Assistant treasurers also mull what a hard Brexit means for MNCs, talk cash forecasting when business lines are changing and rate talent rotation programs.
The Assistant Treasurers’ Group of Thirty’s September meeting in Palo Alto, CA, delved into issues both topical and perennial, the former including insights from sponsor HSBC on the outlook for tax reform and the implications of a hard vs. soft Brexit. Evergreen issues included treasury talent development as well as the challenges of cash-flow forecasting without the benefit of historical data. Members also tackled topics that are both timely and, perhaps, now permanent: the need to prepare for the aftermath of cyberattacks; and some practical steps to boost the odds of succeeding at treasury transformation programs that many members are pursuing, some with limited levels of satisfaction. These, then, were the meeting’s key points:
1) Tax Reform: Reasons for Hope. HSBC’s case for optimism that the GOP can overcome internal strife and pass tax cuts rests partly on the political reality that failure is not an option if the party hopes to keep control of Congress. How do you plan to shift your capital allocation under a new tax scheme?
2) Preparing for the Inevitable Cyberattack. A member whose company fell victim to a devastating cyberattack provided practical advice on what treasury needs to do before an attack so it can stay afloat after the damage is done. How can you improve preparedness for when computers are useless?
3) A Winning Formula for Treasury Transformation. Members got a lesson on how one company successfully addressed pain points and met its transformation goals, in part by having a clear vision supported by senior management. What can you learn from this to improve the odds of success?
Treasury Talent Search
Members discussed the merits and shortcomings of rotation programs that bring new blood into treasury for limited stints. They agreed that the best case is when these training programs target junior employees a couple of years out of college who are pre-MBA. There’s also a preference for having the treasury rotation come toward the end of the program. But many members say the biggest challenge is attracting trainees back to treasury and away from positions within strategy groups seen as more “glamorous.” For this reason, some member companies have eliminated the program. How treasury can add to its drawing power as it embraces more sophisticated technology requiring a greater range of skills is a topic NeuGroup will continue to explore.
Members also heard about the benefits of cross-training programs within treasury departments where staffers in, say, cash management are trained in another aspect of treasury like hedging. One member said her department has benefited because this provides the ability to borrow talent from other groups when people leave. And members within treasury groups are offered job opportunities before a corporate level posting. This company found that the knowledge of its systems held by staffers who have been cross trained gave these internal candidates an edge over people with more job experience from outside the company.
Tax Reform: Reasons for Hope
HSBC presented a Washington, DC, reality check detailing how dissension and “civil war” among Republicans is undermining President Trump’s ability to score legislative victories, despite the party’s hold on the presidency, the House and the Senate. Yet the bank argues tax law change can happen in 2018 despite skepticism about passing legislation during an election year, saying most tax reform bills have passed in even years. The bank also challenges claims the GOP will automatically lose congressional control in the midterm elections because of Trump’s below-50% approval rating; HSBC argues Democrats face long odds in achieving the gains they need, especially in the House.
KEY TAKEAWAYS
1) Don’t give up on tax reform. HSBC remains bullish, asserting tax reform is going to get done, in part because it’s a “must accomplish” priority, noting Trump plans to visit 13 states in the next couple of months to push tax overhaul. The question remains when it gets done.
2) Don’t stop planning for tax change. Despite the ongoing level of uncertainty in Washington and the dysfunction of the GOP, treasury needs to keep planning for various tax reform scenarios, including for mandatory repatriation of foreign profits and the pressure that will bring on some companies from shareholder activists.
Calculating Cash Amid Change
Managing cash is a core treasury function and the vast majority of members (83%) say they have a process in place to adequately capture cash-flow needs. But that statistic doesn’t speak to the nuances of getting it right when business circumstances change. That includes the situation addressed by a member who works at a growing biotech firm that has launched several successful drugs. How do you deal with the lack of historical sales data when preparing forecasts? His answer includes the need for close communication with business units as well as reaching a better understanding of the data by partnering more closely with FP&A staff who often prepare the forecasts. The member also suggests performing a variance analysis to fine tune the forecast and suggests asking these questions:
- Is the top-down cash forecast in sync with the bottom-up cash forecast?
- What is an acceptable accuracy level in dollar or percentage terms?
- What is the cause of the variance: business assumptions; timing; lack of forecast?
- What actions need to be taken to improve the next forecast?
OUTLOOK
Despite HSBC’s optimism, treasury can’t assume anything. Other tax experts are telling NeuGroup the odds of tax reform passing by next summer are less than 50-50. As everyone agrees, the devil is in the details of deductions, deficits and whether a bill can be sold as benefiting the middle class. The obstacles to passing legislation remain daunting, requiring 60 votes or a simple majority if passed through reconciliation. The latter option means not increasing the long-term deficit. Trump’s fight with deficit hawk Bob Corker, who is not running for reelection, further complicates matters. This ongoing state of uncertainty points up the need to keep tax playbooks prepared for scenarios that include no changes or smaller changes, including rate cuts and a one-time, mandatory repatriation of overseas cash.
Preparing for the Inevitable Cyberattack
One member captured the attention of everyone in the room with the sobering tale of what a June cyberattack on the drug company’s computer network meant in practical terms for treasury and its employees. The magnitude of the disruption from losing all access to computers provided a hard lesson for a department that had planned and practiced for cyberattacks but didn’t expect a total, global, corporate shutdown. The experience offers real-life proof why members who have traditionally focused on preventing hacks also need to plan and prepare for the aftermath of security breaches and malware attacks.
KEY TAKEAWAYS
1) Prepare for what happens after a cyberattack. Cybersecurity is not an issue that treasury can afford to relegate to the IT department—and it’s not all about preventing attacks. Preparing for the disruption to business following an attack is part of prudent planning for every department. At this point, it’s more a matter of when, not if, your company will fall victim.
2) Include paper in your plan. Preparing means taking basic steps, including having paper copies of critical information. Do you have your banking information printed on paper? Keep hard copy contact information for banks, trading partners, and employees. And then be prepared for conducting business without access to any networked systems.
3) Keep your smartphone charged. Develop a communication plan that may rely on mobile phones and personal computers; and establish back-up access to computers that are not connected to the damaged network.
4) Keep it simple. This member’s experience suggests companies should reduce treasury operations to only vital transactions (including determining who needs to be paid) when running in disaster recovery mode. It swept collected cash into money market funds and didn’t try to invest the funds. And keep your bank portal tokens handy since that’s your back up.
5) Look all around you. Make sure your suppliers are doing what you are doing. Do they have the same level of cybersecurity awareness? Bring the security of acquisitions up to your standards. And it’s important to educate and test employees with fake phishing emails. Bad actors will find vulnerabilities.
6) The insurance conundrum. Understand your coverage. You may be covered under errors and omissions coverage but you might need separate cyber insurance. Other NeuGroups have concluded insurance is not priced with sophistication since the premium changes very little when you increase the deductible. Some companies may explore creating risk pools or consortiums to self-insure.
OUTLOOK
Cyber risk has not peaked: more than 95% of members polled believe it will increase. The good news is that members overwhelmingly say that senior management understands the risk and that IT has taken a “prudent person” approach. Learning from the mistakes and experience of companies that have been attacked is just one way treasury can help organizations prepare for attacks and mitigate risk.
A Winning Formula for Treasury Transformation
A member at a major health insurer walked members through the company’s award-winning initiative to automate a standard process for cash forecasting, improve risk management and eliminate risks from outdated treasury technology. Achieving the insurer’s vision took more than three years and involved creating an integrated system with components including Reval for cash management, forecasting and accounting and FiServ’s tool for tracking global banks. The goal was to remedy “pain points” under the old system, including poor visibility to global cash balances and transactions.
KEY TAKEAWAYS
1) Transformational pain. NeuGroup Peer Research suggests many members are feeling the pain of inadequate systems: While 60% have recently completed or are close to completing a treasury transformation project, more than a third of respondents say they are not happy with their treasury transformation decisions post-deployment and are not seeing the planned benefits.
2) A carefully designed plan and clear communication are critical. The insurer’s success at meeting its objectives reflected a disciplined and deliberate process of setting goals, securing buy-in from senior management and finding vendors with experience at delivering the results called for in the blueprint. In other words, it’s not all about the technology vendors you bring in from the outside. Equally if not more important is the inside job of communicating with all stakeholders and getting dedicated support from business units and IT. Establish a steering committee.
3) Streamline the data and process. To achieve its vision, the insurer had to streamline the payment process from the bank admin to a treasury management system (TMS) to a payment hub and then to its B2B gateway. After passing a firewall, payment is further simplified, passing from a service bureau to SWIFT. The legacy process contained multiple touch points and ledgers.
4) Find the right consultant. This presenter recommends finding a consultant who understands the TMS market; check their references and ask how many implementations they’ve overseen.
5) Expect the unexpected. Other advice includes understanding how you will support the model post-implementation; understanding the global regulatory environment because it’s not one-size-fits-all; and including extra, unexpected costs in your project budget.
Brexit: Hard Realities
As with US tax reform, there are still more questions than answers facing treasurers trying to plan for the UK’s withdrawal from the European Union, known as Brexit. Sponsor HSBC’s presentation aimed to cut through the confusion and provide members with some concrete implications for the European treasury and cash management operations of MNCs under various scenarios. One takeaway is that the clock is ticking and it’s time to prepare, even if politicians can’t agree on the details surrounding the transition to Brexit. The real negotiation window at this point stands at 15-16 months, HSBC says. The bank notes that two priorities for the UK are control over immigration and withdrawal from the jurisdiction of the European Court of Justice. The UK government recognizes that these aims are incompatible with the membership in the single market or EU customs union. And that makes a “hard” Brexit more likely. This suggests it’s best to plan for the worst-case scenario. One member noted that his CFO started seeing headlines about banks moving out of the UK, and suggested it was time to put a plan in motion. Some of their initial plans include implementing a new liquidity structure and using local banking partners that do not rely on “passporting.” This presentation underscored the need for all MNCs with euro accounts in the UK to do the same.
OUTLOOK
Transformation in treasury is neither fast nor easy but the potential rewards are plentiful for companies that invest the necessary time and effort to develop a thorough plan that is supported at all levels of the business. This requires constant communication and may mean finding the right consultant to navigate the complexities of the TMS market. Advances in technology mean treasury must remain open to at least evaluating the benefits of making changes that can save time and produce better forecasts and greater efficiency.