Rationalising Regional Treasury Functions in Uncertain Times

For years, there has been unwavering agreement among treasury and finance professionals on the benefits of treasury and cash management centralisation for multinational companies (MNCs). Despite this consensus, many organisations in the Asia-Pacific region have yet to realise their goals of operational and functional rationalisation. Those that undertake to do so find that the diverse factors influencing their ability to restructure treasury functions regionally have changed remarkably. While there is a range of familiar root causes, these have been further exacerbated by the effects of a second wave of global economic uncertainty coupled with shifting organisational priorities around how to achieve operational objectives.

In the face of the changing drivers and evolving barriers to rationalise both regional and local treasury functions, companies must meet the challenges of first setting their priorities for treasury reorganisation then reconciling best practice models with the new realities of doing business in uncertain times.

The Changing Face of Treasury

Following the economic crisis that gripped global financial markets in 2008, MNCs have been forced to closely examine their corporate governance and financial risk management policies. Their concern has been to minimise the impact of economic instability on access to funding, liquidity management, commodity prices and interest rate volatility and perhaps most importantly at the time, financial counterparty risk.

In tandem with the rising cost of capital and increased pressures on cash and working capital flows, treasurers’ responsibilities and strategic role have been transformed significantly. Their unprecedented access to boardrooms is just one illustration of this. They have also been tasked with creating strategies to manage areas that will continue to be critical to organisational performance, such as:

• Working capital: eliminating unproductive working capital.
• Liquidity management: ensuring visibility and control of cash positions.
• Access to funding: negotiating global funding lines with relationship banks.
• Counterparty risk management: rating agencies and beyond.
• Sovereign difficulties and associated regulatory uncertainty.
• Revision and application of improved corporate governance and policy control.

Many treasurers, however, feel that their access to both the investment capital and project resources needed to create lasting solutions in these areas have been hampered by the fundamental impact of the economic downturn on their organisation’s bottom line.

Furthermore, the more recent economic events around the globe resulting from the eurozone debt crisis have unleashed fresh challenges. As the spectre of financial turmoil looms large once again, the spotlight is on treasury and finance functions to determine which corporate actions will result in greater certainty and ensure the financial stability of their organisations heading into the second period of economic turmoil within four years.

This renewed uncertainty has forced treasurers everywhere to question whether strategies implemented in the years following the global financial crisis (GFC) have been effective. They must weigh the extent to which the measures taken have minimised the impact of the financial crisis and how the following factors affect their success in developing a more closely regulated treasury environment:

• Volatile global markets and increasing cost of capital.
• Working capital support and allocation of ancillary business to banking partners.
• Board level focus on treasury, cash flow and counterparty risk management.
• Focus on bank diversification whilst maintaining relationship strength.

Perhaps most importantly in the current economic environment, tough times present opportunities for treasurers to rethink the fundamentals of their banking relationships. Particularly, as access to funding becomes increasingly scarce, the correlation between bank funding and allocation of ancillary business will become more apparent than ever before. This has only been accentuated as banks move to satisfy capital adequacy requirements under Basel III. A treasurer’s primary concern in this regard will be to identify banks with a sound capital base that are willing to extend working capital facilities to clients despite global uncertainty.

Key Elements of Regional Treasury Rationalisation

Rationalisation can mean vastly different things dependent on a range of organisational factors; however, the overarching theme of rationalisation has long been placed at the forefront of organisational objectives. To appreciate why this is so it is important that organisations operating in multiple countries and regions understand the inter-dependence between the following key variables:

• Organisational goals for rationalisation.
• Underlying drivers that influence organisations to rationalise their treasury and finance structures.
• Business options that organisations can target for rationalisation.
• Factors that limit the success of rationalisation.
• New paradigm in banking partner selection.

Goals
Organisational goals for rationalisation are anchored in a bottom-line strategy of reducing costs and risks and increasing operational effectiveness and, therefore, usually focus on:

• Increasing global and regional visibility of liquidity positions across multiple countries and multiple banks.
• Raising operational efficiency through economies of scale.
• Leveraging technology investments.
• Improving corporate governance and control.
• Standardising risk management methodologies and investment policies.

Drivers
Following the GFC, organisations were quick to realise that they are governed by a wide variety of economic drivers that affect their performance and, ultimately, determine their success. The following factors are key in driving treasury rationalisation:

• Increased cost of capital, which drives a search for cost-cutting measures, for example, process streamlining.
• Need for more accurate information on liquidity positions, which drives a search for better oversight and visibility of cash.
• Ensuring adequate access to working capital facilities from banking partners either locally, regionally or globally.
• Need to better manage risk, for example, by controlling cash flow through payment centralisation.
• Technology advances that enable more centralised visibility and control, for example, enterprise resource planning (ERP) and treasury management system (TMS) platforms.

Business options
The rationalisation of treasury organisations can be accomplished in a variety of ways and to a variety of degrees, depending on how a corporate wishes to target its business segments. The business options may include rationalising according to:

• Geographic bases such as region or country.
• Product line or business division.
• Customer type such as corporate or consumer, wholesale or retail.
• Business function such as using vehicles like shared service centres and payment factories.

Whether the focus is regional or global, the rationalisation options chosen must ultimately be tailored not only to the company’s industry, but also to its core business strategy, its risk appetite, its culture and other defining characteristics.

Factors that limit
While there has been a steady increase in the number of organisations that are achieving rationalisation, the following are the traditional factors that limit the success of regional rationalisation:

• Legacy banking relationships and technology platforms taken on through acquisitions, which create integration challenges.
• Decentralised approaches to bank relationship management, whereby decisions are determined at a domestic in-country or business unit level.
• Regulatory controls, such as fiscal and currency restrictions, may slow a treasury functions’ rationalisation efforts with extra effort spent on compliance.
• Companies’ cultural barriers, such as a resistance to change or fear of loss of control, can result in a lack of commitment to rationalisation.

The New Paradigm of Banking Partner Selection

The final element is an understanding of the new paradigm of banking partner selection, its evolution and its current challenges.

In past economically robust periods, MNCs undertaking regional rationalisation sought the ‘nirvana’ of consolidating all banking arrangements to a single provider, globally or regionally. The perceived advantage was that having a close and exclusive relationship leads a company to optimal performance.

While rarely achievable, there is some logic in having a single bank. Notwithstanding, the disadvantages have become much more pronounced in the new era, including:

• Risks occur when a corporate is refused funding due to its relationship ‘house’ bank’s temporary liquidity shortage.
• Technological entrenchment dictating that considerable transition risk exists should sole providers’ services become obsolete and dictate need for change in banking partners.
• Deficiencies in a primary providers’ regional or global branch network in emerging or restricted markets.

In Asia-Pacific, for example, despite international banks’ ever-growing geographical footprint and product capabilities, choosing a single provider is still challenging. This is due to various factors that remain as relevant today as they have been in the past, and include:

• Regulation/protectionism.
• Local market practices and local bank domination.
• Geographic diversity and bank coverage, i.e. domestic and international.
• Developing clearing capabilities.

The treasury strategy of avoiding these and other pitfalls led to the paradigm of bank diversification to mitigate risk. As treasurers now keenly appreciate, there exist a number of banking partners with products addressing various corporate processes, and they can decide whom to entrust with what.

Since the GFC that gripped many of the world’s most respected financial institutions, risk awareness and counterparty diversification quickly became a corporate treasury priority. This resulted in a marked change in the desired number of banking partners on a regional basis. Increasingly, MNCs will not opt to have a single global or even regional transaction banking provider but will mandate two or more banks in each region.

Diversification offers corporates flexibility to leverage the capabilities of each banking partner’s products, solutions and niche geographic strengths to reap the benefits they have targeted. A related trend, though less well known, is for MNCs to have a contingency banking partner or structure in place that is non-operational.

Other diversification models include:

• Appointing two or more banks through a dedicated regional request for proposal (RFP) by awarding a group of countries to each.
• Appointing a global panel of banks (typically three to six) via a global request for information (RFI) then conducting country and sub-regional RFPs with a shortlisted field of banks from within this panel.
• Centralising payments regionally or globally, while appointing collection and/or liquidity banks via one of the two models above.
• Maintaining at least a secondary local bank relationship in China, Japan, Korea and India where international banks are strongly challenged by local players.

More recent economic events and associated reactionary regulatory changes, including Basel III, have caused a further shift in the underlying factors driving diversification. This has created a new paradigm, both in the selection of banking partners, and in the importance of the allocation of ancillary business.

As the scarcity of bank liquidity has increased, banks globally now maintain a heightened desire to increase the return on equity associated with the provision of debt through ancillary ‘cross sell’. As a result, organisations will face unprecedented pressure to sufficiently reward those banks that use their balance sheets to provide their clients with funding support, lest they risk compromising secure, sustainable access to working capital. While this has to some degree always been the case, ancillary business will become more closely tied to provision of funding than ever before.

Treasurers, therefore, must assess various banks’ strengths and how they serve the corporate’s treasury function in its entirety, then distribute the ancillary business appropriately based on utility of the overarching banking relationship. Ultimately, organisations must determine partners not only to address these areas today, but also to build strong reciprocal relationships supported by a strong investment roadmap that can evolve over time.

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