Trends in Cash, Liquidity and Working Capital Management Automation

The treasury function is a changing role and becoming more strategic. Traditional duties are being integrated with new activities that expand the reach of the treasurer across the entire company. However, the current dramatic economic conditions are slowing down what seemed a natural evolution of the treasurer’s role, forcing corporate treasury to take care of more tactical and day-by-day activities.

Among the many matters that fall under the corporate treasurer’s responsibility, the synchronised management of cash, liquidity and working capital are the means by which corporate treasurers can weather the storm that is hitting their company’s business. Treasurers are receiving many calls from the CEO, which compels the treasurer to be constantly gathering news and information from as many sources as possible.

Cost control and reduction (i.e. maintain corporate profit) are the most immediate countermeasures against the threats posed by the current recessive economy. Key to this is that cost cutting must not take away from running the business as usual and innovating, when possible, to keep momentum in the market and win against fierce competition.

The most recognised practice is operating at the organisational level, focusing on the governance structure of cash and liquidity management. More than two-thirds of companies have centralised most of these functions. In fact, centralising the control of cash allocation allows treasurers to better balance the needs of investing liquidity surplus, which flows from healthy units, with the requests for cash demanded by others, more financially exposed, units.

A deeper analysis of the centralised organisational structure shows that what really matters for treasurers is not a pure focus on a fully centralised or decentralised model, rather on one that is best suited to the specifics of the individual business strategy. There are other initiatives, too, on which treasury is focusing to weather through the storm.

Exploiting Existing Technology

A truly valuable technical environment is one that supports a high level of secure ‘hands-free’ straight-through processing (STP). Treasurers can, hence, focus on their professional duties with confidence, rather than having to be constantly diverted into unproductive data processing tasks. One of the key initiatives relates to the adoption and use of standards (e.g. XML ISO 20022). The perspective to use a commonly accepted ISO protocol is attractive to both corporates and banks, who are demanding IT platforms that enable inter-bank and, most importantly, customer-to-bank interoperability.

Another initiative is aimed at making the best use of Excel-based solutions, since spreadsheet-based applications are still in constant use by treasury departments. Instead of relentlessly attempting to replace Excel files with automated enterprise resource planning (ERP)-based applications (previous experiences show the futility of such an effort), savvy treasurers are finding ways that allow the use of flexible spreadsheets to perform calculations and simulations based on inputs downloaded from shared ERP data sets.

Revisiting how the technology already in place is being used can allow treasurers to make significant improvements. Too often, current economic conditions limit IT’s ability to fulfil expectations coming from the business side. Market imperatives, and economic constraints, force organisations to contain and control costs without eliminating or reducing mission-critical activities. Celent believes this trend will continue throughout 2010, with the watchwords being ‘resource exploitation’ and ‘leverage of existing assets’.

This spells out the original and abused ‘return on investment’ (ROI) acronym into the more pertinent ‘return on existing investment’ (ROeI). Enterprise software vendors and professional services solutions will be measured against this new indicator. Because few new investments will be easily approved for organisations that want to improve their IT state, IT organisations must seek ways to leverage and reuse existing assets, while reducing unnecessary waste and redundancies to better and more effectively allocate and use resources (both monetary and human).

Complying with Regulatory Directives

Currently, CFOs and treasurers have realised that the regulatory environment has not proven sufficient to prevent the crisis we are still struggling with. “Stricter rules won’t solve the economic crisis,” said European Union Financial Services Commissioner Charlie McCreevy recently, asserting that change in regulation itself is not going to re-galvanise the world economy.

Even under such circumstances, a harmonised regulatory standard is still desirable. What really counts is not the mere adherence to more or less stringent directives. Rather, attention and effort must be paid to establish a governance structure that ensures compliance, increases transparency and helps answer the questions with regards to how the decisions that are made today in order to get through the current crisis will impact the company’s ability to serve its clients long term.

Compliance to directives demands the ability to better communicate. Reporting becomes a key feature, not only for internal management purposes, but, more significantly, to communicate to external stakeholders. Celent expects, by 2012, that corporates will accelerate the upgrade of technologies for communications, accomplishing global visibility and transparency of information.

Managing New Forms of Risk

There is no doubt that the extremely fluid and variable current market dynamics place this business value area among the highest priorities for corporates, especially in connection with the full adoption of the Basel II Framework among small and mid-size corporations.

Today, treasurers are looking at risk with a new perspective, and several kinds of ‘non-traditional’ risk areas are of particular interest. The most referenced is counterparty risk, which relates to unanswered questions such as: Will the bank be forced into a merger? What businesses at the bank will survive? How will bailouts in other countries impact the banks in those countries with which the corporates do business?

Technology plays a role in supporting the treasurer to ensure the adequacy of the information flow when reporting the risk of exposures that impact on financial statements. The confidence of financial data goes hand-in-hand with the timeliness and reliability of the execution of cash flow transactions. This helps in carefully timing investment maturities with cash flow needs.

A treasury management system (TMS) is a suite of software applications used by treasurers to integrate the operations of their unit with the corporate business results. Of the functionalities provided by a TMS (e.g. cash management, forecasting, debt, investment, FX, and payments), this article concentrates on the ones that better support the treasurer in the tactical duties: cash, liquidity, and working capital management.

The Demand Side – Corporates Focus on Cash, Liquidity, and Working Capital Management

Corporate treasurers are aware that the best source of liquidity is within their own operations. They are looking for solutions to liberate it through the optimisation of working capital. Therefore, corporates are increasingly focusing on sourcing funds internally rather than looking to the outside. In order to accomplish such challenging results, there needs to be greater visibility over cash flow across the organisation.

Our research reveals that the trend to centralise corporate treasury functions leads to use automated systems mainly for cash management (cash pooling, netting and payment factories) and less for financial risk management (back office functions and electronic dealing), where Excel is still reported as the main tool.

We discovered that corporations refrain from investing in innovative technologies until the existing investments have been fully leveraged. Alternatively, they invest in the minimum required to run the business.

These characteristics configure the conditions of a demand-driven market, and Celent has identified the following features and functionalities that innovative solution providers of TMS suites must focus on in order to advance their cash management offerings to demanding treasurers:

• Accelerate payment processing and simplify financial transaction management through automation.
• Store and distribute payments and receivables data, such as remittance and receipt data, to be used for processing payments and share information with payment processing networks.
• Connect over the Internet with cash management banks, other financial institutions, customers and suppliers.
• Centralise and monitor business activity, avoiding the need to consult separate web sites and transfer files manually.
• Forecasting platform: cash flow forecasting is an area in which corporations indicate they want more information on how other companies address some of the challenges. In term of functionalities, a cash forecasting system must be capable of collecting inbound data via the web and aggregate and normalise the forecasts from operating units and subsidiaries around the world.
• Integrate cash management transactions with basic trade management functionalities.
• Manage transactions in a regulated corporate environment. Vendors must be able to provide an interface with online trade execution platforms (e.g., Bloomberg’s BOOM and FXall).
• Embedded service bureau: in the traditional service bureau model, the data exchange across the SWIFT network occurs through a bank or a service provider (e.g., automated clearing house (ACH)). Competition among solution vendors will be based on their ability to partner with a financial institution and offer the added value service of a SWIFT member concentrator gateway, directly incorporated in their solution stack.
• Implementation: in parallel with the important technical skills of knowing how to interconnect disparate systems, and what communication protocols and data records to use, success will reside in the vendor’s ability to deliver service solutions of change management, education and training on new practices and business process improvement.

The Supply Side – Banks and Vendors Must Change Their Delivery Model

While the traditional suppliers of treasury software were banks with their proprietary cash management portals, several factors will change this scenario:

• The credit crisis is dramatically reshaping the balance of power among financial institutions. Cost containment and focus on core business are their top priorities, especially where governments have an ownership stake. Banks will have to outsource many more activities than they ever would have before. Cost cutting and layoffs are hitting hard and technology development units are not being spared.
• The combination of slashing IT staff costs and shrinking execution times will shortly force banks to explain clearly why clients should run their cash, liquidity and working capital management applications on the banks’ portals.
• To consistently reduce IT investments, banks are white labelling treasury solutions developed by third party vendors, and embracing industry standards to benefit from economies of scale. This has the collateral effect of diminishing the competitive differentiation of TMS provided by banks.
• The additional emergence of advanced technology enhancements, namely SOA, and of innovative delivery models (e.g. SaaS) are sidelining the role of banks as the main providers of treasury management solutions to corporate clients.

All these factors will push corporate clients to look for alternative solutions, opening very promising opportunities to software application vendors.

But if the future appears gloomy to financial institutions, TMS solution vendors will not live an easier life either. Today’s clients are guiding change and telling vendors what they want and need. Solutions providers must keep up with marketplace demands, and will be expected to ensure, with proven facts and successful implementations, that the synchronisation of the cut-off times, together with the tight integration between their TMS and the banks’ back office systems, are working perfectly.

The lucrative opportunity for TMS vendors of increased sales volumes can be clouded by their incapacity to reshape their go-to-market strategy. Traditionally focused on selling to banks, they must now revisit their strategy on how to provide solutions to corporate clients. Most likely, banks will have to form closer relationships with vendors to provide customers with the best integrated solutions, and have a wide knowledge of ERP and TMS tools.

Corporate clients will be all demanding more functionality, more service and lower response times. Vendors must show the capability to meet the cash management needs of not only their largest corporate customers, but also of the middle market and small and medium enterprises (SMEs).

The model Celent foresees is one where the bank’s application software partner provides an IT platform that aggregates the bank’s value added services, typically financial in nature, with a significant amount of advisory and consulting.