FinTechSystemsMaking the Right TMS Decision – Part 1: Evaluating the Role of a Treasury Management System

Making the Right TMS Decision - Part 1: Evaluating the Role of a Treasury Management System

The development of treasury technology is a spiral. Technology delivers a capability to meet the needs of treasury; treasury uses that technology and identifies a further opportunity to which the developers respond. So the boundaries are always being pushed forward with increasing functionality demand and a continuously advancing technology environment. The application of technology within treasury at the present time is displaying powerful wide-reaching solutions that would have seemed incomprehensible only a few years ago and have forcibly influenced recognised best practice treasury.

We are, therefore, seeing treasurers keeping a watchful eye on new technology as it becomes available from the software houses and the banks, and also how they are applying that technology within their own corporate environment. From the treasury point of view, the treasury management system (TMS) sits centrally in the operation, linking to other key elements of the structure, banking systems, risk management systems, accounting systems, etc. Indeed, the TMS may overlap or even replace these systems; such is the pace of development. But it is the linking that is the key and treasurers are seeking straight-through processing (STP) wherever possible to gain efficient interfaces between systems.

Why Would You Be Looking for a TMS Today?

So why would you be considering looking for a TMS at this time? The main reasons that lead companies to the TMS market are:

  • Requirement for increased control and security and enhanced reporting powers (good corporate governance and regulatory reporting).
  • Replacement of a spreadsheet environment or outdated technology, or concern over your existing supplier’s commitment to its product.
  • To meet the demands of an expanding treasury operation through corporate growth.
  • To increase efficiency within treasury and allow the treasury to add value to the corporate whole.
  • The need to change radically the treasury operation, e.g. to provide one central global treasury.

Companies are far more aware now of the requirement and expectation of good corporate governance. Management and investors are requiring optimum control throughout the financial operations of the company and require the depth and visibility of reporting necessary to demonstrate its existence. With more integration between systems, both electronic and manual, security is of prime importance; the ultimate fruits of wanting security and control have recently been witnessed at Societe Generale. The need to follow the regulatory requirements of hedge accounting standards (IAS39, FAS133, etc.) has found gaps in some older treasury systems and has represented extreme challenges for those using spreadsheet applications.

Recognition of the need to move away from reliance upon spreadsheets is frequently the result of concerns regarding security and control, and hence is likely to be raised initially by the company auditors. Spreadsheet applications can become complex and invariably reliance is placed solely upon one or two people within an organisation to maintain and operate them. Segregation of duties becomes a major concern as the distinctions between front and back office roles frequently become blurred. These are problems frequently faced by small treasuries and where treasury is not a full-time function. Outdated technology, where treasury is operating on legacy or “first generation” treasury software, often carries the same security and control issues as growing functionality gaps are plugged with non-integrated spreadsheets. The software may not be supported adequately by the supplier, there would almost certainly be performance issues and there are likely to be problems providing efficient interfaces into other software used within treasury.

The demands upon the treasury operation can be increased through dramatic corporate growth, acquisition or a change in emphasis of the business (entering new business areas, broadening geographical scope). This could lead to changes in the cash structure (cash management, cash flows, forecasting issues), risk management needs, currency profile (currency flows, hedging requirements) and hence the skill sets of the treasury team. Treasury would need to meet these challenges and should have the systems in place to manage a dynamic environment.

Traditionally the treasurer’s role was to manage carefully the cash and risk generated by the core business and to ensure no mistakes were made. The role has progressed and more treasurers are expected to add value to the organisation through proactive treasury management (without necessarily becoming a profit centre). This has been achieved largely through the application of the technology available. The project to review current treasury technology employed with a view to change starts with a review of the current processes and procedures followed by the treasury and those processes extending from treasury. Processes evolve (or stagnate) over time and a review of this kind will serve to question existing practices and ensure the new treasury achieves the necessary efficiency and follows recognised treasury best practice.

Increasingly, the group treasury operation of multinational organisations will be seeking to optimise cash resources in the centre to ensure the most beneficial use of those funds and borrowing facilities. The option of acting as an in-house bank also extends to carrying out foreign exchange transactions on behalf of operating companies and the provision of these added-value dealing and cash management services globally demands the most up-to-date software. To maintain the high levels of service required of a centralised treasury, the centre must have at its disposal accurate and timely information and the means to communicate that information efficiently within the group and outside the group. Those outside communications would include links to banking software, on-line dealing systems and enterprise resource planning (ERP) systems.

Drivers for Change

We have already seen that the demands for concentration on improved corporate governance, largely driven by the events leading up to and the requirements of the US Sarbanes-Oxley (SOX) legislation, and regulatory reporting requirements have been a major factor in the development of TMS. This is a continuing cycle and the TMS suppliers have to meet those changing requirements in order to meet their existing customers’ needs and to remain competitive within the market for new business. The banks, the TMS suppliers, the ERP suppliers and other specialist treasury software houses have to move forward to survive. Some suppliers are developing their own suites of fully integrated solutions within and beyond treasury while others are working with partner organisations to provide solutions fitting the buyer’s specific organisational need. The ERP suppliers long ago moved into treasury from their business-orientated solutions but are now having to specifically develop the treasury functionality.

Investors and analysts place increased emphasis on a company’s cash profile and that in turn redirects the CFO’s priorities. A TMS-centered solution that can provide accurate and timely cash position data for a global organisation will, therefore, have a great attraction.

Conclusion

In a modern treasury environment demanding tight controls and operations that are fast and efficient, corporate treasurers are looking for technology that will give them reliable and secure STP. ‘Reliable’ to ensure the efficiency of interfaces between the systems employed within and on the periphery of the department and ‘secure’ to meet the stringent requirements of processing funds movements and key financial data.

STP ensures that the transaction is not touched after inception (the various approval, verification, release processes are undertaken within strict, pre-defined access rights) through to completion, dramatically reducing the opportunities for error and fraud, and that information flows automatically and in a timely fashion across systems. The reporting capability of the systems employed has always been a primary concern for treasurers and never more than today with the increasing demand for complete transparency in financial operations for management and regulatory reporting.

The remaining articles in this series will address how to identify your system needs within treasury, how to select the correct system to match those needs and how to implement the chosen solution.

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