Why You Should Eliminate Spreadsheets in Guarantee Management
A global recession affects multinational exporters in many ways but this article focuses on the processes related to managing guarantees. In my opinion guarantees have traditionally fallen into the background but their significance becomes greater as customers are increasingly eager to safeguard their investments. Even though the total volume of business may decline, the number of guarantees may well be on the rise. The tough environment highlights the importance of continuous risk management, which in turn requires all liability data to be maintained constantly accurate and available. Today, treasurers and trade finance directors receive frequent calls from concerned top management who demand to see the latest figures on the corporation’s financial position. How can you deliver this if your guarantee information is spread out in binders across the world? As if the external pressure was not causing enough challenges, cost-cutting translates to job-cutting, hence the guarantee process must be executed with less resources in the headquarters as well as in the operating business units.
Exporters manage their guarantees either centrally or in a decentralised way. In the centralised model, the trade finance department functions as a service centre that receives applications for guarantees from business units, followed by attachments via e-mail or fax. The service centre executes guarantees with the bank based on these applications. If the filing of applications and issued guarantees in the service centre is purely spreadsheet based, the process is highly manual and prone to errors. Also the essential documents related to the guarantees must be carefully stored but kept available to both the service centre and the business unit.
A decentralised guarantee model allows the business units to interact directly with their local banks to acquire their guarantees and maintain the data locally. They must periodically (monthly or quarterly) deliver liability status information to the corporate trade finance department. However, typically it is the responsibility of the trade finance department to set up limits with banks and track their usage, as well as consolidate global guarantee reports for audit and management review. This is a huge responsibility without real time access to the guarantee data, not to mention the laborious effort to consolidate the reports from various spreadsheets. With so much manual work to do, it is not a surprise if the data model gets minimised and some of the reporting detail is compromised. Spreadsheet based reporting is also somewhat unreliable due to the lack of audit trail capabilities.
Last year, Exidio conducted a study on how European exporters have organised guarantee management and what are the biggest hurdles for being successful at it. We interviewed individuals responsible for trade finance at 29 of Europe’s the largest export businesses. Only 10% of the respondents currently use a commercial tool for automating the process – however most say they have created in-house solutions around spreadsheets and local databases. These in-house solutions rarely offer an interface for the business unit user: four out of five exporters receive guarantee applications from business units via e-mail, phone or fax. Here are some of the comments received during the interviews:
While over 60% of the interviewed corporations have to produce monthly or even weekly management reports on liabilities, it is surprising that only 25% say they experience difficulties with the process. Is it because we are too used to the old ways and too busy to develop?
Regardless of tools used, the most time-consuming task is verifying the guarantee wording and customising it to accommodate each bank’s requirements. I believe this was typically not seen as a problem, but rather as a built-in feature of the process. But improving the quality of work instructions and making for example wording samples available within the tools used can save a lot of time throughout the process. This can be beneficial both within the organisation and when dealing with your banks and trading partners.
Modern technology offers fantastic possibilities for collection, management and accessibility of data so why not use it?
A company with centrally managed guarantees should automate the entire process with a tool that provides an application interface for business unit users who can also submit any required attachments electronically with the application. In a decentralised model, the trade finance department should receive immediate reports on each new or modified guarantee. This would be much to ask without a tool which not only makes such reporting easy but also provides added value for the business unit – in the form of an on-line database of their liabilities. Regardless of the overall process model, a minimum requirement from a trade finance director who wants to stay on top of the global liabilities is a centralised, real time database containing details of each and every guarantee with on-demand report generating options.
Exporters should bring guarantee management up to par with the rest of the financial risk management in order to respond to the demands brought on by the current financial climate. Modern guarantee management is achievable with minor investment in process guidelines and a specialised database tool. Some banks have already identified the topic as an opportunity for customer relationship building and offer such tools to their corporate clients.