more and more companies centralize treasury activities, technology and service providers have invested in improved solutions to meet market needs. These improvements have simplified centralization and have enhanced its cost benefits.
The investment in technology and infrastructure necessary for centralization was a major deterrent in the past for all but the largest multinationals. Even at a huge cost, the technology available did not provide key functionality available in today’s environment: a real-time view of balances and cash flows, straight-through processing, distributed access to information or remote transaction initiation. Today’s sophisticated and integrated technology solutions, including ERPs, treasury management systems, bank solutions and web-enabled solutions, have made it dramatically easier and more feasible for companies of all sizes to truly centralize.
There are also an increasing number of bank and non-bank service providers active in the market of centralization, particularly in the area of payables consolidation. These providers accept files of payment instructions, format the payment transactions as appropriate and distribute the payments through their network and/or selected banking partners. They then follow up with a direct feed to a company’s accounts payable system (or systems) to achieve straight-through processing.
There is no doubt that Sarbanes-Oxley, other regulatory requirements and an increased emphasis on risk management, have caused companies to take renewed or greater interest in centralization. Centralization is seen as a means of gaining optimal control and visibility over corporate cash activity.
The centralization, standardization and automation inherent in SSCs ensure compliance with internal policies and external regulatory reporting requirements. The process of centralizing disparate systems and processes provides the opportunity to re-engineer processes and build in desired efficiencies and controls. From a risk management perspective, it is imperative to have the controls and transparency available only with centralization. This is particularly true in the area of foreign exchange exposure and interest rate risks both on the investing and funding sides.
As companies face ever-increasing challenges to effectively manage working capital, contain costs, comply with policies and regulations, and effectively monitor financial risks, centralization increasingly represents a best practice standard. Whether globally or regionally through SSCs, choosing the right technology solutions, bank and third-party services that most effectively and efficiently achieve the appropriate degree of centralization is most important.