Emerging Role of Corporate Treasury Management on the Internet
South African corporate treasuries realise the benefits of the e-business environment but need to take note of the changes and requirements necessary to fully exploit these benefits and to enable them to better manage the overall treasury function and the increased exposure to financial risk which may come about owing to mismanagement, fraud, inefficient systems or the use of modern financial instruments allowing dramatic losses through leverage.
Contrary to some 10-15 years ago, when spending money on IT was fashionable, investment in information technology today must be justified. It must add value to the business processes. Over recent years the treasury department was also affected and had to change due to the need for corporate downsizing and the need for an ever-leaner cost basis and shared service centres, better management of risk and to reduce errors and timely delays, and the need for integrated systems.
The business environment is undergoing major changes that are driven to a large extent by the Internet and the web. This environment is changing how we do business, intensifying competition, increasing the pace of business, transforming businesses into extended businesses and drives the effectiveness of the use of information and the strategic importance of information.
The Internet and e-business (doing business through the web) is linking many systems and participants in the market place, creating new mechanisms for movement of funds and thereby creating new benefits but also new problems or risks. More benefits that e-business will bring is e-finance, helping clients to help themselves. E-business leads to a reduction in overheads or increased productivity as resources can be reallocated to critical areas. Modern information technology in general helps us accumulate a lot more information that may be used for management purposes. In this regard, e-business is a valuable new way of doing business in an easy-to-access environment.
Web-based treasury management and financial services will lead to a broader and more global client base for e-finance service providers.1 Better integration of cash flow into back-office operations will come about. Better access to information from any location, which improves and shortens the management cycle and efficiency. Various types of management information, including economic forecasts, sales and purchase forecasts and information on cash flow, data on corporate planning and market rates will be available, for many types of financial transactions.2 Electronic bill presentment and payment open new marketing and communication channels with clients.3 Browsers are used universally, and development in this area tends to be cheaper than development with dedicated treasury management software.4 Owing to the lower cost of development and the use of browser-based technology, small companies can also participate in electronic data interchange. Owing to the fact that web-based software resides in one location, less time is spent on maintenance, updating and adjustment.5
Disadvantages of integration of systems and development may give rise to greater exposure to financial risk. This emphasises the need for better risk management that may, on the other hand, improve with better integration of treasury systems as risk can then be better managed at corporate level. Security becomes an issue as integrated systems give access to much more data, increasing the risk of loss of valuable data. Lack of security tends to prevent some companies from moving their financial activities to the Internet.6 The speed and reliability of web-based delivery channels are sometimes suspect.
To survive in the new economy, there has to be convergence of technology.7 Sound conventional business sense and an attempt to understand and assist customers should prevail. Businesses have to make use of technology – in this case the Internet – to add functionality or to improve or extend existing business processes internally and outwards.
According to Holton,8 there are three fundamental elements that should comprise any risk management strategy, namely corporate culture, procedures and technology. It is logical that technology should feature in this list as it certainly has become an important strategic tool that the corporate treasurer cannot ignore.
In view of the issues highlighted in the previous sections, the following important points should be highlighted:
This concept refers to the construction of containers of information gathered from all over the enterprise, available for a wide variety of uses on group or individual level.9 The centralised data warehouse should contain all the information needed for management purposes – this implies that in the first place, systems should be capable of supplying the information. If this is not possible, systems will have to be redesigned or re-engineered to supply in the data warehousing and eventual management needs.
Apart from the data warehouse, on-line analytical processing support is needed to retrieve meaningful information for management purposes from the data warehouse.
Certain functions will start playing a much more important role in the future treasury. Funding management, corporate finance and risk management will become more prominent. Support by treasury staff to other departments that affect the risk and general effectiveness of the use of available resources, will become vital. One example here would be where treasury staff help improve the cash conversion cycle to free funds which can be pushed into growth opportunities and other financial investments, thereby improving the bottom line.
Recent corporate management problems in the US underline the need for a more holistic approach rather than concentrating mostly on the management of cash and the management of financial risk at departmental level. If risk is managed effectively at corporate level, the enterprise can possibly take on more risk, which may result in more profit.
Risk management should take the whole organization into account and evaluate the interaction of the various types of financial risk in the enterprise. All risks to which the enterprise is exposed should be considered when managing risk. The risk exposure of the subparts of the enterprise is not similar to the risks that the total enterprise is exposed to. As was mentioned before, sources of risk are different today and much more of the capital of an enterprise can easily be placed at risk with single (derivative) transactions.
Owing to the volatility and risk inherent in the business environment and the additional power that technology brings, enterprise wide risk management (ERM) is becoming increasingly important. In this context, the importance of the data warehouse is underlined in that it will help avoid double counting or duplication of financial risks, and interrelationships will be more clearly observed. Information will also be more readily available.
The financial risk management process (identification of risks, evaluating or measuring, determining the appropriate strategy to counter risk, implementation of the chosen strategy and monitoring), will be reinforced by anticipated e-business changes.
Automated and integrated systems will free resources that will lead to increased returns on assets employed.
ERM will make the management control/cycle more effective adding more value, allowing remote management of portfolios, clients and systems. A more unified and less time consuming way of looking at/interpreting information will be possible. More levels of customisable security from any location are possible today. More complete information for risk management and planning purposes will become more readily available, emphasising the enterprise (group) as opposed to departments. Management focus will be on adding value via risk management and on business processes as opposed to internal intricacies.
The treasury function will expand and will allow greater emphasis on external relationships and links to other Web sites and clients and companies, services will be offered through e-business facilities to clients, ‘self-help’ corporate finance, risk management, cash management and cash management services.
Straight-through processing (STP) will be implemented with less human intervention – systems will make automatic adjustments to the risk exposure and movement of information and documentation will be automated in the e-business environment. Remote control of the treasury will be possible with more transparency from the point of view of the investor.
The treasury will become more important in terms of adding value due to automation freeing resources, accumulation of more information with which to manage the business and (total) exposure to risk. Online analysis of data with much better analytical tools with far greater visual presentation will make it possible to draw more value from information.
It may be argued that treasury should make certain information available via the Internet to investors regarding the overall risk policies and risk position of the enterprise to create a degree of transparency and avoid some of the corporate governance problems as experienced in the US in recent times.
These issues highlight one very important aspect that will materially affect the future position of treasury departments – the management of the corporate treasury must ensure the total integration of the overall long-term business strategy, the treasury strategy and the information technology strategy.
In discussion with outsourcing companies, it is clear that South African corporates seldom have proper treasury policy documents. This is problematic as there then tends to be a general lack of direction affecting treasury employees and the business.
One of the other major problems that most businesses in South Africa face is the fact that information systems are often fragmented or incompatible. Older systems are incompatible with newer technology. This is confirmed by a global survey done of financial institutions by Deloitte in 2007.10 The result of this may apply to an even greater extent to corporate treasuries than treasuries in financial institutions. Due to inefficiency and cost, it is often not worthwhile adjusting older systems to talk to new systems.
Apart from integration, older systems were often not designed for integration. Data files also often do not, for instance, have all information needed for risk management purposes. Part of the inputs to systems are quite often from manual systems such as spreadsheets or other means which is time consuming and leaves room for human errors, giving rise to increased operational risk.
ERM remains elusive in financial institutions due to the non-integration of systems. This applies even more so to corporate treasuries, as financial institutions are often more dynamic and advanced in this regard. Central to everything that the enterprise does should be the accumulation of meaningful and timely data in a data warehouse. Since few corporates are at the fully integrated system stage supporting the latter principle, exposure to all risks cannot be optimally managed. The realisation of this objective still seems a few years into the future for South Africa.
The acquisition, change and implementation of e-treasury systems from foreign countries have become very expensive for South African companies due to the depreciation of the value of the rand against the US dollar, euro and the UK pound. As an emerging economy, our currency exchange rate is subject to wild swings, negatively impacting on good project planning and development budgets. Although outsourcing and in-house development also has its limitations in terms of cost and control, some companies are doing their own developments.11
E-business also has not found its rightful place in the South African business environment due to the lack of cheap bandwidth. Although there are higher bandwidth alternatives available today, they all seem less than optimal and relatively expensive to use.
Although the direction of a company is dependent on what the board approves in terms of policies and risk appetites, it is also influenced by what happens in the business environment. Every enterprise is different but similar external forces often influence all of them. In this sense, the corporate treasury will also be influenced by market changes. To adhere to good practice in treasury management, a company will often have to change to bring its practice in line with other treasuries. South African businesses do focus on corporate governance and here the treasury department has its role to play.
There should be no doubt that the modern (extended) treasury department is a value-adding department. In South Africa, some corporate treasurers still refuse to accept this principle.
Corporate treasurers must take note of developments and tendencies towards building a global presence. Planning for this today is important, as it will ensure that the corporate treasury will develop into a sophisticated operation that adds substantial value therefore helping to drive the overall corporate strategy. Early planning will also ensure that an enterprise will be able to benefit from vast Web developments expected in the future that may allow many new business opportunities and much more flexibility.
References
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2. Forster, W. (2000). Treasury management and the use of the Internet. gtnews.com
3. Marjanovic, S. (1999). Checkfree chief to bankers: go with the Internet flow. American Banker 164(29):12.
4. Jones, R. (1999). Treasury management systems moves onto the Internet in 1998. Web Finance 1(3):7.
5. Markovic, P.J. (1998). Internet technology: key issues for the treasury managers. TMA Journal 18(6):30.
6. Wood, K. (1999). Internet security solutions – seven ideas. TMA Journal 19(1): 26-29.
7. Emmett, M. (2002). Getting the best of both worlds. Financial Mail (19 April):12.
8. Holton, G.A. (1998). Enterprise risk management.
9. Robson, W. (1997). Strategic management and information systems: an integrated approach. 2nd ed. London: Pitman.
10. Deloitte. (2007). Fourth Bi-annual Global Risk Management Survey.
11. Planting, S and Bidoli, M. (2002). The Honeymoon is Over. Financial Mail.
12 Older, wizer, Webbier. (2001). The Economist (30 June):10.
13 Wood R. (2000). E-business will take over the future. Professional Management Review: (November): 13.