There are several approaches to treasury consolidation. One approach is when the corporate treasury centralises its traditional treasury functions to one or just a few global centres for hedging, funding and cash management. The second approach increases the treasury’s scope with the emergence of the financial supply chain, causing the treasury to be involved in consolidations of payments, collections and bank account management in a quest to consolidate all financial transactions regardless of whether they are related to commercial operations or traditional treasury. Another option is when large financial organisations with separate business units and siloed platforms need to streamline down to just one global platform in order to remain competitive. The fourth alternative is consolidation connected to acquisitions and divestitures. This article aims to advise and provide lessons learned from all four types of consolidation.
The requirement for consolidation is IT-based and comprises modern treasury management systems, solutions for connectivity and banks’ solutions for cash management and payments. Treasury consolidation drives down costs despite requiring substantial investment up front. However, the largest benefit of consolidation is increased control and transparency of financial and operational risk.
In the future it will be increasingly difficult to compete without a consolidated shared service centre (SSC) approach for finance and treasury. Not only will the costs of retaining a fragmented environment be very high but, more importantly, any organisation that is unable to dynamically monitor its performance, risks and revenue streams will become almost impossible to manage.
Define Context Then Content
The first key step is to define the treasury’s core purpose and the vision for its future. The mission (‘what we do’) and the vision (‘where are we aiming’) can be derived from the company’s group mission and expectations of shareholders and executive management. The strategy (‘how we will reach’) and targets (‘the tangible results’) can be set out by describing how the treasury supports the core business and how it is incorporated into the business model. Example targets include:
- Improving group cash forecasting and liquidity management (e.g. measured by decreased working capital).
- Consolidating and improving group financial reporting (it is beneficial to add templates of a group reporting package that can be used as a specification for the new IT platform and future state process flows).
- Creating global transparency for the financial risks (risk metrics, distribution, frequency).
- Implementing new global processes, organisation and systems based on ‘best-in-class’ principles.
Treasury consolidation projects often compete for resources with other projects. The key task is to increase treasury’s priority level. There are many ways of achieving this. Anyone working for a fragmented company that finds it difficult to keep track of where all its cash is located can always prove that a consolidated treasury operation can gain control of that cash. This does not simply mean knowledge of where the idle cash is, but actually controlling it so the company can make use of it. Another way is to highlight the operational risks and lack of controls that come with a dispersed organisation. A third way is to calculate the operating margin’s variance with market rates and the effects from not consolidating financial risk management.
Remember that by taking only a holistic perspective will achieve nothing in itself. The mission, vision and strategy definitions are only directional but will be very useful for communicating the project’s purpose and also for scoping the project. The main purpose with defining the context is that everyone understands that anything not fitting into the strategy is out-of-scope. And that will save a good deal of time eradicating unnecessary blue sky discussions on the project.
Low-hanging Fruit
One can do many things to consolidate an organisation, so there is no need to complicate the process unnecessarily. Start with the low-hanging fruit – targets that can be met quickly and got out of the way. Remember to exploit the benefits of being a doer. Communicate every quick win to management and other stakeholders to show that things are getting done – this will win a buy-in for change. Successful execution is proof when justifying an increased priority level for the project. Straightforward targets include centralising bank account management and streamlining the core banking structure.1
Consolidations are Change Projects, Not IT Projects
A consolidation project often results in the implementation of a treasury IT platform. This is both a blessing and a risk. Many implementations can become more expensive, take longer and even create strained relations between the treasury and the system vendor. This is often the result of viewing the implementation as purely an IT project – which it is not. Implementing a new system and IT structure will create a need to adjust processes and the organisation. Change always creates resistance – this is normal – but resistance is often caused by the fear of not knowing what the end result will be.
Therefore, a key success factor for all IT projects is to start by being clear on what the end result will be. Get the future state processes written down and agreed before starting the implementation. Let everyone know the future roles in advance. IT does not change behaviour – people do. Some advice:
- Think of what to call the project; for example, use ‘Get control of cash’ or ‘Implement best-in-class treasury processes’ rather than ‘Implementation of a new treasury workstation’.
- Prepare the HR department and let them participate. The future situation may not have a role for everyone.
- Make change into something positive and necessary to keep the company competitive.
- Create an internal communication plan and execute it consistently.
- Take a phased approach to the implementation. Treasury is a very complex process with relatively few staff involved and very abstract data management. This means that a high level of automation is required but not easy to implement all at once.
- Compare investment costs with reduction in financial risk and financial costs. Do not calculate pay-off through reduction in total treasury staff – this will not be sufficient.
Change will not happen by chance. The requirement for change must be made real and it must be accepted and understood by all those affected. It is important to define what the change will be and how the change will be performed.
Change Processes Prior to the Organisation
Changes to the formal organisation usually fail because enough time and effort is not allocated for the new processes to be completed. Many companies change their organisation too often and do not give the new processes a chance. Experience suggests that an organisation first starts to function optimally only after being in place for a few years. Therefore, the best way is to start by changing the business processes. The formal organisation will naturally change thereafter. Another important key to success with change projects is to use key performance indicators (KPIs)2 to measure the success and the pace of change. Examples of KPIs include:
- Retiring older systems.
- Decreasing the number of core bank relations and bank accounts.
- Consolidating x% of all financial transactions into one global database.
Objective Assessments
Consolidating organisations often create redundant groups or functions. The best way to determine what should be eliminated is to perform an objective appraisal of the teams and determine which is most capable of staffing the new treasury. This requires clear, objective and simple rules – the best one stays, the other leaves. Other parameters include:
- Making the rules clear from the beginning.
- Accepting no deviations or exceptions to the rules.
- Staying objective.
- Letting everyone know the criteria for winning and who will be making the final decision.
- Presenting a well-defined future state process flow coupled with how the treasury will fit into the group strategy and targets.
- Giving everyone a chance to win.
- Treating the losers fairly.
Competition creates a strong drive to excel and in the best cases the groups assist in improving the future state. The team that remains gets a boost in confidence that usually lasts for a long time.
Reuse Experience from Peers
There is no need to reinvent the wheel. There is much to learn from experience, so the new treasury should be built from best practices. Many treasury consolidations have been performed already, and treasury peer groups and consultants can share experiences and knowledge. Developing into a best-in-class function takes a long time – it is an iterative process with many small steps and continual change. Creating a top-performing treasury is a learning process that takes time and requires senior management to embrace it as the future state for the company. It must be an ongoing project rather than a single discrete one.
References:
1. Lind, M. (2008) ‘Bank relationship strategy and management’, Journal of Corporate Treasury Management, Vol. 1, No. 3, pp. 226-228.
2. Lind, M., Bergström, P. and Andersson, K. (2007) ‘The role of key performance indicators for corporate treasury’, Journal of Corporate Treasury Management, Vol. 1, No. 2, pp. 125-132.