How to Get on Top of Your Financial and Operational Risks
Risk is an inherent part of doing business, particularly in these times of uncertainty. If you don’t want to lose money or don’t want any bad debt, then don’t lend money. If you don’t want any risk in your operation, then don’t have any operations. But, of course, that is not a realistic scenario. The key question is how to achieve a balance within the framework of an acceptable level of risk?
In terms of cash management, and moreover risk management, from a corporate’s point of view the connection between the enterprise resource planning (ERP) system and the bank is crucial. It is important to have a strong bank, offering global services and, above all, stability. A robust ERP system and good connectivity is also important. But to be in a safe position with regards to risk, a corporate has to have effective integration of all these things.
Today, the trend is moving from a model that was primarily contained within the corporation, where treasurers and chief financial officers (CFOs) dealt solely with various departments within the company, towards a more networked model, where corporates integrate their suppliers and particularly their banking partners, according to Jim D’Addario, financial solution marketing, SAP. As organisations form links with trading partners and financial institutions, this can also raise the level of complexity, drive up costs and lengthen cycle times.
The increase in organisational complexity is a major factor that impacts the treasury function. “One customer likened it to being stuck on a treadmill: just as they got their financial systems in order and consolidated multiple instances, they then made a large acquisition and inherited a new batch of systems and incompatible processes,” said D’Addario. “There is also a correlation to corporates that have multiple divisions, overseas operations, different accounting standards and multiple currencies to deal with.”
The point-solution financial systems companies use to manage these operations can impede data flow and increase complexity. Mixed IT environments, effectively moving across different systems that are not compatible, slows down cycle times and process integrity. Treasury departments end up using more effort to gather data, which prevents treasury from adding higher value to the organisation, such as risk management and merger and acquisition advice.
SAP sees many clients and prospects who are struggling with the high costs of operations. D’Addario explained: “The finance department is usually very labour intensive and, in particular, treasury deals with many manual functions, such as bank reconciliations, cash forecasting, etc. In addition, complex system environments tend to slow down receivables and cash flow, while increasing day sales outstanding (DSO). Also, multiple systems that make up financial infrastructures impact data integrity – it becomes very difficult to share data across systems in an efficient and meaningful way.”
Firms are still using spreadsheets, which is labour intensive and frustrates compliance efforts in this era of high regulatory pressure. D’Addario observed a lack of integration with the general ledgers for reporting purposes, especially around areas such as IFRS 7, as well as FAS 133, IAS 39, etc. This leads to difficulty in managing risk. As corporate cash managers attempt to curb high borrowing costs, they complain that they lack timely insights into their balances across multiple banks.
Fundamentally, they are taking a reactive approach to risk. The lack of visibility regarding the risk across different portfolios, different instruments, different counterparties, etc, frustrates their ability to manage risk in a meaningful and holistic manner. In the area of reporting, they are lacking the clean data that they need to have insights into managing risk.
This also causes the treasurer to miss cash investment opportunities, borrow unnecessarily, incur higher costs because of disconnected systems, and results in poor control over compliance and financial risks. Further manual, spreadsheet-based processes means corporate treasurers have poor visibility into global cash balances, which leads to inaccurate liquidity forecasts.
“Solving these treasury integration problems means integrating different systems across the three main areas of cash, liquidity and risk to help companies forecast and manage cash more precisely, forecast liquidity requirements and ensure that their sources and uses of cash are moving quickly, as well as having rapid availability to bank credit lines,” said D’Addario. “But it is also important to help treasury visualise and understand the various risks that they’re up against, because if you can’t visualise or pinpoint the problem, it’s very hard to mitigate it.”
Optimising the treasury operation through an integrated solution provides the ability to control and anticipate, and also the ability to enable financial excellence by automating any critical labour-intensive tasks, allowing financial professionals to free themselves from doing a lot of transactional activities and apply their expertise to the vexing problems faced in treasury.
SWIFT’s proposition for corporates is very simple, said Luc Meurant, head of corporate market at SWIFT, the Belgium-based financial messaging consortium. Most firms today have relationships with a number of banks and tend to communicate with those banks over different channels. SWIFT for corporates offers a single standardised gateway to communicate with all the banks over the same resilient platform, SwiftNet.
Corporate clients say this single pipeline brings four main benefits. The first is cost reduction, which is fairly apparent. The cost of every single bank connection is roughly in the range of €10,000 to €20,000 per year. This is very expensive, and treasury department personnel spend a lot of their time keeping those connections in order. Using SWIFT as single channel enables these savings.
Another important benefit is funds visibility, which is essential for corporates. “Over SWIFT, banks are used to exchanging end-of-day and intraday reporting between each other. As a corporate with connectivity to the SWIFT network, it’s possible for it to ask its banks for end-of-day, and in some cases intraday, reporting on its accounts, which would give it improved visibility of its funds and, therefore, a better ability to invest those funds more efficiently in the market,” says Meurant.
Thirdly, control security and risk management. SWIFT is a highly secure and resilient network. That’s the core of the business in the bank-to-bank space and corporates can now also benefit from those investments.
And, finally, SWIFT addresses the issue of compliance. For example, under Sarbanes-Oxley (SOX) corporates listed in the US need to document the process by which it communicates with all its banks, which is a heavy administrative process. With SWIFT, a corporate only needs to do it once.
Previously, SWIFT was seen as connectivity mainly for big corporates with many cross-border transactions. Today, corporates, such as Alten, with a smaller turnover, are starting to get involved. In addition, there are now corporates with fewer bank relationships. “It is clear that if you have many bank relationships, the business case for joining SWIFT is stronger but there are also corporates using SWIFT with only one bank relationship,” Meurant pointed out. And, finally, there are corporates using SWIFT only for domestic transactions, putting to bed the myth that SWIFT is solely for cross-border transactions.
Alten is a high-tech engineering and consulting firm. It conducts R&D and technology projects for large companies in industrial, telecommunications and services sectors. Alten has 12,000 employees, 87% of which are high-level engineers. In 2007, its turnover was €701.2m, 25% of which is from international operations.
SWIFT can help in terms of lowering financial and operational risk. With financial risk, if a firm can’t measure its risk, then it can’t measure its exposure. SWIFT helps through its wide bank reach, with roughly 900 cash management banks doing business on a daily basis with corporates, as well as through standards, which are the core of SWIFT. By combining visibility of funds and visibility of transactions, SWIFT helps corporates manage financial risk. SWIFT has matching engines that are available to corporates so that they can check the status of their treasury operations, matching, etc. “If you can measure, then you can better manage,” said Meurant.
For operational risk, SWIFT provides control, security, resilience and prevention. SWIFT is used by banks on a global basis with the assumption that there is no risk of a breach in the SWIFT network. And there’s only one system that a corporate needs to maintain and train its staff on. Finally, SWIFT is independent from all banks’ systems.
With regards to standards, Meurant is a strong believer in ISO 20022, a toolkit for the development of XML financial messages. “I believe that the richness of the standards will really help in getting additional information back to corporates and to their banks,” he said. “The richness of ISO 20022 is also its weakness: we must implement it in a consistent way. If you start implementing ISO 20022 in a different way with all your banks, it’s going to be chaos.” SWIFT has been working with many banks to set up guidelines as to how to implement ISO 20022 in the corporate-to-bank space. Meurant appealed to corporates looking to implement an ISO 20022 programme, be it on SWIFT or not, to get in touch with SWIFT to make sure that corporates get the standards right.
Finally, SWIFT has launched a new initiative called electronic bank account management (eBAM). eBAM aims to standardise the process of account opening, account closing and mandate management. The purpose is to enable straight-through processing (STP), thereby reducing commercial risk, and also increase the speed in opening bank accounts.
The whole marketplace is moving to a situation that holds many new opportunities for corporates. First, internationally, there is greater regulatory oversight and corporates have to keep a closer eye on risk management, the workflow of payments, calculations, etc. At the same time, in Europe, the single euro payments area (SEPA) operationally means one method of payment, one format, for example XML, and opens up the possibility of reconciliation between payments and invoices. This vision of ‘one’ is expanding internationally beyond Europe because corporates have to integrate different subsidiaries and processes in many countries for compliance, optimisation, cost reduction, etc.
Yet things are not changing at the same pace. Some regulations are coming in thick and fast, while SEPA is moving relatively slowly. This means that new opportunities are also opening up at different speeds. In order to best succeed, BNP Paribas offers some advice.
First, for most corporates that have not yet done it, right now there is momentum to build, run and drive forward a change project in payments and treasury, such as projects built on payments factories or optimisation of collections. Some will be more internally focused in order to find out more about what is happening at the subsidiary level, while others will be turned outwards towards the change in the European landscape – changing banks, changing connectivity, etc. Payment and treasury projects can excel in this period of change because treasury can point to a need for more security in its processes.
Second, a treasury has to take full ownership of its cash management project. The treasury project must look to rationalise, gain more control and optimise processes within the corporation. But, of course, this project has to be strongly linked to the ERP system in order to improve connectivity to the bank(s). At BNP Paribas, SAP and SWIFT, we are trying to have an end-to-end vision of payments, optimisation, treasury and reconciliation.
The eBAM project, as explained by SWIFT’s Meurant, is an example of this vision. BNP Paribas offers STP payments’ processes, while account opening and mandates are paper-based. Together as an industry, we have to improve the loan and account management processes. SAP, SWIFT and BNP Paribas are involved with the eBAM project in order to have precise knowledge, such as who has the mandate to do what on which account, quickly and this has to be STP because, fundamentally, it is a security matter.
Yet reconciliation between invoice and payments, which is a huge subject that we have been talking about for years, is still very difficult. Together we have now built a service model to give reconciliation between payments and advices based on the SEPA framework.
BNP Paribas is also implementing the XML format. Should corporates convert to XML now rather than later? It depends on the corporate and its project, what it’s doing, and how high it rates reporting. Basically, a corporate has to build its project and business case today because over the next five years reconciliation between payments and invoices, as well as STP for payments, collections, account mandates and account management, will improve greatly.
The momentum is building for corporates to choose an open system project in their region with the functionality that they need. SAP, BNP Paribas and SWIFT are preparing for this eventuality – a revolution towards standardisation, reconciliation and diminution of a corporate’s risk and cost.
This article is based on a session during EuroFinance this year with participation from SWIFT, SAP and Alten.