Mid-tier Treasury Technology: the New Web-delivered Opportunity
Mid-tier corporate treasury groups (those with annual revenues between US$1bn and US$10bn) are often tasked with performing a large number of responsibilities with limited resources. Using multiple systems and manual tools is the norm, addressing needs with technology only as permitted by budgetary, time and resource constraints. Despite this, many have done incredibly well, piecing together a combination of spreadsheets, bank solutions, cash management systems and other tools to fulfil treasury’s duties.
For an increasing number of mid-tier treasury groups, however, the expanding role of treasury is finding existing methods stretched and even falling short at times. Since treasury is involved in complex scenarios stemming from global operations, there is an increased need for visibility, optimising global cash and liquidity balances, managing multi-currency transactions, and mitigating interest rate exposures and other risks that come with international responsibilities.
While a variety of options have existed for many years at the upper end of the market, treasury systems have only recently become readily accessible to mid-tier treasury groups. Accounting for much of this access are advances in vendor-hosted solutions (i.e. application service provider (ASP), software-as-as-service (SaaS), web-delivered, or outsourced).
Although web-delivered treasury solutions have existed for a number of years, today’s solutions have evolved significantly from those that were broadly introduced five or six years ago. Far more robust and affordable than their predecessors, these solutions provide both a high degree functionality and excellent security. Driving this progress is an increased focus and significant investment in these solutions by the vendor community, the fruits of which result in better controls, new security standards, greater efficiencies in delivery, and more user flexibility and customisation than ever before.
As a result, web-delivered treasury solutions are experiencing rapid growth. A recent Aite Group survey of mid-tier treasury groups with treasury systems reveals that nearly 45% have adopted ASP solutions. Further, users are from firms of all sizes and industries and include such companies as Intercontinental Hotels, PSA Peugeot Citroen, FiberWeb, Superior Energy Services, Omnicom Group and Liz Claiborne.
Despite the benefits of web-delivered solutions, more than one-third of mid-tier organisations do not own treasury solutions at all. Further, conversations with practitioners indicated some own licensed solutions that are not up-to-date with the latest versions or, in one case, are not even being used. Because of this, the Aite Group believes that 50% or more of mid-tier treasury groups would benefit from implementing a web-delivered solution.
While the outsourced treasury solution market is experiencing rapid growth, it is important to note that not all web-delivered systems are created equal. Some exist primarily as cash and liquidity management tools, assisting in providing treasury with better visibility into global positions. Bank-offered solutions are a prime example of these tools, meeting several important needs of treasury groups, although falling short of the greater functional requirements of the increasingly complex needs of many mid-tier treasury groups.
Other hosted solutions are much more functionally advanced, offering support ranging from managing interest rate exposures to derivatives and even hedge accounting. These solutions are designed to support more mature mid-tier treasury groups in performing tasks requiring more complexity than a cash management system can provide, but are not so unique or complex as to justify the six or seven-figure purchase of a highly customisable, IT-intensive, licensed solution.
With the varying capabilities of vendor-hosted solutions, mid-tier treasury groups should identify both current and future treasury needs, and evaluate multiple solutions to determine the best fit.
Perception plays a significant role in whether or not a treasury group turns to technology for assistance in performing their daily functions. Unfortunately, Aite Group research finds that many mid-tier treasury perceptions regarding vendor-hosted technology and its relationship to key decision criteria are often out-dated or inaccurate. The following are two of a number of examples the Aite Group identified in its research where treasury perceptions of vendor-hosted technology differ from reality.
Identifying the specific costs of any technology solution will always prove a difficult task, as each solution and its implementation has a unique set of costs, varying by company. Factors such as the type of solution a treasury group selects, which modules are implemented and the number of users create a difficult scenario for an apples-to-apples comparison. Despite this, looking at recent changes in the treasury technology market provides insight into a general trend among treasury solutions: increased price accessibility to mid-tier treasury groups.
Primary indicators of this accessibility are the growth of, and advance in, the technology offered by vendor-hosted solutions. Nearly every treasury management solution vendor now offers a hosted solution, especially for those solutions targeting the small to mid-tier treasury market. Historically, however, vendor-hosted solutions for the mid-tier have emphasised primarily cash and liquidity management rather than the full scope of treasury’s increasing responsibility. Several of today’s solutions are different, expanding much deeper into the growing needs of mid-tier treasury.
The reason these solutions have become the primary offering to mid-tier treasury groups is that vendors are able to achieve robust economies of scale by spreading the costs among multiple clients. Instead of a user-licensed model, in which the customer purchases a dedicated server and owns the software, a web-based offering allows multiple clients to share the same server and software, much like a financial institution’s online banking platform. Because of this, solutions can be quite affordable for the mid-tier.
Another huge benefit web-based solutions offer is in lower up-front and implementation costs. Because a company adopting an ASP solution is not buying the solution but rather licensing it, the standard method of pricing for an outsourced solution is done in a subscription format. The subscription may be monthly, quarterly or annually, but the objective is to spread costs out over a period of time to reduce the up-front burden.
Up-front implementation costs are reduced, as vendors have designed these solutions to minimise start-up time. Instead of the many months and even years of implementation fees experienced by users of client-hosted solutions, web-systems can be implemented in weeks and months, greatly reducing costs. Additionally, implementation fees may sometimes be incorporated into the subscriptions, minimising the up-front costs to the client by spreading them out over a period of time.
One of treasury’s most critical responsibilities in every task is to protect financial information. Because of this, some mid-tier treasury groups find it hard to believe that an outside provider could do a better job or place as high a value on protecting their information as they can. With the push toward outsourced solutions, however, treasury technology vendors have taken considerable steps to mitigate these fears.
Among one of the most basic ways to look at the importance of client data security to vendors is that the very existence of both web-delivered solutions and the vendors offering them depend on protecting this information. Were there to be a single breach resulting in an exposure for a single client, it could drive the market to lose significant levels of confidence in the vendor, as well as the technology as a whole. Because of this, there is little the vendor community emphasises more than the security of its client data.
Self-preservation alone, however, does little to instil confidence among mid-tier treasury groups, so it is essential to look at what the actual exposures are and how vendors have responded.
Somewhat surprisingly, the type of information contained in a corporate treasury system does not offer the criminal market as much value as some might think. It is important to protect bank account numbers, cash balances and other elements of financial information. Even so, this information is not nearly as simple for a crook to use as personal information such as a name, address and credit card number.
Corporate financial transactions have numerous safeguards that are not as common in the retail space. Policies requiring dual authorisation for payment transactions, bank products such as positive pay and technology safeguards like random-number generation cards all serve to protect an organisation’s assets. Because of this, having financial and bank account information does not enable an outsider to translate this into a big payday.
Furthermore, with all these safeguards, converting the information contained within a treasury system into currency requires not only significant effort, but often requires inside co-operation. This is evidenced in a 2006 FBI financial crimes report finding more than 80% of corporate fraud is conducted with the collusion of an employee. With such a staggering amount of corporate fraud being conducted in co-operation with a company’s own employees, it appears outsourcing treasury data isn’t as risky as it may seem.
Recognising the internal fraud risk, recent developments over the last few years make a strong case that it is actually safer to outsource data with a vendor than it is to maintain security internally. Two primary advances drive this argument: the security supporting outsourced solutions, and recently developed industry standards.
Each vendor protects information in a different way. Some have built their own infrastructure and host the solution themselves, while others partner with well-established hosting providers whose primary focus is to secure hosted solutions. In either case, data is extremely well protected, with only a handful of individuals even having access to the rooms where the servers containing the data are located. Further, these rooms often used advanced security features – such as biometric scanners – to gain access, recording each entrance and exit to the room. It is hard to imagine any company placing more security around protecting its financial information than these vendors do.
Technically advanced security is helpful; however, as much of the information is shared during a sales process, some concern as to its validity exists. Because of this, SAS 70 type II audits can provide an industry standard. These audits provide industry standards by evaluating controls that have been in place over a specified period of time, rather than at a single, static point in time. Included is both the design and operation of the controls, but also the effectiveness of the controls over the defined period. Audits are typically performed annually. For corporations, because these audits evaluate controls over a period of time, they are able to be assured that the vendor is consistent in maintaining its security.
Treasury technology has for years empowered treasury groups to be more strategic by freeing-up time spent on manual processes, centralising information, and increasing controls among other benefits. Unfortunately, for many organisations these benefits were out of reach due to cost, control and other related concerns. Today, with the robust functional capabilities and the significant flexibility available, web-delivered treasury solutions create an opportunity for all treasury groups to access these and the many other benefits of treasury technology.