Executives face quandary of which functions to outsource.
Pressure from upper management for corporate treasurers to take advantage of shared service centers is now being felt at relatively few firms but it is almost certain to increase, requiring treasury executives to assess just what treasury functions are appropriate to outsource.
The issue was on the minds of attendees at the The NeuGroup’s Assistant Treasurers’ Group of Thirty meeting a in May. One assistant treasurer of a major consumer products company said her firm had established shared service centers over the last four years.
“Treasury has not been in the scope so far, since a lot of the [outsourced] activities have been around accounting and accounts receivables and payables,” she said. “So now is the time to time to think about how treasury will align in the new organizational structure.”
Another AT said her technology company is setting up supply chain hubs in low-tax jurisdictions, broadly implementing SAP, and standardizing processes globally. A big part of the corporate redesign is trying to understand what to house in global shared-service centers, including treasury resources that are now scattered worldwide. Peers have told her their companies that have so far mostly outsourced lower-level transactional activities.
“We’re trying to figure out how far out to go on the spectrum of what should go in the service center,” she said, adding, “You get to areas like credit collections, and opinions are across the map. Should something so customer facing be in a service center?
She added the company has people in 50 countries doing treasury functions who are not reporting directly to headquarters finance but instead to the local affiliates’ finance offices. “We’re trying to figure out what the design should look like and how to bring treasury resources together. We’re still in the early phases,” she said.
Nevertheless, her company appears to be ahead of many when it comes to considering treasury functions to put in shared service centers, in which an in-house or third-party entity takes on operational tasks in a low-cost jurisdiction.
“Treasury departments going to shared service in a big way are outliers, not the rule,” said Carina Ruiz, a partner in Deloitte Advisory who leads treasury advisory and M&A services. “It’s the start of a trend, which is why corporate treasurers may now hesitate to adopt it.”
Ms. Ruiz said treasury is making a late entrance into the shared-services, a mature construct for other corporate functions, because it tends to collocate with the CFO office, in headquarters, along with the treasurer’s lieutenants in charge of cash management, FX, capital markets, and other key areas. In addition, treasury has been a highly specialized function which historically hasn’t lent itself to rote processing, partly due to companies underinvesting in treasury-related technology.
More recently, however, companies have ramped up that investment.
“Now you’re seeing treasury becoming much more standardized through the use of technology, and that has lent itself to standardization and automation, especially in areas such as cash management, FX exposure, and analytics,” Ms. Ruiz said, adding such technology was once only used by the largest companies but now is available to those with less than $2 billion in revenues.
It also helps that treasury executives’ compensation is typically higher than average for corporate finance executives, and so is ripe for the cost savings generated by outsourcing labor to shared service centers. That’s especially true in today’s economically challenging environment, whether in developed or developing countries, where large companies are achieving growth targets through M&A or cost reductions.
Ms. Ruiz noted that treasury has tended to regionalize itself, especially on the cash and liquidity side, and those locations typically are determined by where the corporate already has an important subsidiary, often in high-cost areas such London, New York and Singapore. That approach is changing as the workforce in low-cost countries gain more skills.
“There are places in the world now where 10 years ago you wouldn’t have thought about doing treasury functions, but now those labor pools are more capable of doing treasury work,” Ms. Ruiz said.
Companies with their main European offices in low-tax jurisdictions such as Ireland or the Netherlands tend to choose locations such as Poland, with much lower operational and labor costs, for their shared service centers handling more rote functions. In Asia, the highly trained personnel may be regionally headquartered in Singapore, while shared services could be built at their offices in Malaysia and the Philippines. In the Americas, Costa Rica, Puerto Rico and Guadalajara, Mexico, are prime locations for shared service outsourcing.
Companies tend to start out by building captive shared services centers, Ms. Ruiz said, over which they have more control and can test the waters before moving to less costly third-party shared service providers such as Genpact and Acccenture. She added that it is best to locate outsourced treasury functions in the company’s existing and mature shared service center handling other types of financial functions, to provide employees with a track for upward mobility and to retain talent.
“If you have a lot of staff working on transactions, you want to keep them happy and give them opportunities,” Ms. Ruiz said.
She added that treasury should ensure that management at the shared service center understands how to do service-level agreements and promote employees, and that the retention level is acceptable.
“And before treasury starts moving activities there, it must understand exactly how it will engage with the shared service center and make sure the processes are highly defined—that there’s no ambiguity in terms of what the shared service folks are responsible for and can make decisions about,” Ms. Ruiz said.
The types of treasury function that can be outsourced to a shared service center will depend largely on the degree to which they’ve been standardized and made more rote. So capital markets, where transaction terms are negotiated, would typically be off the table, but cash and liquidity management functions are possibilities. Melody Hart, a senior consultant at Strategic Treasurer, said the most common treasury functions to send shared service centers—typically in low tax jurisdictions such as Ireland where there is plenty of financial expertise—are payment and receipt centers, and in-house bank functions such funding affiliates and reinvesting those funds.
Ms. Hart noted that she’s yet to hear of bank account administration and FBAR or Report of Foreign Bank and Financial Accounts reporting being outsourced, but both are possibilities.
“If a company is opening foreign accounts, involving a lot of requirements such as know-your-customer, it doesn’t want to take up its treasury department’s time doing that type of administrative work,” Ms. Hart said.
Deloitte’s Ms. Ruiz said that time-zone changes can work to a global company’s advantage in terms of their shared service centers, given the different parts of the transaction life cycle in areas such as cash and liquidity management, FX risk management, and perhaps even capital markets.
“In all these functions, there are pieces you can do ahead of time that you can put in a jurisdiction that’s in a totally different time zone,” she said. “The final decisions can be made at headquarters, but that lends to shifting the majority of the workforce and activities to a more cost-effective labor market.”