Effective Risk Management Needed for Riding Out the Financial Crisis
Financial industry analysts speaking at BNP Paribas’ 2nd Cash Management University, which attracted around 200 participants, agreed that the world economic forecast for 2009 is looking gloomy and the overcast may continue well into 2010. Eric Vergnaud, head of OECD countries research at BNP Paribas, said that tensions remained high in the money markets, although moderating thanks to the central banks’ measures aiming to provide liquidity and the governments’ initiatives to rescue the banking system. (To read more analysis from the event, go to #gtnFeature(337)#.)
With credit spreads surging, corporate treasurers are looking at a difficult couple of years ahead. Mark Camp of Henderson Global Investors, and a former director at the Institutional Money Market Funds Association (IMMFA), said that many within the industry had likened the situation to going over the top of the trenches in WWI with bullets flying all around: “You are going to get hit, that is for sure – but it may turn out to be just a flesh wound or it could prove to be fatal.”
Risk is key to this changing world, according to Francois Villeroy de Galhau, global head of French retail banking at BNP Paribas, in the opening plenary of the Cash Management University. He explained that there were three ways to be successful in risk management: “First, you must have a long-term approach. The longer term your view is, the better you can master risk. Second, you must have senior management commitment. Third, you must play close attention to the risk and reward balance.”
The BNP Paribas event focused on mitigating different types of risk. The event was comprised of four workshops:
The thread running through the workshops was how to use new processes and infrastructural technology, such as software as a service (SaaS), shared service centres and payment factories, and improved bank communications to develop a premier treasury unit, as illustrated with case studies from Henkel, Xerox, EDF, UPS and SAP.
This workshop focused on what treasurers should look at when trying to create efficiencies through changing their processes and technology and explored the possibility of outsourcing some of the workflows.
Joerg Wiemer, senior vice president and head of global treasury at SAP, examined the role of the treasurer in a changing environment and gave advice on how to become a world-class treasury unit. At SAP, the global treasury unit supports the execution of SAP’s mid-term strategy by acting as a trusted advisor both to the executive board and the lines of business on efficient financial risk and financial asset management. But it also acts as a value-creating service centre to support earnings per share (EPS) growth, establish best practice structures and processes, and safeguard optimal financial flexibility. “Treasury must act as a key partner in creating and executing SAP’s changing business strategy. The speed and magnitude of change in our business is – and will continue to be – significant,” said Wiemer.
SAP’s treasury unit created a global payments factory, for vendor as well as treasury payments, employing the new SWIFTNet SCORE model. Now there are only two payment formats, used by 55 subsidiaries in 43 countries. The unit achieved straight-through processing (STP), and all messages are integrated into SAP treasury/enterprise resource planning (ERP) system, including online tracking workflow for rejected payments. The treasury benefited from business efficiency improvements and compliance and security enhancements. With speed and transparency in its cash flows, SAP can get a real-time global liquidity status report, which effectively reduces counterparty risk. Foreign exchange (FX) risk is mitigated with tailor-made management reporting from Business Objects.
Elisabeth Signès, liquidity management marketing at BNP Paribas Cash Management, tackled the key questions regarding treasury centralisation solutions, such as what level of globalisation is required, what are the legal/tax/regulation limits, and which added-value services are needed? She said that corporates want a treasury centralisation solution to be secure, aid compliance, control processes/STP, enable real time reporting, and reduce financial and operating costs.
Jean Beaufort, executive vice president of customer service and SaaS at Sage, a business software, services and support firm, addressed the concept of outsourcing, specifically using SaaS. He argued that Saas enables to customers to concentrate on their own expertise while other companies supply the competitive applications level.
Beaufort used the example of Xerox, which looked for optimal centralisation in order to give the company a strategic advantage. Outsourcing using a SaaS model, Xerox was able to:
This workshop looked at risk generated by cash management, the benefits of payment factories in terms of risk control, how to implement a secure bank account management solution and how flexible architectures can support resilience in cash management systems.
Peter Dunstan, European treasury manager at UPS Europe, presented the path UPS took in setting up a payments factory. Because UPS grew externally by acquisition, it ended up with a number of accounting systems in the US, Asia and Europe. The main driver for the payments factory was to streamline, gain control, ensure consistent reporting, and be compliant. Wage arbitrage was also a driver, which is why UPS set up its payments factory in Poland where wages are lower than in western Europe.
The first step was to develop an in-house bank and a global treasury management system (TMS). Second step was to migrate to a company-wide ERP system. The payment factory model was made possible as a result of the ERP system implementation.
UPS selected two banks: BNP Paribas and Citi. It chose a-two bank solution as a compromise between not wanting to rely on just one bank but also wanting to consolidate its banking relationships. It opted for EDIFACT because when it was making the decision 18 months ago, XML wasn’t mature. Today, 96% of cash resides within the overlay bank – only 4% of cash is ‘idle’ or stays with each bank.
The payments factory helped UPS reduce its risk in terms of:
On the back of this success, UPS is reviewing the potential to set up payment factories in other regions around the world.
André Casterman, head of SWIFT France, spoke about helping corporates address financial and operational risks. Casterman sees standards as a way to reduce operational risk and costs. For example:
Verena Michel, an IBM architect, discussed how the market forces were driving change in the financial supply chain through an increased need for efficient cash management and payment processes. Key to achieving this are flexible architectures that can be reused, an industrial approach to processes and data, as well as security and resilience across the technology infrastructure.
The introduction of the single euro payments area (SEPA) has driven change across European payments. As part of the Lisbon 2010 Agenda set out by the European Union, the goal is a harmonised payments landscape in order to make cross-border payments, such as credit transfers or direct debits, as simple and low cost as an in-country payment. But can SEPA help to minimise risk?
Holger Reichardt, chief solution architect, business solution architects group at SAP, opened the workshop with a case study of German consumer brands and industrial technologies firm Henkel.
Henkel used the opportunity SEPA presented to harmonise payment processes and data across Europe. The company wanted to, among other things, reduce the number of banking relationships and bank communication systems, as well as harmonise its European SAP landscape. SEPA effectively provoked rationalisation within the organisation.
Henkel was able to reduce the number of banks and bank communication systems. Before moving across to SWIFT, it had 10 banks and eight bank communication systems in 2006; this increased to 16 banks and 14 bank communications in 2007. The firm decreased this complexity – as part of the solution through SWIFT now three banks are live processing FIN and FileAct messages, and two banks are connected and plan to go live by the end of 2008.
Now Henkel has a cash centre and payment factory solution in Dusseldorf, Germany and a shared service centre (SSC) in Bratislava, Slovakia. It has successfully rolled out the harmonised SAP system to central Europe. The payment factory is presently based on SAP standard but with a future evolution towards SEPA ISO 20022 standard.
Martine Goubert, senior adviser at BNP Paribas Cash Management, presented a case study from French energy company EDF. EDF had a centralised treasury, which played the role of an internal bank. It wanted to do a number of things such as: improve credit collection and create a payment factory; fully integrate operations in ERP through internal statements; and to take full responsibility of the supplier/client relationship on the business side. It took a working capital approach with strong involvement in the automation of collections (ie direct debit and télérèglement) in order to replace cheques.
EDF sees itself as an early adopter of SEPA and benefits in several ways, most importantly through a reduction in operational risk. The adoption of the XML ISO 20022 standard fits with the internal bank’s needs through:
EDF believes that SEPA Credit Transfer (SCT) is well adapted to the payment factory model, making the integration of European subsidiaries into the centralised treasury group easier. On the other hand, it views the SEPA Direct Debit (SDD) as a burden because it adds new risks linked to returns, mandate management and consumer behaviour, and also migration costs are difficult to evaluate. Goubert believes that SDD will not start before 2010. “In 2009, all EPC [European Payments Council] banks will be ready, because they must, but if corporates aren’t ready then it will be delayed,” she said.
In the discussion, a treasurer from a major technology company made the point that the industry refuses to face same problems as with EDIFACT, where each bank interpreted and implemented the standard differently so there are many flavours of the same standard.
Günther Gall, executive vice president, head of division, transactions services at Raiffeisen Zentralbank Österreich (RZB), agreed there is a need for real standardisation and argued that the industry needs corporate feedback in order to see what needs changing.
Gall also raised a critical point that comes up repeatedly at financial industry events – the need for an end date for migration to the SEPA instruments. “Banks don’t think they can force corporates to change – for that we need regulation,” he said.
The fourth workshop took an in-depth look at reverse factoring, as well as the benefits of electronic invoicing (e-invoicing).
Chantal Nicolle, global head large multinational corporate, BNP Paribas Factor, explained how factoring converts a firm’s trade assets into cash and leverages the credit worthiness of the company to stretch accounts payables – factoring is asset based funding, not borrowing. Factoring fits closely the ‘real economy’, supports commercial activities, boosts international growth, and converts short-term funding into an unconfirmed medium term facility.
She argued that factoring is the best tool for risk control, looking specifically at:
She said that factoring is easy to implement compared to securitisation or syndicated loans, it can decrease the cost of risk by selecting best quality portfolios and also bring the administration costs down by outsourcing collection services or using receivables balance assignments. However, in the current environment, cost of liquidity and return on capital remain constraints on treasury activities.
E-invoicing is gaining ground across Europe but there are still some fiscal and legal hurdles to overcome, as pointed out by Gwenaëlle Bernier, VAT partner at Fidal Direction Internationale, who also participates as an expert to the EU Commission work on reforming the European e-invoicing legislation.
In the EU, a company may choose from among two or three systems of e-invoicing (depending on the Member State) so that the e-invoice can be treated as an original document for VAT/tax purposes. The tax authorities effectively want two things: to combat VAT fraud and ensure that debt claims (for the amounts of VAT) against the state are real.
But there are problems with the current EU legislation. The lack of harmonisation of the format accepted, even EDI and e-signature are interpreted in 27 different ways, makes it very difficult to implement ‘cheap’ e-invoicing solutions. There is also no uniform legislation of archiving or on e-audits of e-invoicing systems. Some Member States are very flexible in the format because their legislation on e-audit is very strict (e.g. Finland).
Yet the benefits, for both the banks and their customers, are impressive, particularly in terms of STP and cost savings. Peter Sølund, first vice president, head of cash management concepts at Nordea, identified the key reasons for banks to drive for e-invoicing:
Bente Beck Jensen, e-invoice deployment project manager at IBM, explained the specifics of rolling out an e-invoice solution across the Nordic countries, which had an overall high readiness and interest in e-invoicing – for example, the initiative was kick-started in Denmark by a government digital strategy where e-invoicing to government customers became a legal requirement in 2005.
The major problem IBM faced during the implementation was too many XML standards. The lack of commonality leads to:
Jensen concluded that the market place is ready but waiting for “all of us to join forces and work actively towards a common standard”. He said that the banks must show leadership and the responsibility lies with the corporate customers to push for leading country standard solutions.
Effective risk management is topping the agenda for corporate treasurers as they try to cope with the financial crisis and tightening of credit lines. As the two-day Cash Management University came to a close, Raffi Basmadjian, head of group cash management at French telecommunications company Orange, said that the key to minimising risk is improving the sharing of information in a more accurate and timely fashion. “This includes reporting, intraday reporting, FX, interest rate feeds, etc. Right now we don’t have updates every minute – but we feel we might need that at some point. The key is to be organised to manage this type of information flow, then you can do anything,” he said.
Basmadjian laid out his vision for efficient treasury operations – easy access to all banks without worrying about access to a treasury management system (TMS) or the banks’ ebanking systems. He said that in his company they were striving to simplify the information system as much as possible in order to use the workforce for treasury matters – not to solve IT issues. “If I could outsource a part of the IT, for example to a SWIFT bureau, then all the better for me because then less time is spent on managing this and more time is spent on treasury. Right now the issue is that the market is not ready,” he said.