Making the Most of Talent and Technology, Building a Capital Allocation Framework

Treasurers mull a new synthetic currency product that lowers borrowing costs, discuss how to avoid being bullied by rating agencies, weigh TMS benefits. 

The T30 meeting in Santa Clara, Calif., in late November, sponsored by Standard Chartered and hosted by Avaya, featured a new loan product designed to lower the cost of dollar borrowing, a fresh look at share buybacks in the context of capital allocation, a discussion of treasury roles and responsibilities from two perspectives and a dive into technology, including automation, and its role in advancing treasury’s agenda. Here are three themes that emerged from the meeting:

The T30 meeting in Santa Clara, Calif., in late November, sponsored by Standard Chartered and hosted by Avaya, featured a new loan product designed to lower the cost of dollar borrowing, a fresh look at share buybacks in the context of capital allocation, a discussion of treasury roles and responsibilities from two perspectives and a dive into technology, including automation, and its role in advancing treasury’s agenda. Here are three themes that emerged from the meeting:

1) Lower Dollar-Cost Borrowing with Synthetic Borrowing Units (SBUs). Standard Chartered explained the pros (cut borrowing costs) and possible cons (increased FX volatility) of this new product. Is it worth the risk?

2) Job One for Treasurers: Elevating the Team. It’s all about making the most of limited resources as treasury’s responsibilities grow. Are you spending enough time educating the next generation of leaders?

3) Leveraging Technology to Enable Treasury’s Expanded Scope. The more sophisticated digital technology becomes and the more acronyms you have to learn (AI, RPA, ML), the more pressure there is on treasury to automate what it can and put humans to better use. Where are you on this journey?

Lower Dollar-Cost Borrowing with Synthetic Borrowing Units

Corporate appetite for debt on the balance sheet has increased in a low-interest-rate environment, and US corporate debt outstanding was north of $8 trillion at the time of the meeting. The EUR and JPY bond market rates are low, leading US companies to increasingly raise debt outside the US, mainly in EUR but also, to some extent, in the low-yielding yen. But with interest rates rising, are there new approaches to use to maintain a lower borrowing cost? Anthony Ring, Americas head of structuring at Standard Chartered, shared an innovative solution that reduces USD borrowing costs by two percentage points by accessing funding from a diverse currency universe. Something new for your debt toolbox?

KEY TAKEAWAYS

1) How good does a guaranteed 200 bps reduction in borrowing costs sound? Enter the synthetic borrowing unit (SBU). The aim of the SBU is to optimize funding by reducing interest cost by two percentage points per annum. It does this by creating a synthetic currency from a diversified basket of 19 G10 and emerging markets currencies. The weights of the currencies are rebalanced monthly to maintain a two-point cost savings over the tenor of the borrowing. SBU is calculated by a third party and published on Bloomberg so Standard Chartered avoids any conflict of interest.

2) Are you willing to take some FX risk to get this? Repayment of the funding is based on the prevailing SBU vs. USD spot rate, resulting in potential for FX gain or loss on the principal. However, the FX volatility on a basket of carefully selected currencies is by nature much lower than that of any individual currency, that is, it’s in the range of 2%-3%, rather than 10%-15%. The question is: Can you stomach a little FX volatility on your debt? It’s a change in mindset from the approach of fully hedging debt or swapping it back to dollars.

3) Cap the downside at a reasonable cost. If FX volatility on debt is not palatable, hedging it with an option would limit the downside. That comes at the cost of an option premium, but note that the lower volatility keeps the premium down and the bank requires a lower capital charge on the loan product.

OUTLOOK

Feedback so far, according to Mr. Ring, includes some who deem it “not worth the FX risk,” others who are OK with it, and some who like the diversity this product could add to the debt portfolio. Another consideration, as a member pointed out, is whether you have the ability to pass higher borrowing costs on to customers, and what flexibility that gives you in your debt decisions. Those with limited ability to pass on higher costs may want to kick the tires on this product, perhaps with the option to cap losses.

Job One for Treasurers: Elevating the Team

A recurring theme across our treasurers’ groups in 2018 was the challenge of attracting, training and retaining the right talent, building sustainable team cohesiveness and increasing treasury’s sphere of influence in the overall enterprise. In a discussion of the different treasury organizations at two member companies—both in technology but with different service offerings—a few themes stood out.

KEY TAKEAWAYS

1) It’s not just what you own; it’s what you can influence. Managing and elevating teams emerged as the most important job for treasurers who need to do much more with the same or even fewer resources. It’s imperative to figure out what treasury should own and focus resources on, while also wielding influence in the rest of the organization to achieve common goals. As treasurer, you have a “license to engage across the company,” as one of the session leaders put it.

2) Take help from outside to educate the next generation of leaders. The session leader said he spends 50% of his time educating senior management teams and high-potential people in his company. Twenty individuals are selected each year to complete a carefully designed “Wall Street Symposium.” Delivered by Citi or BAML, it’s designed to broaden high-potential and existing senior leaders’ knowledge and perspective about capital structure, financial markets and, “most importantly, value creation from an external shareholder perspective,” according to the presentation. Being selected for this program is an important career step and a feather in their caps for participants, which increases the motivation to absorb and deploy what’s taught.

3) Co-locate—if you can afford it. At the other presenting member’s company, the C-suite is located in four different offices, a spin-off legacy putting accounting, tax and legal on the East Coast while treasury has nine people in the San Francisco Bay Area and six in other places. Treasury’s head count has been reduced by 40% in four years. Contrary to current trends of relocating staff to lower-cost jurisdictions like Texas and Florida, this treasurer sees more value in co-locating his small team than spreading it out for cost reasons.

OUTLOOK

How can you increase team size? Should you? Our research clearly indicates that treasury grows as the company grows, but as its scope broadens, treasury folks often complain that they need more resources to perform the required tasks. So who should pay for it? A treasurer in another group whose company has grown by adding completely new business lines promotes the idea of asking for some of these new businesses’ budgets to hire treasury resources to support them, rather than asking the corporate C-suite for it. Even so, keep in mind that when asked if they would rather have opportunities to grow by taking on bigger roles or hiring more people, career-minded treasury staff are more inclined to choose the former. That puts the onus on treasury to deliver.

Leveraging Technology to Enable Treasury’s Expanded Scope

Technology and automation also stood out as big themes in 2018 in the NeuGroup universe. What new technology to choose and how best to deploy it? We can all dream about artificial intelligence finally solving the forecasting riddle, but in the day-to-day treasury trenches, having a well-functioning TMS and putting a bot on the low-hanging fruit among your processes will go a long way toward freeing up time for the team to spend on higher-value work. A member shared his thoughts on that and the savings his food-industry company has realized so far from automation.

KEY TAKEAWAYS

1) Are TMSs worth it? Yes. One member without one asked if a treasury management system (TMS) is really worth the effort of putting it in place. He seemed to come away with a resounding “yes” after the ensuing back-and-forth. While a TMS doesn’t do all things for all treasury departments, it can be a time-saving “lifesaver” for small treasury teams, allowing staff to move on to bigger jobs with “less typing and more thinking,” as a member with a broad treasury and risk role scope put it. Certain processes, like SOX controls and separation of duties (payment setup vs. release, for example), are also more robust with a system, and the more you standardize and enable through technology, the more processes can be pushed to a shared services center and/or be automated. But a few things to keep in mind:

• Avoid individual bank portals; make everything go via your TMS or ERP.
• Don’t go hosted; reduce your workload and upgrade efforts by choosing a SaaS solution.
• Avoid tailor-made reports; they may need to be tinkered with every time there is an upgrade to the system.

2) People want bigger and better jobs. Speaking of bigger roles (see previous section), automation plays a critical role in helping lean teams develop, elevate their roles and retain talent. “Not to automate the jobs you can automate is more brutal [on team members] than automating and elevating them to bigger jobs,” the session leader said.

3) Can it be automated without building a bot? The reasons for using robotic process automation (RPA) vary more than the reasons for implementing a TMS, this member noted. Automate where you have the data available and a clearly defined process, including most of the credit-decision process. As a member of another group said, “You put a bot in place to overcome deficiencies in existing systems.” Consider first if the process can be automated in the TMS, or if an Excel macro can do it. If not, then create a bot, but first automate smaller tasks and only use the bot to do the connecting steps.

OUTLOOK

The ROI on automation and bots varies. But the presenting member estimates that for a reasonable setup cost and about $2,000 a year in maintenance, you can realize an ROI of 150% on each robot. His company has automated 31 processes in its shared services center alliance, processed over 100,000 transactions and saved approximately 15,000 hours. What’s your low-hanging fruit?