Best Practice in Business-to-Treasury (B2T): Part 3 - A Case Study
Lars Jakobsen, the corporate treasurer at MCA Corporation,1 initiated a B2T development project across the company at the beginning of 2007. For some time, the company’s excess liquidity outside its pooling accounts was over €100m, and the inaccuracy of cash forecasts had forced the company to make investments mostly in the O/N markets. There had been significant deficiencies in the reporting of currency exposures, and new exposures emerged when the issue was examined more thoroughly with auditors during the hedge accounting audit. No financial losses were created by the currency exposures thanks to favourable development in exchange rates, but risk management was not under treasury’s control. The liquidity had, however, led to significant financial losses. While the corporation’s return on capital was 12%, over €100m of idle cash produced only 2.25%. The annual impact of idle cash was therefore more than €10m.
The CFO, Siv Gunnlund, put pressure on Jakobsen to fix this liquidity problem. The inefficient use of excess liquidity was a blot on her otherwise well-developing working capital management project. In his first attempt, Jakobsen sent all business units a reminder that excess liquidity should be placed in pooling accounts or directed to treasury as internal loans. As this did not lead to the desired result, Jakobsen – together with the cash manager, Anders Lund – personally contacted all business units that had liquidity outside the group accounts. The response to their enquiries was that the business units had large payments to be made in the near future and that it would not make sense to move the money to group accounts. Three months later, however, the situation was still the same.
Jakobsen marketed a B2T project to the CFO as a solution to the problem but because treasury processes were not familiar to Gunnlund, she did not want to allocate a budget for the project before the mapping phase was completed and there was proof that the B2T project was really needed.
The initial attitude of treasury personnel was that the business units were lazy, did not understand clear instructions or just didn’t follow them. Jakobsen’s own background was at a consultancy company and he reasoned that none of the business units should have a reason not to follow instructions if they could understand them. He mapped his own organisation’s customer orientation and examined the way in which people within the corporation communicated with the subsidiaries. He found out that the subsidiaries were considered only nominally as customers. When communicating with the subsidiaries, treasury jargon was used that the subsidiaries often didn’t understand.
As the first phase of the project, Jakobsen initiated a change of attitude within the treasury. Together with the department, Jakobsen carefully looked at how treasury could work more successfully and emphasised the fact that the idea was to improve the expertise of the whole corporation in finance-related issues. The company’s 103 subsidiaries were not professionals in treasury operations and, thus, the only way to succeed was to step into their shoes and communicate in a language they could understand.
Motivating treasury was made easier by the company’s bonus system, which was tied to a corporation-wide working capital management project mostly related to the successful handling of liquidity and meeting legal requirements (hedge accounting and corporate governance). Since the development project was in line with these objectives, Jakobsen succeeded in motivating treasury personnel to adopt a more customer-oriented attitude. Treasury drew up a glossary in which the most common terms used by treasury were explained.
An online survey was conducted in order to establish the needs of the subsidiaries where questions about the know-how of the subsidiaries, the processes and systems they used, and the quality of service that treasury provided were covered. In addition, the subsidiaries were asked questions related to treasury policy, such as when did you last read the treasury policy? The survey was delivered to the operating unit CFOs as well as the people responsible for forecasts and treasury transactions at the subsidiaries.
The answers revealed that the people responsible for forecasts at the subsidiaries did not consider themselves to have much expertise in treasury operations. They had less than an hour a week to take care of their treasury related responsibilities and they prioritised the financial administration processes over treasury processes. They were (courteously) satisfied with the service they received from the treasury. They had last read the treasury policy over a year ago (as the policy was launched just over a year ago, this meant they hadn’t read it since then!) and had no real tools at their disposal, except for a spreadsheet template that treasury had provided and they used to report their cash flow forecasts and currency exposures. The spreadsheet, however, didn’t really offer any added value to the business unit.
The CFOs of the business units felt that they understood treasury operations better. They had just as little time for treasury-related issues as the people responsible for forecasts and they too prioritised the financial administration processes. The policy had last been read over a year ago, and they were satisfied with the service they received from treasury. They also had no tools for controlling treasury related issues.
The company’s treasury policy was written in 2006 to describe the renewed corporate treasury strategy. The document was written in English and comprised 40 pages. It was given to the communications department to test its comprehensiveness and the results were grim. While the words were understandable, the text as a whole was not. The policy was by no means clear or comprehensive.
Mapping the B2T project from the treasury’s point of view focused on the management of the data received from the business units, i.e. the time it took to gather and consolidate data and how error-prone the process was. The systems where the data was integrated were examined. In addition, how well the corporation’s B2T processes met different legal requirements was also surveyed, such as those related to hedge accounting and good corporate governance.
Based on the mapping, it was found that manual reporting using spreadsheets was slow and laborious, and that it was extremely difficult to meet legal requirements, which included requirements about the transparency of information and, to some extent, the audit trail.
Management’s demands were mapped out at the point when Jakobsen was selling the development project to Gunnlund, the corporate CFO. The limitations set out in the project were that it should not burden the company’s IT department, which was already snowed under with an ERP project that had recently started. It was, therefore, agreed that the project would start off with the specification phase and, based on the results, it would then be decided if the project would be carried out or not.
Based on the needs of subsidiaries and the existing treasury policy, the following requirements were specified:
Based on treasury’s needs, the following requirements were included in the specifications:
Based on the demands of management, the following requirements were included in the requirement specifications:
Based on the results of the mapping phase, the CFO bought the idea, and it was decided that the project would be carried out based on each department’s requirements, as described in the next section.
Based on the requirement specifications described above, the treasury work instructions were written for everyone involved in treasury processes. The point of the instructions was to ensure that everyone involved in treasury processes would know what was expected of them. The instructions were made role-specific so that the people responsible for cash flows and currency exposures in the subsidiaries had their own instructions and likewise for the treasury’s cash manager, treasury manager and the people responsible for internal currency deals. The work instructions were published in a format that could be opened from the treasury’s home page on the company’s intranet.
The treasury work instructions were launched at controllers’ meetings held by the company’s financial administration in three different locations: Europe, Asia and the US. A treasury representative first described the background of the project and then explained the importance of the work instructions. In addition, the work instructions were presented in a 30 minute presentation. After the official part of the meeting, the treasury representative had informal discussions with controllers in order to create a better basis for more efficient co-operation.
At the beginning of the project, it was clear that spreadsheets did not meet the demands of the B2T project. As the project was not allowed to burden the IT department and its return of investment was supposed to be quick, the company decided to use a service as a software (SaaS) application.
The request for proposal (RFP) was sent to four candidates: their current TMS vendor, their main bank, the provider of the ERP solution and a company that specialised in B2T solutions. Their main bank dropped out of the contest right at the beginning because it didn’t have the required capability. The three remaining candidates were then evaluated against the requirement specifications.
The RFP helped to highlight the real differences between the vendors and improved the speed of the selection process significantly.
The company decided to launch the application as a ‘big bang’ model. The target was to have all the business units as users within a two-week period. The selected B2T application included a thorough e-learning package, which enabled treasury to launch it at several business units at the same time. The e-learning package included a motivational component where parts of the treasury work instructions were repeated as a well as a complete guide to using the application.
A link to the B2T application was added to the treasury’s homepage on the company’s intranet. The treasury’s work instructions were also included in the B2T application, which helped treasury check who had already read through the instructions. They could also then remind those who hadn’t yet read them. In addition, treasury added a feedback link on its intranet page for the users of the application to be able to send them proposals for improvement regarding the work instructions and the B2T application.
On the qualitative side, the results were as follows:
On the savings side, the results were as follows:
1MCA Corporation is a global manual crushing automation solution provider with locations in 47 countries with headquarters in Kråkby, Sweden. MCA Corporation has 27,422 employees and its annual turnover was €3.23bn in 2006. This company is fictional but the problems and solutions discussed in the article are from real cases.