Members deliberate over a number of topics as they continue to find their way along the path to world-class cash management.
When members of The NeuGroup’s Global Cash and Banking Group met in the fall of 2014, the explored the effect of the latest treasury trends on organizational structures. Member companies showcased intercompany netting system and shared details of its cross-currency notional pooling project. The group looked into best practices for cash compliance and began a project to attempt to define what a world-class treasury should include to meet the needs of global clients. Further highlights from the meeting included:
1) Treasury organizational chart review. In line with the “do more with less” trend seen in recent years, treasury organizations have become leaner and have taken on additional and strategic responsibilities. As such cash management teams have followed this trend, becoming smaller and relying more heavily on a range of tools – including pooling, netting and systems—to maintain service levels.
2) Intercompany netting has significant advantages, especially when coupled with technology to allow STP. Most members answering the pre-meeting survey had a monthly I/C netting process on a sub-to-sub level, making this space prime for automation.
3) Leveraging on notional global pooling. One member shared his company’s global pooling structure implemented through BMG. This implementation not only generated significant savings, but more importantly freed up resources to work on more-strategic projects. This means the depth and breadth of your pooling structure will depend on many factors, including your legal structure, country presence and centralization of your finance team operations.
4) Maintaining Control over Global Resolutions, Signature Cards and Mandates. In this session, Reval led a discussion on best practices to manage global bank resolutions, signature cards and mandates.
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Getting Organized
During this roundtable session, each member presented their organizational structure to the group. Members discussed what they see as trends in global treasury structures and their associated benefits and challenges.
KEY TAKEAWAYS
1) Leaner and meaner is the way to go. In line with the “do more with less” trend seen in recent years, treasury organizations have become leaner and have taken on additional strategic responsibilities. There is a conscious effort to divert FTEs away from non-value-added activities, which means this is also a criterion when evaluating projects. Also, there is increased pressure on resources as they take additional responsibilities.
2) Cash management feels the pressure too. In keeping with moving away from non-value-added activities, cash management teams have become smaller and rely more heavily on a range of tools — including pooling, netting and systems — to maintain service levels. Among pre-meeting survey respondents, the average cash team had five members while the mode cash team had three members. The same group managed on average over 500 bank accounts. Surprisingly, the average number of bank accounts per entity was three, which one would have expected to be smaller, given that not all entities manage operations.
3) When possible, centralize. Most members operate treasury structures centralized at HQ and regional levels. This hybrid structure has allowed treasury organizations to better serve the business locally and to operate more efficiently. More than 60 percent of members operate Regional Treasury Centers.
4) Acquisitions require special handling. Acquisition integration is a challenge for these very lean organizations. It is not only about integrating acquired companies fast but also, as one member put it, about integrating them without breaking the processes that are already in place. Some very active acquirers have specific roles to manage acquisitions.
5) Find your new BFFs. It pays to team up with legal and tax to stay ahead of the curve. This team approach is beneficial in the long run as it prevents any members from going too far on the wrong path before figuring it out.
OUTLOOK
Buckle up, because “do more with less” is not going away anytime soon. This trend is here to stay and managers will need to keep finding innovative ideas to stay ahead of the curve. Specifically for cash management, bank account compliance may be where most of the efficiencies need to come from in the near future.
Group Project on TMS Best Practices
Group Project on TMS Best Practices
Based on member discussion, the group is interested in pursuing a special one-off group project – “Defining a World-Class Treasury System” – similar to the “Principles of World-Class Cash Management” project undertaken by the group a few years ago. This roundtable discussion outlined the project’s initial goals and objectives and the associated timeline.
The initial goal of the project will be to attempt to define what a world-class treasury system should include to meet the needs of global clients.
- Be able to use results to create a benchmark for TMS.
- Differentiate between must-have functionalities and “bells-and-whistles.”
- Create a consistent narrative to push member agenda with banks/providers. One example would be pushing changes to EBAM.
- Project should be product-agnostic.
- Participants: Members would like to extend an invitation to members of other NeuGroup functional peer-groups to join this project, with the objective of obtaining a cross-functional, more complete picture.
The next steps include determining how much meeting time to commit to the project and find a sponsors—a consultancy or a team of treasury systems providers to participate.
Intercompany Netting
Intercompany netting is an arrangement among subsidiaries in a corporate group whereby each subsidiary makes payments to or receives payment from a clearinghouse (Netting Center) for net obligations due from other subsidiaries in the group. During this session, one member company showcased its netting system provided by Coprocess, a niche player in the corporate treasury and accounting sectors.
KEY TAKEAWAYS
1) Leverage technology. Intercompany netting has significant advantages, especially when coupled with technology to allow STP. Most members answering the pre-meeting survey had a monthly I/C netting process on a sub-to-sub level, making this space prime for automation. Netting makes it possible to exponentially reduce the number of transactions and cash volume required to settle I/C. By using technology to automate this process, companies can rip benefits from reduced operational costs vs. spreadsheet, labor-intensive processes. Also, by handling this process in-house instead of handing it over to a bank to be managed, companies can obtain significantly better FX rates.
2) Who decides what to settle and when? One member company showcased its A/P-led, multi-currency, tiered netting structure powered by Coprocess. It settles I/C using A/P data, which means A/P will be settled unless A/R disputes any inconsistency. It is very important to educate personnel on dispute process and I/C agreement terms and conditions to avoid any potential issues. Moving forward, the company plans to upload both A/R and A/P data. All matched data will be scheduled for settling and non-matches will be reported back to be disputed.
3) Leverage on bank account structures when possible to move cash faster. Companies do not always have to wait for the monthly settlement date. They can leverage ZBA structures and couple them with interest-bearing loan-like instruments between specific entities.
OUTLOOK
As companies look for additional efficiencies and ways to free up human capital, expect more of them to automate netting processes. Historically, the progression has been from managing netting in-house manually, to moving to a third-party provider—like a bank—and then bringing back the process in-house due to high FX rates. Current software offerings now allow companies to set up automated processes from the get-go.
Maintaining Global Control
As globalization continues, treasury organizations must constantly balance the need for standardization and central control over individual country requirements that may create exceptions to the global model. In this session, Reval led a discussion on best practices to manage global bank resolutions, signature cards and mandates.
KEY TAKEAWAYS
- A global standardized bank resolution is hard to come by. Most members have moved to or are working toward some kind of standardized bank resolution. Members face opposition from their banks to accept the same bank resolution, and even when that is achieved, different banks may have different interpretations of the same document. Also, there are exceptions to the global resolution when needed to comply with local regulations.
- Managing signatories is an uphill battle. Even after the introduction of FATCA, it is difficult to maintain a very lean list of signatories. Internationally, managers have no incentive to remain off the list. Cash mangers rely on policies to keep the list at a minimum but sometimes there are no consequences for breaking the rules.
The battle is also external; manual and inconsistent processes across banks, as well as little confidence in banks following instructions accurately, make adding and removing signatories feel like a merry-go-round.
- And FBAR adds an additional level of complexity. Compliance is the name of the game. Cash managers spend significant resources managing the compliance requirements. Apart from any possible penalties associated with underreporting, the bigger concern is the associated reputational risk.
OUTLOOK
Corporates will keep looking for ways to more efficiently manage bank accounts and signatories. Specifically, they need banks and systems providers to offer services and products that will allow standard and automated processes for bank account management. It will be key to find ways to influence their product roadmaps.
From In-House Banks to Global Pooling
While pooling is not new, it doesn’t become relevant for companies until they become global, or until they have reached their limits for operating manually. In this joint session, one member shared details of its Cross-Currency Notional Pooling project. In addition, Reval discussed the value of pooling overall, and why the penalties can be harsh if you don’t get it right.
KEY TAKEAWAYS
1) The best pooling structure for you may not be the best pooling structure for someone else. The depth and breadth of your pooling structure will depend on many factors, including your legal structure, country presence and centralization of your finance team operations. While some companies would prefer to pool at a regional level, some others will pool at a global cross-currency level or global multi-currency level. At the end, pooling is about your treasury operations running more efficiently and at a lower cost while minimizing risks.
2) Think as a shareholder and ask tax and legal to get on the bandwagon. As cash managers make decisions, it is important to focus not only on the treasury implications of said decision but also on its overall effect on the company value. This comprehensive approach will lead to better results, especially if tax and legal get on board with this way of thinking.
3) Leverage on best practices. Pooling is not new and there are plenty of experienced companies that would be willing to share their implementation dos and don’ts.
Reval offered several pointers, including: n Set realistic objectives when starting out n Stakeholders should understand their rolesn Well-disciplined project management n Senior level sponsorship n Engage IT as a partner early on n Identify any resource constraints n Communicate up and down frequently n Understand the options and landscape n Stay on task, keep the objectives in your sights but adjust to challenges as they are presented n Work with legal and tax; bank should be a resource as well o Bank providers are part of the bank relationship strategy
OUTLOOK
As treasury managers keep looking for more efficiency, global notional pooling will become more common and popular. The implementation complexity may have held some companies back in the past, but the market is getting ripped for this kind of structure.
CONCLUSION & NEXT STEPS
As in previous meetings, members continue to be challenged to “do more with less.” Consequently, projects and systems that provide additional efficiencies are a top priority. In addition, compliance and bank account management keep fighting to be at the top of the list of things that keep treasury managers up at night.
The spring meeting is scheduled for May 6-7 and will be hosted by Altera. Deutsche Bank is our sponsor for this meeting.