Strategic treasury: a question of priorities for Asia’s corporates

Over recent years the discussion around new operating models to improve efficiency and control in the treasury has heated up. This discussion is driven from several sides: the banks looking to sell a new product or solution; vendors pushing a new technology or network service; and journalists struggling to write about the next “big thing”. The only party seemingly missing is the corporations that should actually be implementing them.

As a result there is a lot of noise around centres of excellence (CoEs) – in the form of shared services centres (SSCs), in-house banks (IHBs), and of course many new working capital management and supply chain solutions. Surely all of these are exciting topics and – in theory – they offer tremendous potential, particularly in the current economic environment.

Yet, once one asks where the actual IT investments of corporations in Asia Pacific are really going, one thing becomes quite clear – it’s not CoEs. A 2015 survey published by IDC Financial Insights of Asian chief financial officers (CFOs) drilled deeper into the daily struggles of a corporate treasurer and where CFOs spend their precious IT dollars.

Not surprisingly the survey paints a different picture to what the media noise would indicate. As a matter of fact, a frequent question asked back by many participants was what all the fuss about CoEs is about in the first place. Clearly there is a disconnect between what practitioners are thinking about today and what the suppliers, media and consultants are trying to push down their throat.

Investment priorities

Obviously the centralization of treasury functions across an organisation is nothing new. However, today CFOs face many options of various new operating models and solutions to fundamentally change the way the treasury works.

There is a bunch of so-called Centres of Excellence that seek to centralise and optimise various functions within the treasury. In a nutshell, an SSC seeks to centralise the execution of specific operational activities including treasury and accounts payables (APs) on behalf of other legal entities. Whereas, an IHB de facto serves as a captive bank for an organisation, and delivers high levels of control – including funding and liquidity – and offers functions such as collect and pay on behalf of group subsidiaries. An IHB also is the conduit for centralised foreign exchange (FX) risk management and improved hedging as well as tax efficiency. Or a payment factory, which is a bit of both, combining the operating efficiency of an SSC and the control, consolidated volumes, and cash management benefits of an IHB.

The 2015 Asian CFO survey asked more than 100 CFOs from medium and large corporations across Asia Pacific about their investment priorities for the next three years. Yet despite all the hype around CoEs, one surprising finding was that these actually ranked the lowest on a long list of priorities. In descending order of importance CFOs prioritised investments in cybersecurity; risk management; corporate-to-bank connectivity; upgrades of treasury management systems (TMS); corporate mobility; and analytics to improve working capital management over these Centers of Excellence.

Without a doubt, the fact that these centralisation initiatives made the list in the first place shows that they address some of the critical issues that corporations are facing. But it also means that there is a significant number of more burning issues on a CFO’s agenda at the moment.

Needless to say, there are major differences among the respondents when a more granular segmentation is analysed. Centralised operating models are more important to larger organisations. 88% of the very large corporations (with annual revenue of more than US$5bn) of the survey group regarded centralised operating models as important or very important as well as 78% in the US$1–5bn range. The survey also showed that they play a more important role in Southeast Asia’s export-driven smaller markets with complex multicurrency, cross-border operations – such as Indonesia, Malaysia and Singapore – and in markets with volatile currencies such as India, Indonesia, and Malaysia.

Up to the challenge?

While centralised operations, without a doubt, offer great benefits to an organisation, they will likely fail to deliver the wanted results if the underlying piping is not up to the demands of the job.

One key challenge highlighted in the survey, for instance, was the poor timeliness and accuracy of the cash flow information in many Asian corporations. Only 16% of the respondents have a timely cash position of less than one day; 11% of which in real-time. A further 24% at least make it same-day. This leaves 35% of respondents with a cash position that’s between one and three days old, and a further 25% where the position is more than three days old.

Moreover, the survey found that corporate treasury groups rely on multiple enterprise resource planning (ERPs) for data sources and use multiple solutions, often manually, to address their company’s needs. As a matter of fact, the manual management of treasury operations is a reality and half of the respondents in the survey indicated that between 25% and 50% of their treasury and payment activities involve manual work. A further third stated that as much as 50% to 75% of activities involved manual work.

Now, a strategic approach treasury is definitely an advantage in times of extreme volatility, high counterparty risk and a growing compliance burden. A good starting point for any treasury strategy is to upgrade the piping even to get to a point where one can make informed, strategic decisions based on accurate and timely data.

Centralisation and efficient data management depend on each other and one is not likely to succeed without the other. Also of crucial importance is the level of discipline an organisation applies to how cash flows are managed and tracked across the entire organization. All the technology in the world won’t help if a corporation is not disciplined about tracking its cash flows on a daily basis.