Contemplating capital structures, allocating cash and bantering about bots.
The fall meeting of the Assistant Treasurers’ Group of Thirty in Seattle sponsored by UniCredit featured informed discussions on issues near and dear to treasury (capital allocation, WACC, in-house banks) and more external forces that treasury needs to stay on top of (automation tools, Europe’s economy, trade wars). Here are three key themes that emerged over the day-and-a-half meeting:
1) Defining and Refining In-House Banks. Developments at home, abroad and in technology are prompting more US-based multinational corporations (MNCs) to tweak existing in-house banks (IHBs) or begin creating one. How do IHBs help treasury achieve more control and centralize finance functions?
2) Rethinking Treasury Structure, Function in the Digital Age. Deconstructing one company’s treasury structure helped other companies see their departments in a new light and ignited a discussion touching on the changing needs of treasury as technology replaces some human tasks and activities. What’s the smart career move: generalist or specialist?
3) Looking Ahead to the Next Recessions. UniCredit’s chief European economist, Marco Valli, gave members a rundown of the bank’s concerns about trade tensions between the US and China, the outlook for European and US economic growth, and the window for the European Central Bank to normalize interest rate policy before the next recession. What are the odds of a eurozone breakup?
Defining and Refining In-House Banks
In a live poll at the meeting, half the members said they have an in-house bank (IHB) and half said they don’t, a result that speaks both to the popularity of IHBs and also the reality that not all MNCs have embraced the concept. But the meeting supported the idea surfacing throughout the NeuGroup network that more treasuries may join the ranks of IHB proponents in the months and years ahead. Two members shared their experiences and thoughts on the subject, and UniCredit provided its knowledge.
KEY TAKEAWAYS
1) No cookie-cutter IHB. “There is no cookie-cutter approach,” one member said, describing how his company approaches in-house banking. For starters, it avoids the term in-house bank, preferring the phrase cash center; some companies may like this approach, which avoids the potential regulatory scrutiny banks face. Beyond nomenclature, using an open-ended definition of an IHB takes advantage of the fact that most people outside the treasury world understand what banks do, which will help them understand what a centralized treasury does.
2) IHBs promote centralized control. There is an advantage to viewing the IHB as a centralized platform to manage and control a wide variety of treasury and other financial services to the business and even broader stakeholders. These services should be the drivers of your IHB definitions and the business case to build them. A UniCredit slide titled “Road Map to Treasury Centralization” shows a progression: from decentralized structures where each subsidiary has treasury activity; to partially centralized companies using cash pooling, netting and payment factories; to a fully centralized model, where a global in-house bank has on-behalf-of functionality (POBO & ROBO) along with intercompany financing.
3) Multiple factors driving IHB adoption. Interest in IHBs is growing, fueled by catalysts that include:
- US MNCs, in the wake of tax reform, are reviewing global legal entity and global liquidity structures, in which IHBs often play an important role.
- MNCs with IHBs in Europe, especially those based in the UK, may relocate them due to Brexit or EU tax rulings. Banks are making progress in offering virtual accounts and services, creating new opportunities for MNCs to refine IHB interfaces with external banks.
- Europe’s second Payment Services Directive (PSD2) is creating opportunities for nonbanks to offer innovative new services, especially in payments, that can connect to an IHB platform.
- Digitalization and new technology are making the general service model more customer-focused, changing the way IHBs serve internal and external customers and resulting in greater ease and efficiency.
Advancing the RPA Revolution
One member’s demonstration of a business risk and insurance chatbot that answers employees’ routine requests for certificates of insurance captivated members, many of whom are working on or exploring robotic process automation (RPA) projects and tools using artificial intelligence (AI). And many are not embarking on these projects alone. The presenting member is working with a company called Pypestream that offers “customer engagement solutions” in the form of bots and robots. The majority of NeuGroup members using third parties to assist their automation efforts are turning to Blue Prism and Automation Anywhere, the latter calling itself the global leader in automatic process automation. Other companies answering the pre-meeting survey named data visualization tools Tableau and Microsoft’s Power BI.
The uses for the new technology listed by respondents included “routing processes that don’t have scale to send to a shared services center,” manual journal entries and back-office finance shared services. It’s becoming abundantly clear that any repetitive task that is going to be around for a while, including bridging data across ERPs, is ripe for RPA. That said, 44% of respondents said they didn’t know if their company has a tangible digital strategy.
OUTLOOK
With these and other driving forces propelling NeuGroup members to undertake IHB projects, we are working in many of our groups to explore the current state of IHB evolution and help identify opportunities and best practices. At the meeting, 86% of those polled said IHBs are likely to be the future of treasury platforms. So we want to provide a road map for companies looking to overhaul an existing IHB and those that want to create a new one.
Rethinking Treasury Structures, Functions in the Digital Age
A member whose company has a treasury staff of between 90 and 100 employees gave a thorough presentation of the department’s organizational structure, providing fodder for a wide-ranging discussion about the ideal division of responsibilities in treasury and the benefits of being a generalist vs. a specialist in an era in which technology and automation are reshaping who does what in finance.
KEY TAKEAWAYS
1) Pillars with a purpose. The presenting company has four assistant treasurers who are responsible for four so-called pillars: 1) trading and investments; 2) corporate finance; 3) treasury operations; and 4) risk and strategy. Each pillar contains between three and five functions with defined areas of responsibility and its own staff. And each pillar has a mission aligned with treasury’s overall mission: Serve the parent company’s business and finance teams; optimize the parent’s balance sheet; protect the company’s financial assets. One member questioned the rationale for some segmenting of units within the pillars, saying, “We would never separate strategy and execution.” The presenting member conceded there is “some tug of war on who should be doing what” within treasury’s multiple pillars and subgroups. This underscored how structural logic can be a challenge in organizing treasury optimally.
2) Consider consultants. Another member said his high-growth company hired a third party to assess treasury’s structure and now has a goal of creating clear segmentation between the front office, mid-office and back office. Part of the motivation for seeking outside help was errors and problems resulting from traders doing settlement and reconciliation in addition to the trade itself. The member praised the consultant’s work and said seeing the structure on paper made it easier to determine where the department needs streamlining and where automation—the goal of all modern treasury when it comes to repetitive, transactional functions—fits in to make treasury more efficient.
3) The value of generalists vs. specialists in the digital age. Beyond structure, the digital age is influencing treasury’s recalibration of the relative value of personnel with wide-ranging expertise and those who are specialists in discrete finance disciplines like FX or cash management. This adjustment is taking place amid more rapid turnover in the treasurer role than in decades past. The group’s consensus is that becoming more of a high-performing generalist than a narrow specialist sounds smart: Not only will robotic process automation (RPA) and artificial intelligence take mundane, transactional duties out of the hands of humans, machines will also learn to analyze data and suggest or perform actions with increasing intelligence and could start to outperform treasury specialists. Rotations through treasury will become more important as the need for people with strategic skills and instincts increases.
Capital Questions
Less than a year after the US tax overhaul freed up trillions in cash parked overseas, member companies are in various stages of repatriating cash and making changes to capital structure and allocation. An assistant treasurer at a company that has brought back more than $25 billion (and has taken some losses on transferred assets) said treasury is trying to determine “what is the right capital structure going forward, what to do with the cash, what do investors want?”
Another member said her company’s capital expenditures rose, but not because of tax reform. But the overhaul meant the company could fund the capex “more easily.” She said the company now is trying to figure out the right cash balance and is finding its banks all “use different metrics” to help answer that question. The member said her company’s complex entity structure means it takes longer to determine the most efficient way to bring back cash and there’s been no need to bring it all back.
A third member said she knows what her company needs to do with the cash: pay down debt. The more problematic issue: Prior to tax reform, the company ran a large commercial paper program, so cash forecasting was “not a big deal; if I’m within a billion it was comfortable. That is obviously no more,” the member said.
OUTLOOK
This in-depth look at one company’s organizational structure resonated with many members, prompting a suggestion that the group have one member present his or her company’s treasury structure at every future meeting. The value of this type of analysis is likely to increase as treasury takes on more responsibilities and plays a more strategic role within companies, and as new technologies mean some tasks formerly done by humans are automated and controlled by algorithms, bots and the power of artificial intelligence. Treasurers will need to surround themselves with and maintain people in key treasury roles who have good general treasury judgment honed by experience in a variety of treasury and finance disciplines to provide environmental, social and governance checks on the machines while also ensuring the people understand how to support all stakeholders.
Looking Ahead to the Next Recession
UniCredit’s chief European economist, Marco Valli, gave members a rundown of the bank’s concerns about trade tensions between the US and China, the outlook for US and European economic growth, and the window for the European Central Bank to normalize interest rates before the next US recession.
KEY TAKEAWAYS
1) Rates, recession and the closing window. Mr. Valli said the window for the ECB to normalize monetary policy will close over the course of 2020. That’s based in part on the bank’s expectation that the US will enter an economic downturn in 2020, prompting the Federal Reserve to cut interest rates. He said the ECB is behind the US and will be lucky to bring rates back to zero from current negative levels before the eurozone starts slowing materially. Expect the first rate hike in late 2019.
2) Expansionary fiscal policies, more QE. With rates at zero, the ECB will have very little room to stimulate the eurozone with monetary policy, Mr. Valli said. So “all of Europe” will have to embrace looser fiscal policies to combat the next downturn, he said, adding that it’s “not thinkable” that only Germany can do so. The ECB, meanwhile, will have to embark on another round of quantitative easing.
3) ECB crowding out fixed-income investors. The euro capital markets should remain attractive and may even see spread compression again if the ECB resumes its bond purchasing program, since other European fixed-income investors tend to get crowded out, leaving even more appetite for US names not eligible for ECB purchase. One presenter from UniCredit said, “European investors love US issuers” because they offer diversification from European issuers. But he conceded issuance by US MNCs is down, in part because of US tax reform and unresolved tax questions about offshore borrowing.
Odds & Ends
- PE firms will have to cope with leverage. One member noted an advantage her company now has when competing against private-equity firms for acquisitions: The interest deductibility limits under tax reform are not much of a constraint for investment-grade MNCs compared to highly levered PE firms. As PE firms learn to cope, they may be less aggressive in bidding up valuations for targets.
- Risk appetite differences. One assistant treasurer told the group that he’s trying to get more clarity on the company’s risk appetite. Treasury “de-risked” its portfolio strategy for cash a couple of years ago, he said. But the company’s founders are always challenging treasury to take more risk and “do something with a piece” of the cash, while the CFO “has a different viewpoint.” This, of course, raises the larger question facing treasurers of whether to shift from passive management to a more active approach.
- Managing talent. One member described a finance-wide effort at his company to become “more intentional about how we manage talent.” The goal is to build more transparency, education and consistency into the employee performance review process and tie performance reviews to an “attributes framework” so employees have more insight and comfort about the promotion process.
OUTLOOK
Fears about Brexit and Italy’s battle with the European Commission over fiscal policy have given rise to questions about Europe’s economic health and the sustainability of the European Union. In a poll at the meeting, more than half the members put the odds of a eurozone breakup in the next five years at less than 20%. But the possibility of a breakup and the specter of another round of QE in Europe is something MNCs need to factor into liability and risk management planning. And by 2020-21, we should also have greater clarity on tax rules potentially favoring offshore borrowing and which way the next US administration and Congress will lean, and the resulting policy sentiment about corporate taxes.
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