Corporate TreasuryCentralisationCentralisation OutsourcingWhat are treasury management services?

What are treasury management services?

A deep dive into outsourcing treasury management services and points to be considered while selecting treasury management service providers

In today’s business world, the outsourcing of treasury functions is an increasing trend. Whether it is liquidity management, payments and FX, receivables management, trade, netting, tax management, bank-fee reconcilement or any other treasury task, the concept of treasury outsourcing is rapidly growing.

Outsourced functions allow finance teams to reduce operating expenses, while providing access to the latest and best treasury applications and TMS for managing the outsourced function.

One of the most overlooked benefits of treasury outsourcing is the expertise of the operators that accompany the outsourced service. A quality outsourcing provider is staffed by treasury professionals – people who understand the goals and demands of the organisation. Moreover, outsourcing staff have taken an additional step: they have become an expert in one area of treasury.

Treasury outsourcing becomes even more common when the organisation isn’t big enough to have its own internal treasurer or when the treasury team doesn’t have time to perform all their treasury management roles. In such a case, treasury outsourcing is a better option since an external vendor will bring more efficiency and cost-effectiveness.

But most corporate treasurers will agree that treasury outsourcing can be complex. There can be several apprehensions: How could I possibly entrust the financial heart of my business to strangers? How should we tweak this system to suit our unique business processes? How might we interface with other systems? And how can we ensure that our treasury experts’ competencies are still top notch when it’s time for an upgrade?

Managed treasury (or outsourcing) works very well for some. Some of the misnomers of the past have been dispelled – the company retains decision making, and customisation rather than standardisation is the name of the game. Here is a deep dive into outsourcing of treasury management services.

History drives the current models of outsourcing treasury management services

The outsourcing of treasury services was originally established at a time of significant treasury centralisation, the development of global financial service centres and the establishment of international and regional treasury centres in the Americas, Europe, Middle East and Africa (EMEA), and Asia. In parallel, the rapid development of treasury and banking technology provided a technology platform capable of supporting treasury centralisation in specific locations.

In the current climate there are two outsourcing models: one where an integral part of the treasury process is outsourced and the other where there is a ring-fenced reason for doing so.

Ring-fenced services relate to treasury activities that operate on a standalone basis, such as inter-company netting and inter-company administration. Netting easily lends itself to outsourcing, particularly where internal resources are stretched. Inter-company loan administration is often established in jurisdictions in favourable tax regimes and, subject to meeting tax and regulatory substance requirements, also lends itself easily to outsourcing, particularly where the company has no presence or expertise in the jurisdiction.

The model for outsourcing part of the treasury process is difficult to define as it moulds and modularises to meet specific requirements. Two common models, however, are:

  • A full off-the-shelf suite of managed treasury solution: the provision of front, back and middle office treasury services and/or a state-of-the art technology solution customised to meet a company’s specific needs.
  • Back and middle office services: where the company’s in-house treasury runs its own front office treasury management activities in-house, while using the outsourced service provider’s treasury technology infrastructure and for treasury back and middle office services.

A case for outsourcing treasury management services

Treasury centralisation and outsourcing are available to treasurers around the world. With increasing economic uncertainty and decline in risk appetite, many treasury teams are actively investigating outsourcing solutions to both enhance existing treasury business models and create value for shareholders.

Here are the reasons why outsourcing of treasury management services is being considered by the treasurers:

Cost: Installing a cost-effective professional treasury with all necessary systems can be difficult. Corporate treasurers cannot justify the level of resources required to provide a best practise treasury control environment.

Technology: Outsourcing avoids the expensive investment in treasury technology and infrastructure. There is also a significant cost and effort required in retaining the technology resource expertise to maintain and operate the technology platform. In all likelihood, any organisation that has already invested heavily in a treasury management system (TMS) is less likely to consider the benefits of outsourcing, but conversely it is a real alternative for an organisation with a technology need or with legacy systems.

Resources: For certain types and sizes of organisations, attracting and retaining expert professional staff can be costly and problematic, and a back and middle office service can work in this circumstance.

Control: For organisations where there are control gaps, outsourcing part of the process such as the back office, immediately contributes to having a sound corporate control framework.

Set-up: In a situation where there is a need to establish treasury capability quickly, for example in the case of a merger or divestment, outsourcing lends itself to a quick implementation timeframe since the technology infrastructure and resources are already in place.

Outsourced treasury management services

Outsourced treasury management services help corporate treasurers in achieving tactical and strategic goals. Whether their most pressing issue involves improving core treasury processes, developing an effective treasury structure, enhancing working capital management, or financing future growth, treasury specialist firms are prepared to help.

These services can be generally applied to organisations of all sizes and complexities across geographies and sectors.

Here is a list of treasury management services offered by advisory and consulting firms:

Setting up a treasury function: Treasury management services experts can design and implement a treasury management system which can result in reduced borrowing, better risk control and hedging, and a reduction in banking transaction costs.

Treasury consulting: For these services, the team of external treasury consultants work directly with the organisation to advise on treasury matters, develop strategies for financial risk management, liquidity and cash management, and implement treasury operations and infrastructure.

Transaction-related treasury advice: The external treasury advisor helps in identifying and managing financial risks appropriately in a financial advisory transaction is often critical to a successful outcome. The advisors can also assist:

  • Buyers, for example advising on target currency exposures, potential impact on valuation, and possible methods to protect against currency exposure during transactions, particularly between exchange and completion
  • Post-Acquisition, either to establish or improve treasury operations, or to integrate two existing treasury teams
  • Companies that are refinancing debt
  • Businesses that are experiencing restructuring challenges, for example through improving cash management, and selecting and implementing appropriate interest rate hedges

These treasury management services could also be extended to support Capital Markets work, primarily in the context of the working capital statement and assessing group funding.

Treasury optimisation: The treasury management service providers will help to identify where the organisation’s treasury function falls on the treasury maturity curve—specifically whether the current state of the treasury team is fragmented, controlled, or optimised. They can define the organisation’s desired target state and identify areas for optimisation by developing a plan to achieve the target state—including initial resource requirement estimates and a view on preferred technology enablers.

Payments and FX: Payments and FX capabilities of treasury management services experts can optimise the organisation’s cross-currency treasury potential through global formatting guides that provide up-to-date requirements to facilitate properly formatted payments, flexibility to select payment types and initiation channels and reporting mechanisms for visibility into balances and FX exposure.

FX risk management: Foreign exchange risk is the most common form of risk managed by treasurers. These services include identifying the risk by gathering underlying exposures from cash flow forecasts, analysing the risk by determine Value At Risk or other metrics of FX exposures, treating the risk with hedges with forwards (or options and combined strategies) and monitoring through daily mark-to-market to ensure that hedging works as intended and risk limits are not exceeded.

Liquidity management: All treasurers know that cash is king, and they need solutions to enhance the liquidity and to optimise working capital. Liquidity management services help treasury teams tackles cross-border liquidity challenges to help optimise cash flow and lower risk by focusing on process automation and custom structures.

Receivables management: These services can provide key capabilities at each step of the receivables process and works in conjunction with the treasury team’s internal systems to automate accounts receivable, reduce Days Sales Outstanding (DSO) and improve your working capital.

Digital treasury services: Aeric Cohen of PwC says: “A ‘digital treasury ecosystem’, where the CFO or treasurer makes real-time financial decisions on their tablets, is not far beyond the reach of currently available technology. In such an ecosystem, there is no direct reliance on banking partners or the company’s broader organisation – just an executive and an interactive dashboard powered by interconnected digital technologies.” Treasury management services from vendors offer digital suite of channels across payments, reporting, data and research for end-to-end visibility.

Extended services: A few treasury services management companies provide extended, non-core services as well – like treasury talent management. Organisations availing such services can expect a focused approach on the treasury talent market. Other extended services offered are:

  • Treasury research
  • Industry benchmark study
  • Treasury management services to businesses that are experiencing restructuring challenges
  • Advisory services post-acquisition, either to establish or improve treasury operations, or to integrate two existing treasury teams
  • Treasury consulting services to companies that are refinancing debt

Selecting treasury management services

According to EY’s Treasury management systems overview, the following questions need to be considered while selecting treasury management services

Company information

  1. Company history
  2. Headquarters location
  3. Other representative offices (if applicable)

System information

  1. System name (product)
  2. Year the first version of system launched
  3. Non-core (TMS) value added products and services (e.g., hosting services, middleware solutions)
  4. Languages of support

General system and solution information

  1. A brief description of the product
  2. Implementation approach and methodology
  3. Current version of the system, and what year was it released
  4. Development strategy (e.g., in-house vs. outsourced)
  5. Release policy and frequency
  6. Number of releases per year. Distinguish between major (functionality) and minor releases. Do all (minor) bug fixes require a new release
  7. Average time required to upgrade
  8. A list of functionalities delivered as part of the core solution
  9. Internal or external middleware required for integration
  10. Supported third party report writers

Most international banks offer treasury management services. In terms of non-banking treasury management services vendors, Bobsguide has collated the following list of the market’s leading treasury management service providers, breaking down what they do and why they stand apart from the competition:

  1. SAP S/4HANA Finance
  2. Oracle Treasury
  3. ABM Cashflow
  4. CAPIX
  5. Treasury Line
  6. FIS
  7. Kyriba
  8. AccessPay’s BankSense
  9. Salmon Treasurer
  10. Reval

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