TechnologyConnectivity/InterfacingGetting the Most Out of Your Investment in Technology

Getting the Most Out of Your Investment in Technology

Technology has given us constant, real-time access to vast amounts of data; it has powered the capital markets to extraordinary heights (and depths) and made ordinary products, such as phones, cameras, televisions and computers, do extraordinary things. Yet, there is a darker, riskier side to technology. Did it contribute to the dotcom debacle? And what about its role in the ongoing meltdown of the mortgage-backed securities markets now affecting the US, Germany and France?

Treasury professionals spend many hours making cash, debt or investing decisions by setting various control limits and using the latest tenets of portfolio management. It is possible that treasury’s ability to perform these tasks in the future is being jeopardised by the very tool being used to reach those decisions, namely technology.

  • Does the use of more technology ‘black boxes’ simply shift risk from one area (market or credit risk) to another (operations) because some systems do not play well with others or because IT resources to fix these issues become available only after a problem is discovered?
  • Are the tools we use (i.e. technology) really to blame or does the fault lie with the tool’s operator because what is being produced does not address the issue at hand?

Is the Promise of Technology Real?

If you listen to the various systems vendors they would have you believe that more technology is better. With the use of today’s technology, every treasury is promised that they will be able to call up and process large amounts of data from their company’s servers or data warehouses, analyse this data then distribute reports via email or browser around the world before anyone’s coffee becomes cold. This same enterprise wide system will be able to communicate with other internal systems or those external to the company and quickly alert everyone to tell them only what they need to know. As anyone who has recently purchased a ‘state of the art’ financial system knows, the cost of acquiring and maintaining all this technology starts in the hundreds of thousands of dollars and can quickly rise into the millions.

What appears to be forgotten in the pursuit of technology is the issue of the ‘weakest link’. Not all systems will be up to date all of the time; they speak different ‘languages’, maybe missing data and/or contain errors. In this age of web-based, real-time information, the combination of new systems with old can create unacceptable levels of operating risk, especially for those senior managers within a company who are responsible for certifying, under penalties, that their company has well established financial controls, that they have examined them and that they work.

The Survey Says…

In our ‘Treasury Issues 2007’ survey, each company was asked how reliant they were on a treasury ‘system’ of web based bank systems, emails and spreadsheets for various treasury tasks such as cash management, debt, investments, risk management, etc.

Among the Fortune 1,000 companies (i.e. sales of more than US$1.4bn):

  • Over 65% said they were mostly or solely dependant on such a system described above for collecting cash balances, creating a cash position and creating cash forecast.
  • Over 60% said they were solely or mostly dependant on such a system for initiating funds transfers.
  • Over 50% said they were solely or mostly dependant on such a system for monitoring their debt or investments.
  • Approximately 45% said they were solely or mostly dependant on such a system for monitoring market risks associated with exposures, hedges, etc.

From earlier surveys among a different group of 370 companies, it was learned that over 74% of ‘large’ companies (i.e. sales of more than US$1bn) have acquired and employ at least two, and as many as 10, ‘major’ financial systems to manage their financial processes.

The bottom line is that the continued use and reliance on so many systems from so many different sources could expose treasury and the company to unknown or unacceptable levels of operational or systems risk by introducing a weak link into this long chain of data acquiring, information processing and decision support process.

Where Should Treasury Be Going?

In considering whether treasury or even the company has optimised its investment in the technologies that it has acquired, regardless of whether they are spreadsheets, in house systems, ‘store bought’, etc., it is necessary to determine what goals are important. In other words, what is the problem to be solved?

As part of our Treasury Issues 2007 survey, we asked each respondent company 20 different questions concerning their treasury or business goals and then asked the respondents to rank their importance.

Regardless of company size, the two issues below were ranked most highly by the respondents.

  1. Seek a mandate to reduce and/or more efficiently manage the company’s working capital and operating cash flows in conjunction with the company’s business units.
  2. Develop new methods to improve cash forecasting that accurately predict future liquidity requirements.

The third most important issue did vary according to sales size and complexity (e.g. number of banks, number of currencies in use, etc).

  • For the large, more complex companies (i.e. sales >US$1bn), acting as internal consultants to other areas of the company (e.g. operating entities) was the third most important issue.
  • For the small companies, seeking a role in their company’s strategic planning processes was the third most important issue.

When setting goals it can be equally important to know what is not important. Again, the survey indicated that the goals below were the least important:

  • Play a more active role to control ‘values at risk’ in accordance with the company’s corporate governance policies.
  • Require staff to attend external courses, conferences or training sessions to enhance each staff member and treasury’s overall effectiveness.
  • Reduce or simplify banking relationships.
  • Create or more effectively manage an in-house bank to allocate funds among the company’s major lines of business.

Most interesting, upgrading treasury systems and reducing reliance on spreadsheets fell in the middle of the pack, implying that treasury was either happy with their systems or not concerned whether their use of today’s tools could retard their ability to attain tomorrow’s goals, such as the ones above. Furthermore, a good argument can be made that the ability to attain the important goals could be jeopardised by a lack of resources applied to the unimportant goals. After all, they are unimportant.

How Much Staff is Enough?

Contrary to popular opinion, technology does not operate itself. Staff is required to operate a company’s technological assets. It is generally acknowledged that the proper use of technology can reduce the need for staff increases. The corollary to this statement is that it becomes more important to prioritize the use of staff because there are so few.

One other fact is fairly certain; treasury staff are among the smallest within the financial functions reporting to the CFO. For example, among the large companies, 55% of the companies had more than seven people. Even among the truly large (i.e. sales more than US$4bn) 75% of treasuries had less than 15 people. Very few treasury departments among those surveyed had the luxury of having any under-used staff to effect change. Having your most important resources performing highly repetitive and routine tasks (e.g. accessing each bank’s web site each day, downloading/copying data, inputting numbers into spreadsheets, etc) takes them away from the key treasury goals highlighted above which are more planning than processing oriented, ones that really may not require much technology at all.

If today’s limited staff resources are spending all of their time interfacing or processing instead of planning for the future, it leaves little time to determine if today’s controls are adequate for tomorrow’s risks, one hallmark of a company’s ability to possess a world class treasury function.

Is Treasury Doing a Good Job?

Regardless of the size of the company or the number of systems in use, most companies are driven by profitability rather than liquidity; liquidity is often considered, but operating profits (i.e. EBITDA) and sales or sales growth usually rule. Since EBITDA, by definition, ignores interest expense and nets and ignores FX exposures or gains/losses (i.e. mismatches between revenues in one currency and costs on another and any net costs are excluded or buried) it is no wonder that treasury’s performance goes unnoticed. Few companies look at liquidity (e.g. working capital) as an issue or consider it important enough to adequately reward those who generate it or who make it happen via access to the capital markets. In most corporations the balance sheet makes no noise.

Without a series of treasury-relevant performance measures it becomes difficult for treasury to justify the acquisition of or upgrade technology. Also, the continued reliance on multiple bank web sites, general ledgers, which are only correct once every 30 days (i.e. when the books are closed), and spreadsheets, slows treasury’s ability to present a coherent view of the company’s uses and sources of funds, which can prove valuable to senior management.

Continued reliance on adequate technologies constrains treasury’s ability to demonstrate its value and plan for the future, further inhibiting treasury’s ability to justify the need for newer technologies. At a minimum, treasury should be orienting its technologies toward achieving its most important goals.

Are Banks Complementing or Constraining Treasury?

Let’s review today’s environment:

  • Interest rates have increased (difficult to stop).
  • The capital markets are becoming more volatile (difficult to control).
  • Treasury has limited resources (maybe some help will arrive).
  • The company has too many systems ( too much time spent extracting data from/to spreadsheets to get that integrated picture).

If this situation sounds familiar, then seeking outside help, from your banks or others, could be warranted. After all, a bank is where the company’s funds reside and every major bank has made large investments in modern, web-based systems. It is only when you try to aggregate multiple banks’ data that their systems show their limitations, which make data integration and forecasting trends elusive.

Most companies in the Treasury Issues 2007 survey deal with less than 10 US-based banks and less than 15 international banks. It is worth noting that a small number of companies are not even sure of the number of banks that they use. The number of banking relationships could be the issue for some corporates, rather than the technology used.

Large Companies
Number of Banks Used
In the US Outside of US
Not sure 7% 12%
Less than 5 34 31
5 to 10 29 17
10 – 15 11 12
15 – 20 7 7
20 – 25 2 2
Over 25 11 19
Total 100% 100%

With cash, debt or investments with so many banks, why do companies continue to rely on a system composed of many parts where the risk of ‘dropping the baton’ can cause corporate embarrassment or worse? The survey results are unclear on this point, except for the fact that cost is usually an issue in corporations. It is easier and cheaper to use relatively low cost spreadsheet/email/web based systems, making it appear that a company is being cost efficient. However, low cost doesn’t necessarily translate into added value. Furthermore, the banks rely on their web-based systems to generate fees for them. It is not unusual for a company to spend 15-20% of its total US bank fees on information services which can cost some of the very large companies US$100,000 or more each year just for obtaining information.

What Role Should Technology Play?

There are no right answers here either, only alternatives. Technology vendors will try to get you to subscribe to a ‘one size fits all’ solution by buying the proper number of their ‘modules’ that will allow treasury to accomplish a set of standard tasks. There is nothing wrong with this approach as long as you realise that it is the system outputs and the relationship of these outputs to predefined goals that are the key to measuring treasury’s effectiveness. A technology that demands resources to capture, reconcile or translate data (i.e. all system inputs) into information is not effective and not optimal.

Having modern, integrated systems is the first step to allowing technology to power treasury into becoming a more strategic planning, value added organisation. The next step is to lessen treasury’s dependence on spreadsheets. After all, spreadsheets are very much a 1980’s technology when it was not important for one computer or spreadsheet to talk to another. Back then, there was no such thing as networks and ‘global’ was less important. Even today, the only way that spreadsheets talk to each other is by being emailed as attachments to someone else, hardly a process that contributes to real-time updates or allows a process to be easily audited.

Another issue to wrestle with when deciding if technology is a help or a hindrance is the ‘Swiss army knife’ versus ‘best of breed’ conundrum. If a company has a limited technology budget, which type of system should it acquire: one that does everything (i.e. the Swiss army knife) or one that does a few things very well (i.e. best of breed?) There are no right answers here (especially without knowing a company’s special circumstances), but the larger companies have found that specialised, multi-purpose treasury systems are preferable compared to systems developed in house or even ERP systems, which often do not connect with a company’s financial institutions or provide management with forecast information.

As a company grows, technology needs to grow with it. All companies should explore alternatives, including non-bank vendors, to reduce dependence on any non-integrated (i.e. spreadsheet, email, multiple bank) systems.

What Should I Consider When Optimising Technology?

The main factor is keeping treasury’s eye on the prize such as enhancing profitability, maintaining sufficient liquidity and creating an ability to recognise the risks inherent in its chosen businesses. When properly used, technology should be able to generate three major types of benefits:

  • A re-allocation of staff away from processing and toward planning – the optimal technology system will allow a company to reallocate its staff resources towards areas that are under-resourced (e.g. working capital improvements, risk management, forecasting) adding to a company’s capacity to absorb more processing work with the same level of resources.
    • Accomplishing this task requires redesigning existing workflows across many organisation silos.
    • This process should also involve the operating areas that are the source of operational cash flows. Everyone who touches the cash flow cycle should have access to the same information and processes so none of them ends up being the weakest link.
    • There is a downside: systems that do more require well trained treasury staff, which can require extra expense or time out for more training.
  • Reduced bank fees – A significant portion of bank fees are devoted to ‘information services’ (as defined by the Association of Financial Professionals/AFP) because companies use many bank systems. Replacing these many systems with one more automated one that can integrate each bank’s data can reduce bank fees. Also, using fewer banks makes any system implementation easier.
  • Optimized working capital levels – A shortage of working capital leads to borrowing or a reduction in investments. As net interest expense is a function of the amount borrowed or invested, multiplied by a market rate, the wrong level of working capital can increase net interest income. A system’s ability to produce more coherent measures of working capital or intercompany borrowings, now or in the future, can lead to increases in operating cash flow and a subsequent decline in bank borrowings or an increase in the opportunities to invest, boosting net interest income.

If technology is ever to assist treasury power itself to a world class position, it is incumbent on all treasuries to identify the dynamics behind their operating and financial cash flows, explore what tasks are not being accomplished because of today’s shortcomings and then monetise the value of those changes.

Conclusion

The pursuit of more technology is, by itself, not sufficient to power a treasury function to the status of ‘world class’ and can result in a waste of money and time. More effort should be devoted to directing the current technology towards predefined goals, before acquiring more. Based on the survey results, the weaknesses in today’s treasury or financial processes reside in the lack of integration among the many different systems.

This lack of integration causes users to focus their energies and time on controlling their processes, rather than the quality of the end results. Compounding the integration problem is the lack of performance metrics which prevents treasury from demonstrating its value which could justify new and more proper investments in technology. Another contributing factor is the inability of today’s technologies to measure an event until after it is over because today’s major financial systems are only correct once a month when books are closed. A dependence on non-real-time, accounting-oriented data can ignore the dynamics between profits and cash flows and the company’s future need for liquidity or its exposure to changes in market rates.

While it is too early to tell whether the acquisition of technology has compromised any business goals, it is possible that some senior treasury managers could be taking on unacceptable levels of risk without being aware of it. Fear not. Additional investments in more technology are probably warranted, but treasuries seeking to be world class would be better served by moving to fewer, higher quality systems to reduce the risk that the decision process will fail and by eliminating their dependencies on the dangerous combinations of old (i.e. spreadsheets) with the new, more modern technologies. After all, a chain is only as strong as its weakest link.

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