What are Corporate Treasurers' Technology Requirements Today?
Today’s typical corporate treasury management system selection projects are searches for solutions that generally address integrated treasury operations and management reporting requirements, with respect to the following business issues:
Perhaps the key word here is ‘integrated’, meaning that corporate treasurers now expect their technology solutions to integrate seamlessly, both externally and internally.
Internal integration involves one functionally complete system based on a single database. The value of this technical architecture to the treasurer is that its robustness leads directly to superior ease of use and ease of reporting.
External integration refers to communications with complementary third party systems, in the following general categories:
Integration was once seen as a distant ideal that might be achieved in expensive banking systems. Modern treasury management systems include the scheduling, monitoring and communications management technology that make the efficiency and control benefits of integration feasible and financially viable for most corporate treasuries.
There are a number of distinct areas in which requirements are changing – some are geographically specific and others are global.
Recently, hedge accounting and Sarbanes-Oxley (SOX) compliance have been major drivers for new and expanded implementations of treasury technology.
There are some current indications that the hedge accounting pressures are at least stabilising, as more companies implement solutions that satisfy their auditors. Auditors of course still look closely at hedging solutions, and we can anticipate that this process will continue to exert some pressure on technology – but probably not as much as has been previously experienced. IAS 39 is at last joining FAS 133 in maintenance mode, rather than as a front line issue.
SOX continues to be a driver of substantial importance, both because of the complexity and scale of the requirement, and also as a consequence of its ripple effects, which are still spreading around the world. The SOX compliance issue that most profoundly affects treasury technology is process management; treasurers (and their auditors) are looking for best practice SOX solutions that drive, manage and document treasury processes, with 100% transparency. This trend is coupled with increasing levels of interest in STP, as much higher levels of hands-free automation become viable and economic options for corporate treasury.
Asset management is an emerging requirement for technology support, in a newly developing trend in the expansion of classic corporate treasury operations beyond their traditional boundaries. This evolution has been caused by several distinct business issues, including capital preservation, funding and hedging long-term liabilities, the in-sourcing of pension portfolios, and the long-term investment of surplus financial assets. Support for a widening range of asset classes is becoming a standard requirement, and companies are looking for property and commodities in addition to bonds and equities. This general requirement is stressful for transaction based treasury systems that were built to support cash management, FX hedging and money market funding operations.
Commodity risk management has for some time been a requirement of a relatively small number of corporate treasuries, primarily in distinct commercial sectors such as energy, transportation and mining. Today, there is a much broader demand for system support for commodity hedging, as a general response to increased commodity price volatility since 2004. This change also reflects the broadening mandate of treasury in many companies. There seems to be no current consensus about the level of treasury technology support for commodity hedging that is necessary – and economic. At a minimum, treasurers need to see the financial impact of significant commodity exposures. Commodity dealing can make more extreme demands on technology; some commodities’ physical management (such as shipping and insurance costs) is intricate, and the evolution in interest in hedging commodities has driven the investment banking quants into a creative frenzy in the innovation of commodity based derivatives. If the impact of commodity hedge accounting is added into to the equation, it is difficult to imagine treasuries being able to handle the additional processing demands without significant systems support. There are clear benefits for treasurers whose mandate includes commodity hedging to use a single, integral technology solution; the key question is defining the economic and practical boundaries of that solution.
There are still many corporations whose treasury departments do not enjoy enterprise-wide vision of cash and financial exposures. The web based technology to achieve these once remote goals is available today, and increasing numbers of system selection projects include the provision of solutions for these strategic business issues.
It is very clear that spreadsheet-based technology solutions continue to be deemed unacceptable for increasingly smaller treasury operations, as auditing standards tighten. As a rough generalisation, companies whose annual sales approach US$0.5bnwill formalise treasury departments in response to the value of the financial risk that they are carrying. Smaller organisations that carry relatively large amounts of risk (such as significant exposure to exotic or illiquid currencies) may also institute treasury departments. Spreadsheet systems are seen as unfit to support treasury operations (even at entry level) for numerous reasons, especially their lack of robustness. They are also highly dependent on their authors for their maintenance. Investment in treasury technology may be legitimately justified as an insurance policy premium against the financial consequences that might plausibly be incurred by a failed spreadsheet solution.
Companies that implemented their treasury technology systems 10 or more years ago frequently find these solutions to be inadequate, for a variety of reasons. Very often, the team who selected or designed the solution, and those who implemented it, have moved on, and the system now is – or appears to be – inadequate. Older systems were often centred on deal capture and valuation, and do not address modern requirements in diverse areas such as ease and scope of reporting, completeness (for example in automated cash management and hedge accounting) and transparency. Sometimes this is because the old system is now truly outdated; in others, this situation has occurred because users have failed to keep track with the system’s evolution. In the latter case, system extension or even re-implementation may be the most effective course of action. In any event, users of treasury technology should periodically evaluate their technology solutions against contemporary parameters (such as those outlined in the first section of this article) to determine if further action is justified.
Conversely, the solutions that are judged to be working well will satisfy these general parameters, through their technical evolution, their ease of use and reporting, their transparency and their functional completeness. Many standards, such as full drill-down research facilities, were once considered to be ‘nice-to-haves’. They are now essential features, both to support efficient treasury operations, and to prove that they fully comply with strong control requirements.
It is not only the completeness of functional solutions that cause them to be considered to be working well – or not. Treasurers are rightly demanding increasingly high standards of client support and professional services from their solution vendors. Those technology solutions that are supported by the provision of strong relationship management services are generally seen to be working well by their client base, and beyond.
ASP solutions are one aspect of the outsourcing debate that has raged for years. In practice, ASP works very well – for some treasuries. Its most attractive features include the subscription pricing structure, the flexibility and the technology outsourcing. The ASP model runs into problems when specific complexities and requirements become critical issues: solution elements such as reporting, interfacing, risk management and hedge accounting often need individual attention and solution provision, and this can have adverse consequences in terms of the true cost of the ASP service (for both supplier and vendor) and in the functional suitability of the solution. An emerging issue (from some US based SOX auditors) is the acceptability of third party hosting of financial information. There is no definitive verdict on this question, but it is now coming more into focus. ASP can provide a useful solution, at least in the short term – and provided that clients are happy to be left with no residual system rights when agreements expire.
There is much talk among the treasurers of larger companies about the value of connecting with SWIFT for both bank balance and transaction reporting, and for making payments. An immediate benefit of doing this is that treasury management systems would replace multiple interfaces with electronic banking workstations or, for North American cash management, polling and parsing arrangements. Such streamlining reduces interface maintenance overheads and operational risk. It means that treasury technology will communicate with bank systems in a uniform and very secure manner. Banks have resisted corporate access to SWIFT for a variety of reasons – but they can reap at least one benefit from its evolution, and that is eliminating the cost and risk of supporting electronic banking workstations physically located in clients’ offices.
However, the talk about SWIFT seems to have translated into limited corporate sign-ups so far this year. Corporates are looking at the costs and benefits of direct SWIFT connection versus using a SWIFT bureau, but in 2007 there has not been a massive surge. Guy Griffiths, director of sales and marketing at SMA Software and Consulting, a UK and Ireland SWIFT business partner, comments: “We are seeing increasing levels of interest from banks whose corporate clients are pushing them to secure SWIFT connectivity.” This observation may well be a leading indicator of an imminent increase of corporate action in this area.
A likely future course of technology evolution involves the treasury dashboard in which all the information needed by treasury executives is presented in one customized information set, incorporating policy, documentation and process management. Such solutions are becoming available in the more technically advanced systems, and may well become best practice standards in time, as they contribute to optimising treasury management.
Finally, the provision of complete management reporting is emerging as a best practice requirement for effective treasury technology. The treasurer is confronted with the monthly task of generating management reports which address some or all of the following business issues:
Technology can ensure that the production of this critical management reporting is complete, accurate, compliant and transparent – and that the required reporting is produced in a timely manner, with minimum manual effort.