Technology Requirements of Corporate Treasurers Today

First and foremost, treasurers are becoming more interested in having a ‘profitable’ treasury by adding value to the business. The treasurer’s success in integrating their role more deeply in the corporate management infrastructure has created significant new demands, and will continue to require innovative energetic change management for many years to come. This holds especially true for treasurers of companies with global exposure.

The source and use of cash has always been at the core of treasury functionality. Due to the treasurer’s quest to figure out what cash they have and what cash the business is going to need over some future period, there have been increases in the innovation and technology required to keep pace with the ever expanding complexity of instruments bought or sold by the companies they are charged with. Not to mention auditors and regulators who are not afraid to ‘require’ new types of analysis or controls. The good news is that there are tools available that can meet many of these challenges if the approach and implementation are done prudently.

Of course, complexity comes in many forms. Some solutions try to simplify this by offering a ‘good enough’ result across everything, while others focus on specifics and cover front to back for a small functional area. The more complex the makeup of the balance sheet, the less likely a single solution will fit the bill to provide capabilities sufficient to drive profitability.

What Are the Technology Requirements of Corporate Treasurers Today?

In a nutshell, a treasurer needs what all management needs, to manage more (risk, product analysis, lines of business, reports, integrations, etc.) without the luxury of an unlimited budget. The successful treasurer will be able to employ their limited resources in a way that allows for more analysis on ways for the company to be successful (investments, product pricing, profitability analysis, effective hedge management, business line funding, corporate funding, FX strategies, economic capital management, and maybe even M&A). To do this, the employees performing all the nuts and bolts work of treasury need to find more efficient ways to do their jobs. Namely, more and better automation! Automation allows for tighter integration of treasury across the company and consequently more quality input to business decisions ranging from funding to investments.

Technology investments for today’s treasurer need to provide a large amount of information in a concise manner, as well as provide automation of functions that take the time of their staff. Not many treasurers would attest to a spreadsheet based process report if they were not sure their staff spent sufficient time reviewing. Conversely, a well-designed system and process can produce reports with high confidence and little verification required each time it is produced.

Some key areas that merit focus are:

• Automation of transaction processing (including entries for contractual obligations).
• Integration of reporting and analysis across entity and lines of business to provide a unified picture of the whole corporate landscape.
• Seamless integration of market data into the valuation functions allows for daily position and risk information, and improves response time for decisions.

As the balance sheet becomes more complex and global in exposure, the shift to more risk management related functionality will continue to increase. The industry is seeing innovation in the areas of hedge accounting, cash management solutions, and risk analytics. The increases in sophistication of business strategies make it hard for the treasurer to keep up with a spreadsheet. Every application treasurers consider needs to be applicable to the full range of products across the enterprise to avoid implementing a solution that is yet another spreadsheet ‘added’ to the results.

Drivers Behind Treasurer Requirements Today

Treasurers Role

Treasures are increasingly expected to help support line of business decisions including asset/liability management, funding, liquidity, investments, M&A and hedge position management and accounting. The more integrated treasurers become in the value-added decisions the more budget they will have for treasury innovation.

Complexity

As companies globalise and are exposed to more complex products, the requirement to calculate various metrics quickly has increased to include value, liquidity, credit, and hedge effectiveness. For example, as some financial companies added mortgage investments to their portfolios it became very important to model more scenarios for clearer pictures of risk to various events on a daily basis. Given a single bond you can still get away with a spreadsheet as long as you monitor it daily.

Reporting

Reporting requirements are driving change in that reports are needed for much more than just reporting to external entities. The ‘treasury reports’ are becoming a primary decision support tool for investments, funding, and the cost benefit matrix for projects. Accounting/finance systems need to develop decision support information instead of just external reporting requirements.

The most significant requirement changes have probably been around two key factors, scope and speed:

Scope:

• Treasury technology is consistently moving to an enterprise focus from a more compartmentalised approach.
• Scalability of solutions reduces cost of ownership and frees resources from managing ad hoc reports (ad hoc analysis will continue to be a primary requirement).
• Addition of an automation solution without good controls is a non-starter.

Speed:

• The time allowed for producing financial reports has not increased while the complexity of the average balance sheet has.
• The analysis on pricing, risk metrics, cash management and capital allocation has to be done quickly to be useful in the business decision process. The calculations must be performed in a short time for increasingly more complicated products.
• Ability to implement quickly is important to sustainable change management. Long lags add significant risk and increase total cost of ownership from the change itself.

Which Solutions Are Working and Which Aren’t?

Larger companies that can afford to invest in troops of consultants and costly infrastructure will continue to get results with the solutions that are very broad in scope. In the treasury space, Oracle/Peoplesoft and SAP solutions get good traction and with the right resources results are generally in line with expectations. These solutions provide large organisations with dispersed locations a more integrated solution that operates well across multiple locations and divisions. However, these solutions are less robust in handling complex financial instruments such as fixed income securities or derivatives. The business and accounting rules for these products are very specialised and tend to require solutions targeted specifically for this purpose. While it would be an ideal solution to use these applications to handle all transactions due to the integration across multiple business areas the gap in current functionality has caused most companies to look towards other solutions.

Due to the large number of financial restatements and increased volatility in the markets, systems handling the processing and accounting of a company’s various derivative products have received more attention recently. Treasurers want a solution that will allow them flexibility to execute the appropriate risk management strategy without concern for the operational and accounting impacts. Additionally, they want a solution that will integrate with the other systems without adding significant costs.

Solutions that are not proving successful are ones that do not provide extensibility, transparency, or require too much infrastructure development in order to keep it running. Spreadsheet-driven solutions are prime examples of non-extensible solutions that have inordinate financial model risks, and have virtually no systematic control. Other problems are:

• Heavily siloed (e.g. good at trade capture but not FX, etc.) systems tend to be very good at a small group of products so if you only own a small number of product types you can get away with one of these solutions.
• Like our beloved spreadsheets, systems that are difficult to scale in terms of physical infrastructure and additional products are not able to meet the growing demands of the treasurer.
• Solutions that require a large amount of customisation to meet existing or new needs because cost of ownership can fatally skew the risk reward balance.

Any solution with poor process design or implementation will not improve scope or speed. That being said, it is important to focus on these areas when considering a solution. It is important to remember that a solution that is difficult (relative to company) to implement due to high complexity and large amounts of customisation typically has a much higher engine run costs that does not come down over time.

What Can We Expect to See in The Future?

I suspect there will always be a debate over whether it is better to acquire the single solution (high customisation and/or organisational change costs) or implement the best of breed solution (typically large impact automation for smaller specific area). There may be a day when there is a solution that can cost efficiently as well the following:

1. Do all types of pre-transaction analytics.
2. Capture all transaction types.
3. Immediately discount risk and help in pricing/trading.
4. Immediately demonstrate impacts on financial statements and economic capital (pre and post trade).
5. Seamlessly integrate with market information.
6. Comply with FAS/IAS accounting standards.
7. Is scalable to any type of business or process across the globe.
8. Doesn’t require customisation.
9. Integrates with ERP/ERM systems.

Even if such a solution existed there is little doubt that it would not be long before new financial instruments would be created causing the use of spreadsheets or additions of ‘best of breed’ applications that solve product nuances better.