Treasury Challenge: How to Manage a Global Subsidiary Network
There are many challenges facing the headquarter treasury operations of multinational companies whose business includes interaction with a global network of subsidiaries. These challenges involve more than finance management; they usually extend into managing the complex cultural, linguistic and diplomatic issues that habitually accompany international commerce. The technical solution deployed to facilitate treasury’s communications with the subsidiary network must therefore accommodate these broader issues, if the overall business issues are to be effectively addressed.
The combination of a modern treasury management system with the general facilities of web-based communications provides the necessary framework for achieving a solution that brings added value to group treasury, regional treasury centres and, essentially, to the financial operations of the subsidiaries themselves.
The nature and distribution of the subsidiary network of course differs from corporate to corporate. In larger companies, there is often an intermediate organisational level, in which regional treasury centres may take responsibility for managing cash forecasting, liquidity and exchange risk for a local cluster of subsidiaries. Common examples for a US corporation are regional treasury centres in Europe and the Asia Pacific, and often in Latin America. Such arrangements help to form valuable cultural bridges with the subsidiaries, in addition to facilitating 24/7 treasury operations to provide optimised risk management coverage by treasury.
In practice, many variations of these models are found. In essence, group treasury is often seeking global visibility of cash, liquidity and risk exposure, and will want to put in place a technical solution and workflow that helps to achieve these important objectives. The model adopted depends on corporate policy towards centralisation/decentralisation; but even in decentralised organisations, there is often an overriding priority to achieve a global overview of cash and financial risk, regardless of whether the management of that risk is central, regional or fully decentralised.
Sarbanes-Oxley (SOX) compliance continues to be a powerful catalyst for standardising treasury policy and process on a global basis. In the context of working with complex international subsidiary networks, this standardisation impetus may be powerfully resisted by local factors. The goal is clearly desirable, but there are likely to be significant challenges in achieving it effectively – and at a proportionately reasonable cost. The technical solution must be flexible enough to accommodate a range of critical local requirements, such as foreign exchange control regulations, interest accrual methods, financial instruments, taxation and other regulatory requirements. It must also address the more mundane – but, arguably, equally important – issues of language and culture mentioned above.
It follows from these observations that the solution employed must be comfortable to use for perhaps hundreds of diverse local users, by communicating with them clearly, by fulfilling their treasury needs, and by showing them a return in value of the efforts they are expending to support group treasury. Successful standardisation comes at a price!
‘What’s in it for me?’ is the self-centred cry often heard when individuals, perhaps at very junior levels, are asked to take on additional work that does not provide them with any obvious benefit. The problem is compounded in the case of global operations that span many different time zones, countries, languages and businesses. The business benefits of achieving enterprise-wide visibility of liquidity needs and financial exposures may be obvious from the centre, but if the process is viewed from the periphery of the corporation, the value may be obscure – or even invisible. In the extreme, individuals may be asked, in a language in which they are not comfortable, to communicate information that apparently vanishes into a black hole, without even getting a ‘thank you’ in return. It’s hard to get an enthusiastic buy-in from people who are treated like this.
Communication between the centre and the subsidiary network are usually web-based, providing a cost effective, robust 24/7 two-way channel. The centre will achieve its desired result of receiving the information it needs, through an efficient straight-through processing (STP) process. From the subsidiary viewpoint, the teams should be able to enter the forecast or exposure information through their standard web browsers, ideally through templates constructed specifically using local language and conventions, and with minimal training. And they should get something back for their efforts. The reward could be in the form of on-demand reporting of useful information, or improved interest income/expense, or through benefits in improved performance in relevant key performance indicators (KPIs); but there must be a perceived positive value for the mechanism to work properly.
In theory, bank overlay reporting or a full implementation of SWIFT can provide complete global cash position information. In practice, the actual experience of treasurers falls short of this ideal, for a variety of reasons. In extreme cases, controllers may not be fully informed about the existence of all of the bank accounts across a complex international organisation – let alone have visibility of the current balances of these accounts. This inevitably leads to interest management and foreign exchange inefficiencies, as the organisation may in fact be borrowing or buying a currency in some locations, while simultaneously the same currency is being held in surplus in other locations. In some cases, such situations can only be effectively resolved via the efficient two-way use of a treasury management system, in combination with its web-based extension. This is especially the case when the business has significant commercial activities in certain developing countries where some banks may not be SWIFT members, the information may not be available to overlay banking data capture arrangements, and the banks do not offer electronic balance and transaction reporting facilities. In such cases, the treasury management system’s centre-subsidiary communications channel provides the only really viable solution – and this, of course, depends on the implementation of the right technology to fulfill the requirement.
Today, an increasingly important security and control requirement of well-managed corporations is the global administration and audit of bank account management information. Some of the necessary information to set-up and operate an accurate central database is often distributed around the subsidiary network. The communication of this information from the subsidiaries may be achieved through the extension of the solution described above for cash and exposure management.
The actual bank relationship information that may be captured and managed includes authorised bank account signatories, target/peg balances, contact information and overdraft limits. When analysed together with centrally held facility utilisation information and with treasury dealing volume statistics, treasury management obtains a comprehensive picture of the true state of the corporate’s relationship with the bank, so that the relationship may be better managed. Additionally, a strong technology solution optimises signature maintenance and administration, and therefore supports the operation of a very robust bank account control environment.
The ideal organisation for many treasurers is to operate an in-house bank structure to centralise all business unit funding and foreign exchange hedging within the treasury department, to optimise interest management, and to deal efficiently in the external markets. The company may decide to implement a multilateral invoice netting solution to meet these objectives. The requirement may be complicated by local monetary and fiscal policy, as well as elaborate corporate ownership structures, which must be accommodated in the solution. Treasury management systems for such situations again require user-friendly subsidiary-centre communications, plus suitably powerful and flexible functionality to meet the necessary requirements; these may include intercompany and external dealing, dealing as a broker on behalf of the subsidiaries (where required), multilateral netting invoice collection and processing, plus the necessary reporting, such as netting summarisation for each participant. Such a solution fulfils the needs of the many different scenarios that occur.
Effective in-house banking technology brings a broad range of benefits to the subsidiary network. For example, they can gain added value from the solution through the facility to request, run and receive their treasury reporting on an on-demand basis, via an automatic process. The detail of the reporting will naturally vary from case to case; examples include intercompany and external deal confirmation, interest performance analysis and the provision of in-house and external bank balance and transaction reports. The possibilities are open-ended. The end result can significantly reduce treasury’s reporting burden, and also enrich the financial information received by the subsidiaries.
The goal of achieving efficient two-way communication with an international network of subsidiaries may be achieved through the effective deployment of contemporary web-based treasury management technology. The treasury centre will enjoy the many benefits such as the ability to view – and perhaps manage – cash and financial exposures right across the enterprise – provided that the subsidiaries see some real local benefits as well. Through deployment of the right technology solution, some of the real challenges of managing international treasury organisations can be met, to everyone’s benefit.