Treasury Communications Technology - Are We Getting the Message?
For too long, treasurers and chief finance officers have struggled to control the financial operations of their corporations using technology that consists of a disparate mix of partial solutions. Too often, the sum of these parts falls a long way short of the comprehensive and efficient financial management systems infrastructure that every large business should have.
As a result, many financial operations continue to be manual, creating exposure to inevitable risks of human error. Worryingly, many are also estimated, based on relatively crude financial models of ‘how our cash flow behaved’ this time last week, or month, or year. There is plenty here to keep corporate finance executives awake at night.
Earlier this year gtnews published What Keeps Treasurers Awake At Night?. The survey of over 500 respondents across diverse business verticals and global locations compares levels of concern about different issues for treasurers and bankers throughout the world.
In this list of top worries, ‘keeping up with technology’ appears to be somewhat distinct from the other worries, in that in its own right it is not necessarily a top priority for financial executives. However, it becomes a top priority because it is a consequence of the other main causes of angst. Therefore, if this shared technology challenge can be reduced, it stands to reason that there will be at least some reduction in operational risk across all of the other business exposures listed. This is easier said than done.
Also, from recent and current discussions with our customers, it’s no great surprise to discover that the fear, uncertainty and doubt involved in enterprise-wide financial technology increases with the scale of the enterprise. Customers acknowledge that global organisations face the greatest challenges, having customer communities, regional operations and multiple banking relationships in many countries, dealing in many currencies, and subject to many different regional regulations.
So, surely the largest global enterprises should have sufficient resources to invest in technology that will properly support global financial operations?
Not necessarily so. In corporations outside financial services, regardless of their size, the priority for technology spend is invariably, and understandably, directed to the core competency and trading function of the business. Therefore, the primary systems investment goes, for example, to warehouse management, the research laboratories, store operations, production line re-tooling or engineering design. In almost every case, the requirement of the finance division is secondary. To command budget share, the division requires an extremely good business case and clear analysis of the forecast return on investment.
The adequacy of corporate financial technology has become a current issue for good reason. Our customers in all industry verticals, including the banking sector, agree that the corporate financial services landscape is changing.
A multinational corporation commonly features multiple operating divisions and departments that exchange financial communications and transactions with external business communities. These divisions and departments might include, for example, the corporate treasury itself, purchasing, sales, accounts receivable and payable, credit control, personnel and pensions, currency dealers, audit and compliance and bank reconciliations.
These different operations are not usually located in the same place, and some are replicated in other places. In addition, each will have local accounting responsibilities and some local accounting systems, but these will rarely be the same and connected across the entire global enterprise.
According to its business function, each division and department will have local knowledge of funds moving into or out of the enterprise, and may also have a forecast view of funds likely to move. The financial or accounting technology that it uses to record and map these cash movements will vary according to the sophistication of its financial operations. Some will perform adequately with Excel spreadsheets. Some will require complex accounting applications.
Even within the enterprise, therefore, standardisation of, and consolidated reporting from these fragmented part-solutions is complex and very difficult to quantify in an enterprise-wide business case for improved financial technology. But it must be done, to meet ever increasing profitability targets and to comply with ever tighter regional regulations.
Outside the enterprise, many challenges in financial operations revolve around the organisation’s relationship with one or many banks. Corporate bank customers are demanding changes. They want one method to connect to the bank. In fact, they want one method to connect to all their banking service providers globally. They do not want to have to maintain many different connections to integrate to the bank but rather want to have a single gateway. Corporate customers want banks to let technology hide the complexity of geography, protocol, or network connectivity from them. They want quick easy secure connections, not separate connections for all payments, trade finance, and many other types of service.
As corporate customers and their banks increasingly migrate into a world of paperless and automated payments, besides ease of process integration, customers also want more information associated with their transactions. They need part numbers, purchase order numbers, invoice numbers, and other relevant information and comments to accompany each payment transmission.
To aid the reconciliation of bank records with the cash movement activities of their worldwide divisions and departments, corporates also want real or near-real time visibility into their multi-currency bank account transactions and balances. The banks’ customers want to see what their capital needs are globally – they want to see their complete customer position/portfolio across the total enterprise.
Critical for both improved treasury profitability and optimised global cash flow is efficient cash management. Treasurers need to reduce unnecessary float and apply surplus funds either in reduction of borrowing requirements at other locations, or in achieving an investment return. They need to maintain liquidity by having accurate funding in the right currency and the appropriate account just in time – too soon or too late are both inefficient.
Treasurers need to meet cash management objectives both inside the enterprise, in the many departmental and divisional cost- and profit-centres, and externally, in many bank accounts in multiple locations.
In many cases, it appears that the main impediment to successful cash management operations is not existing treasury accounting applications. Most enterprises would never build a successful business case for investment in expensive and sophisticated accounting applications in every cost- and profit- centre for two reasons. First, such a proliferation of solutions is rarely justified and second, this will not solve the cash management challenge.
The core problem is about moving near-real time accounting data and intelligence from diverse internal and external sources into central accounting systems-of-record. It rarely lies in the financial application technology. Translated, synchronised and consolidated financial data can then be processed so that accurate cash movement decisions can be taken and related transactions can be authorised. Cash management transactions can then be transmitted from the treasury, again in near real time, to optimise enterprise-wide cash flow and profitability. The same accurate data then can be transmitted into central audit and compliance systems.
Tighter regulatory environments are affecting business financial operations in many countries. In the US, for example, the high costs associated with compliance with Sarbanes-Oxley (SOX) are already a major source of corporate complaint. Section 404 of the SOX, in conjunction with related SEC rules and Auditing Standard No. 2, requires public company executives and auditors to issue two new public reports:
To pass an audit, firms are finding that the entire process of financial reporting must be documented, auditable and secure. Any new technology that a company would purchase to help with solving problems of cash management and payments must be able to provide audit trails for the transactions.
Again, it’s not only the accounting applications that are affected here. It’s also the financial processes – it’s about how, where, why and the level of authority and control with which funds are moved around the enterprise community.
Security has always been an important consideration around financial transactions, but today it is critical.
The subject spans a broad range, from data protection to contingency and recovery, and beyond. Customer identity theft and card security are both particularly topical. Security for moving large amounts and high values of data across networks is mission critical. Security breeches not only result in fines and penalties, but are hugely damaging to corporate brand and reputation. Analyst studies have shown that security breeches and other operational risk management failures have a direct and immediate adverse impact on shareholder confidence and associated stock market values.
Of all the data that may be lost, corrupted or leaked, financial data is at the top end of the sensitivity scale.
It is certainly true that:
But it is probably also true that corporate financial data is at much greater security risk when transmitted between corporate locations, or being exchanged with external trading community members or financial services providers – in other words, when it is moving outside the enterprise.
Unless corporate treasurers can truly understand the systems challenges arising from the way that critical financial data moves around global enterprises and financial communities, they are not going to improve their sleep patterns.
Corporate treasurers are not likely to justify an enterprise-wide investment in ripping and replacing all their existing financial technology. Neither will this necessarily resolve a problem that is based not in accounts processing, but rather in data communication management.
They do, however, stand to reduce all their main categories of operational angst if they have the appetite to sponsor an investment in technology to translate, standardise, synchronise and manage their multi-enterprise financial data transmission processes. Given the range of real benefits that such an investment can return, this is a corporate business case that will deserve close attention and real priority.