Where and How Can Treasury Add Value?

Back in 2006, PwC conducted a survey of 182 people in 166 companies throughout Europe. Respondents included not just corporate treasurers but also CFOs, finance directors, regional finance and treasury professionals. The questions they were asked focused on understanding where treasurers considered they added value, and investigating how this value was being measured and communicated.

The survey revealed some interesting yet surprising results. It seemed treasurers believed they should be focusing on certain activities that they thought maximised value-add but believed that shareholders wanted them to focus on different areas. Given these discrepancies, what is interesting is discovering which view (the treasurer’s or shareholder’s) was the right one in order to be best prepared for the current market volatility and complexity. Before reviewing the survey results in this context, let’s first review the current market climate treasurers have to operate in.

The Current Market Climate

As we all know, the world has changed, and extremely rapidly over the last year. Part of what we wanted to establish in our survey this year was: what has changed for treasury? Of the respondents questioned on ‘What do you think is the biggest challenge/value-add opportunity facing the treasury team in the next 12 months?’, approximately 60% cited dealing with the credit crunch as the most important (see Chart 1 below).

One respondent, the head of tax and treasury at a FTSE 200-350 company, said: “The credit crunch – it’s taking us somewhere new…it will change the landscape for lenders. The challenge is how to adapt.”

Indeed, the credit crunch seems to be the single hottest topic of conversation and its consequences are the single biggest challenge for treasurers in both the short and long-term.

Although access to credit may be seen as the major crisis, other challenges have also been raised. For example, the increase in volatility of previously stable currencies has caused perhaps familiar challenges, though now in new regions of the business. Twenty-seven per cent of respondents said FX issues would continue to be their major challenge over the next 12 months to three years. “Risk management of FX exposures is one of the main challenges for us,” commented one survey respondent, a group treasurer at a FTSE 100 company.

Finally, although not necessarily a market change, many of those surveyed this year stated that implementing or dealing with IT related issues was one of their major challenges for the immediate future. This highlights the fact that enabling increased automation and STP is still a hot topic.

The issues above combined with huge jumps in the price of many commodities and the increased uncertainty in interest rate movements has created a nervous and challenging environment for treasurers, CFOs and board members alike. If this is how treasurers now see the current climate in which they must operate and add value, how did their opinions, as documented in 2006 survey, prepare them for this climate?

Did Treasurers Get it Right?

When we asked the question almost two years ago (i.e. pre-credit crunch): ‘Where is treasury adding value?’, we received the following response:

When asked the question: Where do treasurers believe shareholders would like them to focus?, we received the following response:

It appeared that back in 2006, treasurers wanted to focus on the traditional areas. In particular, they wanted to focus on bank relationship management and long-term funding. They also wanted to increase their influence in areas such as working capital management and decision/business support. But was this the right move?

With our newly acquired 20/20 hindsight, our survey respondents seem to have got it exactly right. In 2006, we concluded that the reason for the above result was that “… a few basis points saving on a large long-term funding programme or ensuring the commitment of relationship banks during times of crisis, provided clear value add.”

Now, in 2008, this has proven to be very true. Many treasurers have experienced the fact that it can be much more than just a few basis points saved. Indeed, securing long-term funding at any price can be a long and difficult task in the current climate. As one of the respondents, a group treasurer at a FTSE 100 company, in this year’s survey pointed out: “It was a hell of a lot easier to raise capital for everybody 12 months ago than it is now!”

It is fair to say that the perception of what activities shareholders wanted treasury to focus on also had its merits. In the 2006 survey, shareholders saw treasury risk management as being of prime importance. In the current climate, this too has proven to be an important focus area. The market has seen increases in volatility of some previously stable currencies and price shocks to a broad range of commodities. Note, this was and is an area of value-add treasurers in both surveys agreed on.

Given that treasurers do seem to have got it right in terms of where they can add value, the question we then asked in both surveys was: How are you measuring this value?

Value-Add Measurements in Treasury 2006-08

Sadly, it seems that not a lot has changed on this front. In 2006, our results showed that although many claimed to be ‘value-add treasuries’, few were measuring the value added in any consistent or comprehensive way. The 2008 survey still shows that of those questioned; only half are using any kind of performance measure to demonstrate their value to the business. Most of these relate to market returns against external or internal benchmarks. The reasons presented for not having a more comprehensive or formal set of value add measures were:

• “There is no steady business baseline to benchmark against.”
• “It is hard to design the appropriate metrics.”
• “Performance metrics are not seen as relevant for treasury.”
• “People are not rewarded on such measures.”
• “Too much effort is required to produce these.”
• “We are weak in this area. It’s hard to identify the axes or metrics to measure value,” said one respondent, a deputy financial director at a FTSE 100-200 company.

Those that did measure performance said that these measures were essential for them to explain to senior management what they were doing. The metrics produced were largely based on simple accounting numbers or market-based benchmarks though; in other words, readily available information.

Treasurers who did not focus on performance measurement considered these simple metrics as ‘measures for measures sake’. In their view, time would be better spent identifying exactly what activity it is you are trying to monitor or the behaviour you are attempting to induce. “They are mostly spurious, so we couldn’t justify the administration,” said one group treasurer at a FTSE 100 company.

Few of the respondents had developed any kind of non-financial metric to show that risk and control of the business is improving. Also, surprisingly, given that many were investing significant sums in IT, none mentioned the need to track return on investment for systems implementations.

It seems that treasuries are still not measuring performance due to lack of time to both design the appropriate measures and then on the onerous process of producing the monthly reporting against these figures. To pick up this point, the 2008 survey asked: Do you think that you have the right resource to deliver a best practice treasury function? Unsurprisingly, most claimed to be resource constrained.

Many felt frustrated that treasury can add or at least save significant value. This was felt to be true in light of the size of the positions being managed combined with the current market turmoil in credit, commodities and FX. Yet most claim to have insufficient time to devote to any of these tasks. Indeed, many feel that too much time is still being taken up by manually intensive, non-value added tasks. This perhaps explains the continuing focus on IT improvements and STP enhancement.

In addition, strategic projects and regulatory compliance are also seen as being a large drain on resources, resources that are still being seen as scarce in the market.

The Future for Corporate Treasury?

Once again, we asked our survey respondents what they believed were the future enablers for treasury. Back in 2006, most ‘value-add treasurers’ saw a better use of IT in the form of increased centralisation and automation as a way for treasury to add value. Specifically, they saw implementations of in-house banks, payment factories and STP as the new enablers (as can been seen in Figure 4 below).

Today’s respondents replied that although the above initiatives still have value, much more value will come from getting back to the basics of managing funding, liquidity and interest rate risk. It seems that previous treasury priorities, such as the drive for efficiency, centralisation, automation and compliance, have not gone away but rather need to be seen in the light of changing market conditions.

Treasury’s Elevated Role

On a positive note, many treasurers see a silver lining in the current crisis and uncertainty. They believe that their preparation for, and reaction to, the current market conditions (as evidenced in their responses in 2006¹) has proved that they have the skills and approach to be ready and able to manage financial risks across the business.

It is true that the current crisis has elevated the topics of liquidity and financial risk management to board level. As such, many treasurers have been elevated with them. Treasurers are now seen as key advisors on board level decisions. Moreover, they are being seen as having the correct skills and long-term view to partner with the business on enterprise-wide risk advice to be adequately prepared for future crises².