What to Plan for This Year

The NeuGroup Network’s Key Themes for 2015

Strategizing Around Key Takeaways

Based on key takeaways and discussion threads from The NeuGroup Network in 2014, we extrapolate what treasury and finance executives should be planning for in 2015.  

Last month, we presented the key 2014 takeaways from The NeuGroup Network as selected by the leader of each NeuGroup. This month, we look at three key takeaway themes (plus two bonus items, see sidebars) and focus on how they should be used in 2015.

1) Capital structure and planning. Financial institutions have had their capital structure and planning subjugated to regulatory stress-tests based on standardized scenarios. Non-financials by contrast will continue to have capital structure and planning dominated by activists. How activists signal preferences for growth, capital distribution, corporate footprint and risk appetite will be critical for non-financial corporates to respond to proactively in a year when US rates and the dollar are expected to trend upward.

2) Organization and staff development. A clear trend in MNC finance functions has been that leadership roles, including the treasurer, have become more multifaceted and filled by executives of the highest potential, being groomed for even higher positions through rotational assignments. This has forced treasurers into a careful balancing act to ensure continuity in key roles at key times while embracing the benefits of rotational programs. Playing off this trend is an equally important one: the project orientation of a growing number of finance function tasks. In response, project management expertise and dedicated project manager roles must become the norm to ensure treasurers can continue to do more with less.

3) Flexibility vis-à-vis banking services. With all the early talk of the impact of new regulation (Basel III et al.) on banking relationships, the takeaway message has been that banks have done all they can to mitigate the effects on key clients. This leaves corporates exposed to a scenario where the effects can no longer be mitigated. It also may make them less receptive to non-bank alternatives, prompted by the regulatory constraints on banks, that may offer superior solutions.

---

Capital Structure and Planning

2015, in all likelihood, will represent an inflection point for rate policy, with the US leading the way toward a reversal of QE and normalization of monetary policy with a rate rise. Thus, treasurers (particularly in the US) will be held to account on how well they have positioned their corporate’s balance sheet and funding profile for a rising rate environment that is also helping to drive up the dollar. This added scrutiny comes on top of increasingly sophisticated activist demands that will continue to pick at corporate capital structure, investment and distribution plans.

With these expectations, corporates should build on well-articulated capital plans with the right emphasis on growth and distribution, a key NeuGroup takeaway last year. 2015, in short, will not be an easy environment for treasurers to fund their firm’s capital plan, and its contingencies, nor mitigate against all that is at risk with rising rate expectations and a strong USD.

Key Planning Themes

• Stress-test activist demands. Whether activists are directly targeting your firm, your competitors or you are simply observing their current play book, your firm should prepare a capital plan with an eye to what activists are agitating for as well as your own strategic plan. All plans should be subjected to a variety of scenarios, from worst- to best case. Determining how each would fare can defend against activist demands that are questionable in light of stress-testing. Treasury can add value by helping senior management endorse, understand and articulate the right capital plan to the market, including quantitative and qualitative analysis for discussion of how it is at risk and the various alternatives considered in shaping it. In the process, capital structure and planning will continue its trend to becoming more sophisticated and robust.
• Redefine scope of rate risk. A related action more companies will be taking this year is to redefine the scope of their interest-rate risk management. Viewing rate risk through a more comprehensive ALM framework will help treasury determine a more optimal fixed-to-floating mix to complement the over-arching capital plan. All treasurers are beginning to think more like bank treasurers and asking questions like how rate-sensitive are the key businesses and how revenue will respond in a variety of rising rate scenarios, including an abrupt near-term rate shock. They can also look at risk correlations and knock-on effects for currency rates and commodity pricing. Looking beyond the debt portfolio, treasurers can better optimize with their next funding round, including looking at alternate currency capital sources, and set better benchmarks for interest-rate positioning going forward.
• Don’t ignore liquidity risk. Rising rates will be coming in conjunction with an end to quantitative easing, or central banking flooding of financial markets with liquidity. Many corporates hoarded cash despite the liquidity flooding of the last 6+ years and may be glad for an ample liquidity buffer as central banks try to drain liquidity from the financial system. To the extent that activists continue to emphasize returning cash to shareholders, part of stress-testing the capital plan should ensure that there is ample liquidity on hand, or alternative funding sources at the ready, to support the business if access to expected funding seizes up (aka cash management). US MNCs, of course, must also weigh offshore liquidity differently due to the tax cost of having it fully available to the balance sheet. 2015 will shed light fairly quickly on whether US tax reform will fix this sooner (before the effective end of the Obama administration) or later (year two of the next administration). Tax planning is also central to the parallel structuring theme described in the box below.

---

Organization and Staff Development

Member-by-member walk-throughs of treasury organizational charts during 2014 revealed that many were in the process of reassessing the impact of rotational assignments in order to keep this typically leanly staffed department operational and functioning smartly. More sophisticated process improvement and automation are critical to this too, which is brought about by more frequent projects that can overwhelm day-to-day management frameworks. 2015 will see more progress on refinements to finance function rotations and more sophisticated use of project management roles to better implement change.

Key Planning Themes

• Continuity roles deserve more emphasis. Given all that was said in the first section, it will pay for treasury not to have too many inexperienced rotational staff in critical positions this year. Thus, the concerns that have prompted treasurers to push back on some of the more aggressive rotational assignments should be elevated to marking more boxes on the org chart for continuity assignments with no new rotations this year. With job prospects picking up a bit in certain key markets like the US, it may also be worth paying up to retain experienced treasury talent or to bring new experienced professionals into key risk management, investment and capital markets roles this year.
• Assign more talent to project management roles. High-potentials rotating in with project management experience may be better placed in PM roles as opposed to say learning to be a foreign exchange manager this year. While a project manager in treasury used to be a placeholder assignment for staff that lacked clear roles or were close to being waived, it is rapidly becoming a vital and permanent box in more treasury org charts. There is real value in having a few Six Sigma black belts (or the equivalent) to help manage the major projects that treasury undertakes almost continuously. The shifting financial landscape means treasury is going to be asked to undertake even more of them in 2015.
• Get a treasury technology PM. Treasuries that use SAP extensively often have a project manager to assist with implementation and upgrades, along with the process changes needed to suit such a comprehensive tool. This role is also valuable for TMS use beyond SAP. Thus, we see more treasurers assigning staff to more permanent treasury technology liaison positions, which include a significant project management component along with IT experience. As every treasurer learns sooner or later, effective management of a TMS implementation or upgrade project is key to the success of any system supporting treasury. You will be glad for these liaisons and project managers as well when a significant cyber attack hits treasury (see box below).

---

Banking Services Flexibility

2015 may or may not be the year that your relationship banks can no longer shield you from the regulatory impact on banking services, but you better begin your preparations this year regardless.

Key Planning themes

• Determine the risk-adjusted switching costs for liquidity structures. The irony in the Basel-instigated bank liquidity rules, at least those being implemented in the US this year, is that in order for banks to count on the short-term liquidity made available to them by offering liquidity management services for regulatory purposes (LCR), they need to show that customers receiving them would bear “significant switching costs to obtain services from another provider.”

  This counters the objective of most corporate treasurers post-crisis: to make liquidity structures easier to switch (should the bank offering them get into trouble). Many treasurers gave up on this after considering the potential cost and meeting reluctance on the part of banks to gear up to offer a service that is not cheap to provision on a contingency expectation to win the full business. 2015 is a time to return to this exercise: (1) to help banks justify the operational service requirement to avoid a high deposit outflow assumption on LCR calculations; (2) to create a benchmark to assess alternative services that will be increasingly on offer by non-banks; and (3) to determine the value add of a next-stage structure to augment or disintermediate structures offered by banks.

• What stage IHB now? In light of changes coming to banking services and with the cost benchmarks arrived at above, this is a good year to assess the current stage of evolution you have toward a “fully functional” in-house bank (IHB). Several members have made substantial upgrades to their IHB platforms in anticipation of SEPA or in contemplation of its next-generation outgrowths for pay-on-behalf-of, receive-on-behalf-of arrangements. More are thinking about what they should do now in the context of the current evolution of their IHB structure, or, if they have something different, any intercompany liquidity transfer, payment and netting structure.

  The question to ask this year is not only will I benefit from a significant new refinement to my intercompany cash/working capital utilization infrastructure, but what operational and other risks might I offset in terms of reducing reliance on banking services in regulatory flux? Smart treasurers will add tax considerations, too.

• Monitor and keep up with disruptive innovations. Reducing reliance on bank financing has been a strategic imperative for many non-investment grade corporates post-crisis, but the range of capital market opportunities is growing across the credit spectrum. For example, even good credits are looking at asset-backed (e.g., receivables) financing as a niche and contingency funding tool and lightening up bank group commitments. 2015 is the year to think beyond traditional disintermediation and get serious about disruptive innovations in finance and payment mechanisms. For example, as one member noted in November: Block chain technology, if not crypto-currencies, will gain acceptance in most treasurers’ career spans—better start learning about it now.