Case Study: Enhancing Financial Control at Swiss Federal Railways

The effects of the 2008 global financial crisis
were felt every bit as acutely in the government sector’s treasuries as they
were in bank and corporate treasuries.

At Swiss Federal Railways
(SBB), a key response in managing the after-effects of the crisis was the
decision in 2009 to simplify and centralise the corporate treasury function.
At that time, bankruptcy was a very real threat to many of Europe’s railway
networks and the prudent course of action for SBB was to improve the control
of treasury operation  and increase transparency levels.

Specifically,
the exercise focused on that most sensitive and critical of treasury
operations, the management of payments. The decision to do so was taken by
SBB’s corporate treasury department, with the support of  the chief
financial officer (CFO). The high level business objective of the ensuing
‘payment project’ was to ensure that all SBB’s commercial, operating and
treasury payments were authorised through one single system, so that more
effective control over our finance operations was demonstrably being
delivered and enforced.

SBB’s Treasury  Business

In the case of SBB’s Payment Project, the catalyst for change was
the steady increase in the size of SBB’s debt portfolio over the course of
several years. This growing problem made SBB’s need to control the
resultant free cash flows increasingly urgent.

SBB was organised in a
relatively decentralised way with the effect that, at the time, a range of
core treasury processes were run quite independently at a divisional level. 
Consequently each distinct division was, in practice, itself performing a
significant number of important treasury operations. These included the
external financing for acquiring new rolling stock, liquidity risk
management, market risk management – and the management of all kinds of
payments. There was effectively no clearly-defined allocation and
organisational segregation of many of these important treasury functions.
Inevitably this resulted in the creation of internal issues, for example
around the division and allocation of responsibility for some treasury
processes such as payments.

It was decided that SBB’s corporate
treasury function would take full, centralised control over all core
treasury functions, including investment administration and cash management
– and the management of payments. An important driver in reaching this
decision was recognition of the long-term risk that a major financial
reorganisation of SBB would become  unavoidable, unless financial control was
effectively and transparently centralised. In practice, the new
organisation needed to assume responsibility for managing a relatively broad
range of financial functions, which also included bank account administration
and cash pool management.

The Situation before the Payment
Project

Before the project got underway, payments processing at
SBB consisted of two different payments systems in operation. One was a
stand-alone payments platform, which only supported payments with a limited
number of Swiss banks. The other was a stand-alone system that was only used
by one SBB operating division. The situation was then examined in greater
detail and was found to be even more complex. For example, part of SBB’s
process involved issuing payment instructions to banks by fax, for those
cases in which there was no electronic banking system in place to manage
payments. This introduced an additional level of complexity and the
potential for error into an already complex set of processes. And finally,
banks’ internet banking tools were being used when they were available,
further complicating matters.

Choosing the Treasury 
Management Technology

At the start of the centralisation
project, SBB treasury was supported by a stand-alone treasury management
system (TMS). The first decision  made was to take advantage of SBB’s SAP
installation, and to roll out SAP’s treasury system solution, ‘TRM’

SBB’s SAP installation was among the largest in Switzerland, and it made
good sense for the Payment Project component of the centralisation project
to make extensive use of the organisation’s ready-made SAP resource pool
and knowledge base, combined with the process standardisation control and
management benefits achievable  through deployment of SAP’s standardised
facilities. This approach combined efficiency with the low operational,
financial and project risk levels associated with the extension of a proven
system solution such as SAP.

This key strategic decision was taken
through a comparative efficiency analysis of a short list of potential
solutions. It was carried out by a team of five experts: a project manager, an
IT executive responsible for financial SAP applications, the head of cash
management, and two cash managers.  

The ultimate driver for
implementing the management of SBB’s payments on SAP was an attempt in 2011
to interconnect a major European bank with the Swiss system. When the
project team discovered that this was not practical, it was clearly time to
identify and implement a new payments solution, which would be mandated to
deliver without exception against all the defined business requirements. 

One important factor in this decision was the size and high
quality of SBB’s SAP support IT team. This sound technical resource
foundation provided us with the necessary level of assurance that we would
enjoy strong and effective support during the SAP payment solution
roll-out process; and this certainly proved to be the case in practice. An
integrated SAP payment solution, using the Hanse Orga payments module as an
SAP add-on, was clearly the most efficient and effective payments solution
available for us out of the possible alternatives. 

Our
implementation needed to achieve best practice standards, and to fulfil all
SBB compliance requirements.  This was best accomplished through designing
and implanting a fully- integrated SAP payment workflow. The SBB SAP
implementation’s flexibility has enabled us to preserve the levels of
complementary decentralised and centralised control that SBB policy requires.
In practice, this means that payments are formally approved in SAP by local
divisional staff, before their release and subsequent transmission to the
bank. The bank account signatures are applied by the treasury team, as a key
element in the imposition of central control. The adoption of this
particular account signatory control workflow comprised a major behavioural
shift for people in SBB’s divisions, where general feeling before the
project had been that bank signatures were a central part of their running
of their businesses. Technically, this shift of signature control is not
a major undertaking; but it represents a substantial cultural and
behavioural shift for SBB. This particular process change was essential
for the project’s success.

So the SAP payment solution provided
the means to re-engineer and centralise payments management at SBB,
eliminating the control issues and inefficiencies that had developed
through working with two stand-alone systems, plus fax-based workflows
and a range of internet banking tools.

Evaluating Bank 
Connectivity Options

Once SBB treasury had decided to
move ahead with SAP to support its payment operations, the next key
decision related to choosing the method to be used in connecting with the
banks for the actual secure transmission of payments messages.
SBB’s
decision was based around the evaluation of three alternative solutions:
host-to-host connections, Electronic Banking Internet Communications Standard
(EBICS) and SWIFT. 

The team quickly eliminated the host-to-host
option, for several reasons: it required detailed negotiations with 
banks on the technicalities of the channels to be used for inter-connection,
it was potentially complex and error-prone, and it would require substantial
in-house and external effort to set up, maintain and support the
connections.

One option considered was a solution based on the
deployment of the EBICS payment message transmission protocol. The EBICS
standard did not support our Swiss banks to a sufficient level of
performance compared with SWIFT. In contrast, the SWIFT FILEAct standard is
independent of the payment file format, as opposed to EBICS. 

The
team selected SWIFT based on its proven ability to provide standardised
connectivity with all of SBB’s cash management banks. SWIFT of course has a
global reputation for the highest standards of security and robustness,
which was implemented for and fully established in the global inter-bank
market. SWIFT handles vast volumes of inter-bank payment traffic daily,
and its standard messaging protocols and well-authenticated general
resilience were both most attractive features in SBB’s evaluation.

Implementing SWIFT and Choosing a Bureau

Having
chosen SWIFT, the treasury team then needed to decide on the best technical
platform and support infrastructure for its operation. Within SBB, non-SAP
solutions require the use of an expert third party to manage the
infrastructure. 

It was obvious that working directly with a
third party telecommunications provider was an expensive option.  The team 
evaluated the cost/benefits of using the services of a specialist SWIFT
bureau, and determined that the bureau route was SBB’s better option. We
used the same project team for the bureau selection exercise as was used for
the payment system selection, with the omission of the SAP IT executive, whose
enterprise resource planning (ERP) expertise was not needed for this phase
of the project.  

The team identified several benefits achievable
through working with a bureau. Firstly, this approach was clearly more
cost-effective and, most importantly, we would be able to take advantage of
the bureau’s expertise in the highly technical field of establishing and
supporting SWIFT based bank communications.  There would be no need to hire –
and potentially train – the team to perform the essential technical work.
Besides the cost savings, working with a partner with the necessary technical
skills, experience and track record would incur significantly lower levels
of project, and subsequently operational, risk.

SBB’s status as
a Swiss pubic company required us to conduct a formal tendering process to
select our SWIFT bureau. Accordingly, we ran a request for proposal (RFP)
process and contacted various suitable service bureaux based in Switzerland.

Among the most important selection criteria was the number of
successful projects that each contender had conducted with large Swiss
corporate treasury departments. The SBB service bureau RFP also evaluated
each bureau’s track record of working with the supplier of the SAP software.
At this point, we had already decided to use the SAP software technology
component of the payment  project.

The SBB SWIFT bureau selection
project chose Fundtech BPP. In line with our pre-defined priority selection
criteria, SBB was happy to learn about Fundtech’s recent successful project
performance working with another Swiss federal institution. A useful side
effect of this practical experience was that Fundtech clearly understood and
accepted the contractual terms and conditions necessary to work with Swiss
federal institutions. This superior level of understanding significantly
facilitated and accelerated the contract negotiation process.

Technically, Fundtech’s Swiss bureau had already established successful
working connections with all SBB’s cash management banks in Switzerland and
Central Europe (PostFinance, UBS and Deutsche Bank for bulk payments, plus an
additional five banks including Swiss National Bank for treasury payments).
This was another very positive factor that emerged in SBB’s bureau
evaluation, as it demonstrated the relatively low project risk levels that
would be incurred through working with Fundtech. There were simply fewer
potentially uncertain and unknown factors that might be encountered in
implementing SWIFT payment messaging via the Fundtech bureau service than
was the case with alternatives. 

The five-person team which
executed the SWIFT implementation project phase comprised a project manager
from Fundtech, plus from the SBB side an IT specialist from application
operations management, an external support specialist for the server
infrastructure, and two cash managers.

The implementation of the
Fundtech service bureau SWIFT connectivity project was fully and
successfully completed over a 3-month time period. The actual
implementation effort included twenty days’ IT specialists’ effort to
establish the server infrastructure and connectivity, and fifteen days’
effort by the SBB treasury team to complete the SWIFT on-boarding process,
including the work needed for contract management with our banks (SCORE)
and with the service bureau. 

Lessons Learned and
Conclusion

The team is happy with its choice of 
Fundtech. As an example, on occasion during the implementation process it
proved necessary to build a work-around solution to manage specific problem
issues. Unfortunately, the need for message format work-arounds is quite
typical when implementing SWIFT -based connectivity with banks.  This
is because at deep levels of detail some elements of message standardisation
break down, as individual banks impose subtle MT101 or FileAct format
requirements in order to convey some specific element of information. In
understanding and coping with such specialist requirements that Fundtech’s
expert resources proved invaluable, by constructing and delivering sound and
timely solutions. 

The team encountered several other detailed
technical issues during implementation, in which service bureau expertise
was central to efficient resolution. One case involved some banks’ protocol
messages which were not being properly processed in SAP. Fundtech
constructed a set of message and process transformations to  rectify this
issue, enabling SAP to process these messages automatically.

Another case involved one of SBB’s banks which did not accept certain bank
file formats transmitted via the SWIFT FileAct channel. Fundtech provided
a virtual private network (VPN) solution to resolve the issue. The bureau
also proved its value to SBB by properly managing data sorting issues that
were encountered when dealing with large bank statement files transmitted
by the SWIFT FIN channel; Fundtech provided a solution within days, which is
certainly much quicker than would have been needed to build a solution for
this issue in SAP.

Today, the Fundtech SWIFT bureau provides a
robust and dependable single point of connectivity for SBB’s payments
management process. SBB’s SAP system is able to provide central treasury
with a dependable cash management reporting environment, taking advantage
of the new levels of visibility of incoming and outgoing cash flows across
all SBB’s operating divisions.

The single centralised payments
management platform extends treasury’s cash visibility to payment flows
relating to investment portfolio management, fund transfers and payroll
operations, in addition to operational commercial flows.

Project Benefits Summary and Next  Steps

The
next phase of the payment project will take advantage of SWIFT’s intra-day
bank account balance and transaction statement reporting facilities to
feed the SAP cash and liquidity management tool. This will empower SBB’s
central treasury to keep track of intra-day liquidity, helping to enhance
cash management quality across the organisation by optimising the use of
internal cash resources and  reducing external borrowing costs.  

Meanwhile in  treasury management terms, the key benefits that SBB now
enjoys through having centralised payments management through SWIFT and SAP
is the much more effective prediction of the organisation’s liquidity
position. For example, the team is now able to control year-end liquidity
within a range of  20-30 million Swiss francs (CHF), which was just not
possible with the previous solutions that were in place.

We
enjoy all the benefits of a standardised payments solution, implemented on a
most robust and dependable technical platform. From the human resources (HR)
viewpoint, the treasury centralisation project has enabled us to save two
full time equivalents (FTEs).

SBB benefits from the enhanced
control and transparency of the new solution. We are pleased to confirm
that working with a specialist SWIFT service bureau smoothed the
implementation process, and today facilitates effective live operations for
a vital financial process at Swiss Federal Railways.