By John Hintze
Treasuries are finding their advisory roles growing amid the continued turmoil of the global marketplace.
The treasury departments of multinationals (MNCs) have long sought to play more strategic and advisory roles across the company, even taking a seat at the C-Suite table. This is a goal companies have found mixed success in attaining but which could be particularly helpful in times like these.
Take for example the devaluation of the Chinese renminbi earlier in August, which triggered even steeper devaluations in the currencies of multiple developing markets across the globe. Corporate foreign-exchange (FX) hedging programs certainly helped companies reduce the immediate shock of the devaluations and gave them more time to devise their responses.
Few observers, however, foresee quick turnaround for those currencies or the euro or US dollar (USD), which are respectively anticipated to remain weak and strong for the foreseeable future.
The long-term currency declines have likely led to MNCs reconsidering their supply chains, capital expenditures, and sales and marketing strategies, and who better to play a role in such strategic decisions than treasury executives, leveraging their financial expertise and relationships with global financial institutions.
“Unfortunately, it’s probably more of an aspirational orientation than an actual one,” said Peter Frank, US leader of the corporate treasury solutions practice at PricewaterhouseCoopers (PwC). “There are many treasurers out there who are value-added partners to the business heads of companies, but many more who are not.”
Nevertheless, Mr. Frank noted, virtually all treasurers want to elevate their departments into the strategy realm. The challenges to do so are often industry specific, but an overarching barrier is that the skills required in the treasury function are often insufficient to add value in other areas. Even the drive to automate treasury functions with the intent of freeing up treasury to pursue those value-added services has panned out less than anticipated.
“Companies may have automated a lot of what were historically automated processes and freed up some capacity, but the skill sets of the people in treasury are not suitable to add value to the business segments,” Frank said.
Essentially they’re missing the necessary business acumen , and one longer-term solution is to make sure new hires have broader economic backgrounds. Another approach adopted by larger companies, Frank said, is to develop formal programs to cross-train executives across treasury functions and other departments in the company.
“For the highest potential individuals, treasurers are looking to assign them to areas outside treasury, such as financial planning and analysis (FP&A), taxes, corporate development and even M&A teams,” Mr. Frank said.
The intent is to bring those executives back to treasury. But even if they end up elsewhere in the company, expanding executives’ breadth of experience benefits the company overall as well as the treasury function. Former treasury executives may now work in FP&A, or the tax department, or one of the business units, but they understand the treasury function and can help foster closer ties across various functions and businesses.
“So the objective isn’t strictly to upgrade the abilities of the people who move, but it’s also a mechanism for developing closer ties between the functional business units, so that in the future collaboration will come much more naturally,” Mr. Frank said.
In addition, larger companies are always engaging in significant internal projects, whether a restructuring, or entering a new market, or implementing an enterprise resource planning (ERP) platform. Those initiatives are typically led by a team of executives, and treasurers are pushing to make sure a treasury executive is a part of that team.
“The project may not be strictly related to everyday treasury activities, but by being a part of a cross-functional team, it helps treasury to develop relationships internally and get broader exposure in the company,” Mr. Frank said.
Melissa Cameron, global leader of treasury advisory services at Deloitte, said that a significant trend over the last few years has been moving treasury beyond being a good operator and dutifully conducting treasury activities such as managing cash and lines of credit, to becoming a “catalyst for change and a strategist in the business.” It can do this [become a catalyst] by helping business partners maintain their operating margins given the strength of the dollar relative to other currencies and how long that may last, and explaining how non-derivative techniques can be used, often written into contracts, to mitigate the risk of future FX shifts.
Achieving the ability to provide such influence, however, can be a challenge. Ms. Cameron said putting some “runs on the board,” a steady stream of successes, can help expand the treasurer’s influence. As a start, for example, treasury’s close relationship with bank counterparties can be leveraged to provide crucial FX-related advice to the chief financial officer considering an overseas acquisition, or to the sales and marketing department that is writing contracts with customers.
“Treasury might even talk to the folks in logistics about what the currency shifts may mean for the location of new manufacturing plants,” Ms. Cameron said.
Similarly, treasury can work more actively with a company’s CFO and sales and marketing teams to figure out ways to maximize growth in emerging markets often with more restricted economies. “Treasury frequently understands currency and cash controls that specialized folks in these other areas may not be as familiar with,” Ms. Cameron said. She added that Deloitte has increasingly seen its largest MNC customers establish numerous regional treasury centers in a number of locations, to be close to the front-line businesses, whereas under the traditional model regional offices may have been limited to one in Europe and another in Asia.
“They’re often in the same office and can be very strong business partners,” she said.
PwC’s Mr. Frank noted that ever since the financial crisis, economic growth in the developed markets has been slow and companies have shifted their businesses, accompanied by business functions such as treasury, more toward developing markets. That has increased demands on treasury, especially if the company seeks to raise capital locally, instead of issuing debt in the US and making an intercompany loan.
“To do that, you need to manage the local bank relationships and business relationships, and it’s difficult to do that from headquarters in Chicago, so we’re seeing the development of regional treasury centers in China, Singapore, other parts of Asia, Brazil and India,” Mr. Frank said. “Treasury functions increasingly need to be global, and to do that they need a footprint on the ground.”
Mr. Frank said treasurers especially in the large MNCs are increasingly taking on the role of being the “champion for working capital improvements” within the organization, including accounts receivable and payable, supply chain, inventory management and manufacturing. Those functions typically don’t fall under treasury, but organizationally the treasurer is a natural leader to drive working capital improvements, Mr. Frank said.
Enterprise risk management (ERM) is another area increasingly influenced by treasury. “ERM programs usually are not owned by treasury,” Mr. Frank said. “But a lot of those programs are looking for ways to become more analytical and quantitative in terms of how they evaluate risk, and treasury plays a natural role in helping them do this.”