Recent changes to regulations and corporate governance standards (such as IFRS, Sarbanes Oxley and Basel II) have had a significant impact on companies, financial institutions and (to a lesser degree) public institutions. This also has had and will have an effect on the treasury function. However, technological advancement made by vendors of treasury management systems (TMS) and trading and dealing systems (TDS) have focused especially on meeting these challenges. The core focus of the survey is to establish to what extent vendors have succeeded in keeping up with the pace of change and if this is in line with the expectations and needs of their clients.
The rate of technological advancement has been exponential for many years and this trend will continue for the foreseeable future. Technology has radically altered the way in which treasuries operate in a relatively short period of time. Many of the activities, which traditionally formed the basis of the treasurer‘s job, are now automated. Sophisticated software products such as TMS should completely automate all standard, day-to-day treasury processes.
The introduction of high-speed Internet connections has meant that information such as bank account data is now available in real-time. This has been hugely important for treasurers – the availability of up-to-date and accurate financial information has enabled them to make more informed decisions regarding, for example, investments and foreign exchange trading, than ever before.
Treasury is becoming an increasingly virtual environment. Treasurers should recognize this and decide how best to use technology to their advantage. Technology enables people and systems to work remotely yet operate collectively. Many more treasury operations will be outsourced. The debate surrounding centralized versus decentralized models of treasury will become obsolete – the treasury of the future will be neither decentralized nor centralized in structure. The treasurer’s role will become increasingly strategic and the approach more holistic.
As an executive of a mid-sized to large (multinational) corporate, financial institution or public institution, you are probably facing a number of questions when it comes to the use of treasury related technology, such as the following:
- Are current shortcomings in my TMS and/or TDS a generic problem?
- What are the reasons behind these shortcomings?
- Do system users and providers have similar views on necessary solutions?
By analyzing the survey data, we can begin to determine differences and similarities, identify trends and try to find answers to the above-mentioned questions.
Key Findings
The following points summarize the highlights of our research:
1. Among the client respondents, the overall ranking of their current TMS is positive (over 80% rank their TMS average or above). This is a favourable outcome for the vendors, although we also found that there is need for improvements in several areas. However, we have to bear in mind that a vendor may have a newer release of their TMS available (which includes the reported lacking functionalities), but due to various reasons, a treasurer does not go ahead and upgrade or renew his version.
2. Risk management is high on the priority list of companies and institutions that have to comply with Sarbanes-Oxley, IFRS/US GAAP, and other regulation and legislation. Executive management recognizes the risks involved in the business that drive the need to introduce or enhance controls in several parts of their organization. Mark-to-market valuation, quantification of risks, modelling of financial instruments, a more comprehensive and higher standard of reporting are some of the newly required standards. However, these are not yet all introduced within current TMS. The vendor survey indicates that vendors have already been working on the enhancement of their risk management functionalities, or at least are in the process of finalizing these enhancements within the next update of their TMS. Examples include mark-to-market valuation, pricing modules, and other functionality with direct impact on the P&L or balance sheet. In addition, what-if scenario analysis, counterparty credit risk analysis, sensitivity analysis and value-at-risk will help the treasurer get a better understanding of the possible exposures and risks. Encouragingly, 40% of respondents are already using this type of functionality. Given its significance we would expect risk management functionality to be used more.
3. The introduction of new accounting standards, such as IAS 32, 39, IFRS 7 and FAS 133, has brought the accounting function into the treasury department. Up until now, treasury departments tend not to be using the accounting functionality within TMS to their full extent. An obvious reason for not using this functionality may be that treasurers are not used to or familiar with accounting itself. Another reason may be that treasurers do not regard themselves as responsible for accounting issues; the treasury function is regarded to be at the front-end of the process and accounting function on the back-end. Alas, treasurers may no longer escape their fate. The impact of hedge accounting, valuations, and new accounting regulations on treasury is growing every day.
4. Although ERP integration in the current legislation timeframe has been a hot topic for some time now, above half of the respondents did not identify ERP integration as a reason to select between different TMS in the past. Current frameworks such as Sarbanes-Oxley state that interfacing should only be done when the risks are mitigated through the processes with regards to the use of the interfaces. Respondents claim that the impact from Sarbanes-Oxley will make them choose otherwise next time. A fully standardized and integrated treasury module within an ERP system will minimize risks involved with interfacing.
5. According to the responding treasurers, the major innovations should be in cash management functionality. New payments standards such as SEPA determine the urge to upgrade in this respect. Risk management and enhanced reporting requirements strengthened the need for more functionality in these fields. The key drivers for innovation from the client’s versus the vendor’s perspective are matched closely. Many vendors claim that they keep close contact with their clients on these topics. In the view of the clients, however, the communication between vendors and clients is not satisfactory. This finding does not correspond with the vendor’s claim to know their clients very well. On the other hand, the general agreement on the necessity of enhanced functionality in the field of risk reporting and compliancy is not a wild guess, given the widespread publicity on these topics. Vendors need to acknowledge the mismatch in perception on communication and service levels. On support, documentation and other after sales services and communication, the treasurers expressed a clear need for better understanding of their wishes.
6. According to most of the TMS vendors, their systems have web-based tools available for their clients. Only 31% of the respondents reported that they are using the web-based functionality of their TMS though. This may indicate some or all of the following possibilities:
- A lot of treasuries still use versions of the TMS that have no web functionality.
- They do not use this option despite being available in their system either through lack of knowledge and training.
- They have no need for such functionality.
This in itself poses the question to what extent it is relevant for treasuries to ‘own’ the system rather than just using it. The underlying question is – to what extent does ownership guarantee continuity? It seems to be the case that vendors are responding to clients’ needs with a considerable time lag.
Most treasurers who are using a TDS tend to do so with a web-based functionality. In general, the upgrading of a web-based system is easier from a companies and a vendors perspective. In this respect the users and vendors of TDS are ahead of the game. It is a bit surprising to see that current TDS are mainly used for basic product types.
7. An important finding of our survey is that on the client side, there is a strong need for communication from the vendors. According to the participants, documentation and support on the offerings of their TMS is a weak point. Interestingly enough, the vendors indicate that they are well aware of what their clients need and want from their TMS. What causes these contradictory findings is not apparent from the data. What is clear, is that vendors think that their support on the client side is enough, while clients do not generally share this view. From our experience, it is not uncommon for a vendor to put a lot of effort in explaining what the system could do for a client, while an elaborate description of what the system actually does for the client is harder to obtain.
Summary
Most common shortcomings for TMS are in the area of cash management, risk management, accounting, governance and legislation, in user friendliness of the system and in (after) sales support. In some cases, vendors have more up-to-date versions of their system available which (partly) mitigate the shortcomings, but in other cases there is still a challenge in coming up with the right solutions for the users. In addition, there will be a challenge for the treasurer in selecting the appropriate system.
The 2008 survey will identify whether vendors and clients have been able to bridge the gap in systems functionality and whether new regulation and legislation have created new challenges.