The Pros and Cons of Treasury Centralisation
This debate over a centralised versus decentralised treasury structure is not a new one. It has long been the source of discussion and frustration for many treasurers and chief financial officers (CFOs). Each structural model offers benefits to the global organisation. Clearly delineating which is superior is a difficult task, and one that requires careful consideration.
As multinational organisations grow, and global footprints expand, the complexity of treasurers’ responsibilities increase and their ability to manage these responsibilities becomes far more difficult. Routine treasury tasks become harder to manage, such as:
Facing these types of significant challenges, it’s not difficult to see why many treasurers have traditionally considered a decentralised model as a potential solution (figure 1).
The decentralised model usually includes a strong global treasury centre as the hub, or treasury headquarters (HQ). This site provides general ground rules to all decentralised operations by way of global policies and guidelines. Generally, the HQ is supported by one or more regional treasury centres, located in key markets throughout the company’s footprint. These centres provide regional treasury expertise and leverage local knowledge of regional banking and financial markets, practices and protocol. As the scale of trade and geographic growth dictates, companies can further enhance this decentralised model with the creation of payment factories and foreign exchange (FX) centres to manage the processing of transactions more affordably.
While the decentralised model solves many of the problems that expansive global treasuries face, this model has its owns challenges. A decentralised treasury structure typically requires more aggregate global treasury personnel than a centralised structure. And the model still presents some challenges to the HQ treasury level in areas of communication and oversight. And, in these difficult economic times, the added costs of redundant staffing, maintenance of multiple treasury sites and systems can be a challenging economic hurdle to overcome.
Because of these issues, many treasurers have moved to a centralised treasury structure (figure 2).
Source: Treasury Strategies
A centralised treasury offers a number of tangible and intangible benefits to the corporation, including:
Transition to a centralised treasury is no easy task. Treasurers should keep in mind several critical success factors for a smooth transition:
Best-in-class technology is a requirement for a centralised global treasury operation:
Treasury technology should be bank-agnostic to ease the transition from one banking partner to another in the event of a bankruptcy or financial crisis.
A global standard enterprise resource planning (ERP) system, while not necessarily a prerequisite, nevertheless will reduce the amount of effort to create interfaces with the new treasury technology needed for centralisation.
Critical to the success of a treasury centralisation effort is the selection of the right banking partners.
Both the centralised and decentralised treasury structures offer advantages and disadvantages. Which design a company chooses will depend on global footprint, available resources, executive commitment, and available technology. Regardless of which centralisation path treasurers select, a successful implementation will hinge on their ability to secure prior senior management buy-in, a well-defined plan, and sufficient resources to implement. Once in place, to remain successful, each structure will require:
With an effective treasury structure and capable resources, treasury can support even the most challenging demands that a global business can present.