Treasury Outsourcing in New Zealand
Given its geographical location, the New Zealand economy is very dependent on exporting, predominantly agricultural, for its economic survival. Equally, the country manufactures very little and so relies on the importation of a large amount of goods, from TVs to cars. At the same time, many New Zealand companies carry debt levels that require active management to smooth the vagaries of the volatile interest rate markets. Because of this, New Zealand companies have had a lot of exposure in managing treasury risks and are reasonably knowledgeable in how to approach it.
Contributing to this, the New Zealand dollar is one of the most volatile of the actively traded currencies in the world and this has meant that New Zealand treasury risk managers have had actively to manage the currency risk to protect their bottom line profitability. However, 90% of New Zealand companies have 20 employees or fewer, where there isn’t the luxury of having a treasurer solely to focus on these risks. This often means that the chief financial officer or the financial controller is the one who needs the expertise to manage these risks.
At the same time, we have also seen larger organisations who, for one reason or another, have not retained the in-house treasury expertise they might have had 10 to 15 years ago. This is partly due to the consolidation of companies as the head offices move to Australia or Asia, with treasuries being managed more centrally. Also, there has been a downgrading of the importance of treasury within an organisation, due to both cost cutting and the access to treasury advisory companies, allowing an almost complete outsourcing of the risk management role.
The market for treasury advisory services is reasonably mature in New Zealand, with most large organisations using an outside treasury adviser to assist in risk management, as well as undertaking one-off type work such as establishing treasury management policies.
While this trend of downgrading the treasurers’ role is continuing, the opposite is occurring when it comes to the controls and compliance around the treasury area.
There are a number of reasons for this. One is that there is access to better and cheaper software systems than there has been previously, especially through application service provider (ASP)-delivered solutions. Secondly the world has changed in recent times and boards of directors are demanding more information and better controls around the area of treasury risk management. This, coupled with the regulators’ drive towards better controls and compliance around financial instruments, has meant that the focus is just as much on the controls as it is with risk management itself.
This has been partly assisted by the sometimes onerous requirements for hedge accounting under the International Financial Reporting Standards (IFRS), which has pushed some to take a more passive approach to hedging. This has meant that risk management is more mechanical but the requirement to record and measure is greater.
The dilemma for organisations has been how to resource these areas of control and compliance when there is a lack of treasury expertise in this area and organisations are unwilling to increase the head count, especially given the current economic environment.
Part of this problem has been solved by the introduction of more affordable treasury management systems, which have assisted with more advanced reporting, increased controls and helped with the hedge accounting process.
This has predominantly been through the ASP-delivered solutions whereby the client leases the software as opposed to having an owned in-house solution. For many years New Zealand companies used spreadsheets to record and report their treasury exposures and hedges. While spreadsheets remain a flexible and cheap alternative, the introduction of web-delivered treasury management systems made the move away from spreadsheets easier. The introduction of hedge accounting and the requirement to provide hedge effectiveness testing also pushed many over the edge as these functions are difficult to replicate using spreadsheets.
The treasury management systems give access to real-time valuations of financial instruments and more sophisticated reporting, as well as increasing controls. Having audibility of the actions within a treasury management system is one area which gives auditors more comfort, as are features such as automatic emailing of confirmations to both the counterparty and the person carrying out the control function.
The use of ASP-delivered treasury management systems was the last cog in the process that has allowed the outsourcing of these roles to become a viable alternative. In common with most countries, the outsourcing of IT roles is common in New Zealand. Over the past five years it has become more popular in other areas, one of the most visible being outsourcing of call centres in places such as India.
The outsourcing of treasury administration, reporting and processing is now an accepted way of managing a treasury function in New Zealand. ETOS is an outsourcing provider in New Zealand. Its business model is built around providing treasury administration services, often in tandem with accessing the clients’ treasury management system. This may be by remotely accessing the clients system in their own IT environment or, more commonly, by the use of an ASP-delivered treasury system.
The company’s first client, eight years ago, was Meridian Energy, the largest state-owned electricity generator in New Zealand using both hydro and wind power. It was formed from the break-up of the Electricity Corporation of NZ into three electricity generators in 1999.
From a treasury perspective, Meridian Energy has substantial debt requirements, including funding through a US Private Placement programme and hedging through cross currency interest rate swaps, as well as significant foreign exchange (FX) exposures for the purchase of capital items such as wind turbines.
In 1999, as a new organisation, Meridian Energy had the choice of establishing its own treasury department or going down the outsourcing path. It chose the latter, employing a full-time treasurer but outsourcing the middle- and back-office treasury roles
The initial contract was given to a domestic bank, Westpac, which had plans to develop this business. However, when the contract came up for renewal two years later, Meridian Energy chose ETOS to provide these services. Eight years later, ETOS is still providing these services, albeit in a wider role than it was originally mandated to do.
The treasury roles that are outsourced by Meridian Energy include:
Originally, Meridian Energy chose to outsource its treasury operations as it didn’t want the costs associated with setting up its own treasury. In the early stages, the debt and FX requirements were relatively small. Over the years, the debt has doubled in size to more than NZ$1.2bn, while the FX requirements have increased as the company branches out into areas such as wind farm development.
The company’s commitment to treasury outsourcing remains strong. As group treasurer, Linda Robertson, says: “While the Meridian ETOS relationship is an outsourcing arrangement, the relationship is such that I feel they are definitely part of the wider Meridian team.” Meridian Energy might have been one of the first to outsource its treasury middle- and back-office functions but many in New Zealand have followed, including a number of top 50 companies.
There are a number of reasons for this and New Zealand may not be unique in this regard. Corporate treasury management is a dynamic industry; one only has to look at the introduction of IFRS to see that treasury risk management is not the same today as it was five years ago. Yet, at the same time, there has been a downgrading of its importance in terms of having a full-time treasury department carrying out the management of these risks and a reducing pool of treasury professionals to call on. More commonly, these roles are being spread among different members of the finance team. However, as the importance of the role is being downgraded, the need for knowledge in the area is increasing – yet access to this skillset is becoming more difficult.
These are perfect conditions for an outsourcing model to work, whereby access to as much or as little treasury expertise can be obtained as necessary, control and compliance areas can be ticked off and the institutional knowledge remains with the client, when it could otherwise walk out of the door with each resignation. In some cases, ETOS has been the only constant within a finance department for the past nine years.
Treasury management systems are a good example of where the outsourcing of the management of these systems enables the continuity of knowledge to be retained for an organisation, without it being within the organisation. This is a further extension of software-as-a-service (SaaS).
The current environment has brought a closer focus on costs but at the same time an equal interest in the controls and compliance surrounding the treasury area. In New Zealand, a viable solution to this is being found in the outsourcing of roles that might normally be done in-house. For some, it is a mind shift to have these areas looked after by someone other than an employee of the company. However, the success of treasury outsourcing in New Zealand shows that this view is becoming more the exception than the rule.