Achieving Treasury Excellence

Assessing Treasury Operations

There are many different models for how a treasury can be set up and different measures of what can be deemed treasury best practice. In order to find a path to treasury excellence, we must first analyze a treasury’s set-up and ask why it is organised in a specific way. Even though each treasury is unique, there are practices and services in certain areas that may provide improvements to your existing treasury operations. It is a matter of knowing where and what to look for, and the starting point is to understand and describe your current situation.

At this point, a large number of treasurers will claim that they know exactly what their current situation is. Some may even try to prove this with a document detailing their SOX compliance. However, in order to completely understand and describe the treasury operation, it is necessary to understand and clearly describe the six key components that form a treasury.

One way to describe the framework of your treasury in a way that provides a clear understanding of how the treasury objectives and policies drive the operations and how the different components affect each other, is to divide the operation into the following components:

1. Treasury objectives – This includes the mission and objectives that govern a treasury. These are defined by the company’s senior management.
2. Treasury governance and policies – From the treasury objectives a number of governance directives and policies are established. These ensure that treasury operations are performed according to corporate strategies.
3. Treasury processes – For each objective there are a number of processes to fulfill the objective.
4. Treasury organization – In order to perform each activity within the processes and adhere to the policies, a treasury organization must have pre-defined roles and responsibilities.
5. Treasury data – The activities performed in the processes store, record, enrich and analyze treasury data/information. It is the enrichment and modification of this data that the activities are focused on, and, in turn, will ensure that the objectives can be met.
6. System (technology platform) – In order to store, record, enrich and analyze the data/information through the different activities performed by different roles, system/technology support is essential.

One objective that almost every treasury department has is to describe and manage the financial risk of the company. This objective will normally be further described and defined in a risk policy, which is often approved by the board and gives the treasury staff written guidelines on what they are responsible for, how they should go about this and what their boundaries are. When the policy is carried out a number of processes, roles and responsibilities, data and system support are needed. These include areas such as:

• Risk measurement and analysis.
• Hedging.
• Treasury limits.

When, for example, FX hedging is described it will be broken down into a number of activities (e.g. consolidation of risk figures, position reporting, FX exposure analysis, FX hedging decision, creation of FX hedges), who performs these activities (e.g. risk committee, risk manager, front office) and what system support you have for these activities (e.g. risk application, risk figure interfaces, position reporting system, treasury management system).

With this description of treasury, it is important to understand that the components of a treasury are interlinked. Changing one component will have an impact on the other components. We therefore need to capture these different components and understand how they are interlinked, while keeping them separate to understand how changes to them will affect others.

Another key challenge is to create an organizational and technological landscape that clearly captures the essence of the treasury operation. This is necessary because:

• We need to ensure that all processes are captured and documented.
• Without a landscape description, processes will be treated as silos rather than as interconnected processes that make up the treasury operation. This in turn will result in an unclear understanding and description of the processes.
• If we do not map out the interconnection between different processes, systems and organizational units, we will be unable to address pain points/problem areas/improvements that span multiple processes, organizational units and systems.

Key Performance/Process Indicators

However, it is not enough to capture the current state of the treasury operation through the six components defined above. We also need to understand what effect change would have on treasury operation in terms of performance. If we are hoping to achieve treasury excellence, we must determine the effectiveness and efficiency of the treasury operation. This will enable us to take informed decisions on improvements. What is needed is a measurement that defines the components and can be attached to them.

It is not hard to establish that the treasury process is the component most suited for measurement. Treasury processes are defined to achieve the objectives and adhere to the governance and policy directives set forth. These processes are interconnected with the technology, data and organization that together form the treasury operation. Furthermore, it is common practice to define processes and attach measurements to these processes. This means we can use existing theories and methods around processes and process improvement when establishing measurements. We can therefore conclude that we also need to define, record and store key process/performance indicators (KPI) for each process that has been defined and established. Which KPIs are chosen and used will drive how the treasury operation is improved. Defining the correct KPIs is therefore crucial.

The processes that a treasury consists of will be driven by the treasury objectives, including:

• Cash flow forecasting.
• Cash concentration process.
• Bank relationship process.
• Transaction processing.
• Hedging.
• Treasury limits.

For each of the processes we need to define the key process indicators that enable us to measure how well a process is performing. It becomes quite clear that process efficiency measures (cost, time and error) are valid for most of the processes and for some they are absolutely vital, for example, for transaction processing. Other processes require more treasury specific measurement. The cash flow forecasting process needs measurement for accuracy, while the FX hedging process needs measurement for risk mitigation related to the hedging cost. What we have achieved at this stage is a fully assessed treasury operation with KPIs recorded and stored for each process.

Changes, New Services and Solutions

Whenever there are new services and solutions offered, the effect on the key components can be assessed and targets for the KPIs can be defined. A more formalized and structured methodology to improve the treasury operation can now be used. Examples of exercises that can be carried out include:

• Advanced system comparison and evaluation by analyzing the impact of a system on the processes, organization and data of a treasury (e.g. what does the system support and how? What are the effects at process and organizational level of changing between two systems? Which processes are not correctly supported?). Any application or system can be analyzed this way. However, the systems that are used and most heavily affect treasury operations are the natural starting points. This would normally be the treasury management system, but could also include systems like trading platforms, risk tools, and general ledger applications.
• Impact analysis of centralizing or decentralizing different functions (e.g. what is the impact on roles and responsibilities if we take the strategic move of centralizing our treasury? What will be the effect on processes? Is my system able to manage this change in roles and activities?). One of the key challenges of a treasury is often how the cash management function should be organized to enable process efficiency, organizational acceptance and adequate system support. By doing elaborate analysis across a centralization/decentralization perspective the impact of the changes can be properly investigated, goals can be formulated and proper organizational acceptance can be reached.
• System implementation methodology driven by the characteristics of the treasury operation’s components. By using the different components of a treasury operation you can ensure that the systems are understood and implemented from a treasury operation viewpoint rather than a system functionality viewpoint. When a treasury management system is implemented the methodology utilized is driven from the product functionality and features in the system. As the system provider knows the product, rather than your treasury operations, this is expected. But, in order to achieve a fully utilized system and take advantage of all the possibilities and ensure that the system has been properly tested, the implementation should be driven from your treasury processes and operations. This is also likely to deliver higher quality with less friction between the parties involved.
• Forecast accuracy affects analysis. For example, which of my subsidiaries are under performing when it comes to treasury forecasts and what is the impact on my hedging and funding strategy, my KPIs (this could include cash flow forecast accuracy, hedge costs, funding costs etc)? What are the reasons behind such inaccuracy – is it based on the organization, processes or systems and how do I mitigate these problems?

In this way, any change/improvement/problem in a treasury can be correctly analyzed, understood and measured.

Treasury Benchmarking

In this article we define treasury benchmarking as ‘the comparison of practices and outcomes of two or more treasuries’. It has already been stated that each treasury is unique and that best practice must be understood in the environment where it is implemented. But does this mean that we cannot perform benchmarking exercises between different treasury operations?

Although we cannot benchmark the complete treasury, we can benchmark the different components and understand how they interact and affect the outcome of the treasury operations. Many of the objectives and processes are generic and can be compared. No treasury is so unique that its components cannot be compared with any other treasury.

A wide range of possibilities exist when it comes to benchmarking. For instance, you can analyze:

• Performance measures (e.g. what are the KPIs of risk management in other similar organizations?).
• Cash management strategies (e.g. what are the processes, roles and systems used to optimize the cash management area and what affect does this have on the KPIs?).
• Control (what SOX control mechanisms have been implemented in the processes, systems and organization and what is the cost?).

In essence, you can define any area where you have a special concern, and benchmark it against another organization. However, the key is that the organizations taking part in the benchmarking exercise must have described and assessed their treasury organization using the same description tool, and have divided the description in the different components using similar KPIs. Hence, using a common framework to assess and describe a treasury is essential for comparison between treasuries.

Long-term Strategy to Achieve Treasury Excellence

Treasury should, as its long-term strategy, use a methodology that allows it to improve its treasury operation continuously over time. The goal is to create a state-of-the-art treasury based on its situation and environment. As outlined in this article, it is possible to use the following methodology:

• Capture the treasury operations and its components.
• Add key performance/process indicators.
• Analyze the impact of changes, new services and solutions.
• Use treasury benchmarking to learn from other best-in-class treasuries.