By Joseph Neu
Had the summer ended merely hot, then the role of treasury in managing the meltdown effect on polar ice would have made more sense; however, the unexpected late-summer global credit markets meltdown—not melting ice—gave the impression that EuroFinance’s 16th International Conference on Cash and Treasury Management got off on something of the wrong foot. As The Economist’s Executive Editor Daniel Franklin, who followed the opening session on climate change with a preview of the magazine’s “World in 2008” economic outlook report noted, perhaps the wrong “CC” had been the lead.
LOOKING PAST THE CREDIT IMPACT
Still, neither Mr. Franklin nor most of the audience disputed that climate change is an important issue for multinational corporations. Quick polling of the audience suggested a consensus that the credit crunch would be a distant memory by next year (perhaps wishful thinking); unfortunately, climate change will most certainly stay “hot.”
Plus, according to Mr. Franklin, the recent liquidity squeeze has come at a time when the global economy boasts all-time heights of prosperity. Forecasts from the Economist intelligence Unit (EIU) showed that even in the US (where credit issues originated), there is a 60 percent chance that economic growth will continue next year at close to 2 percent. Of course, there remained the 40 percent chance of a less-rosy outlook, as well as a 10 percent chance of a severe recession, were the Fed to fail in propping up the economy.
The bottom line is that so long as global economic growth holds up (avoiding crisis), there will be plenty of attention focused on the longer-term issue of climate change. This is especially true in Europe, where regulatory moves to encourage carbon emission reductions will be strongest. Consequently, climate change will take on increasing urgency on many corporate agendas, as they are defined by the C-Suite and Board. And where they go, so too should corporate treasurers if they want to add value in support of the broader business agenda.
Fortunately, there is plenty treasury can do, in particular under the carbon emission trading schemes favored in Europe. Anne Boden, head of transaction banking for Europe at ABN AMRO, pointed out several ways treasury can manage carbon risk. Many of them are similar to its role in managing commodity exposures and supply-chain finance).
If the role of treasury within corporate climate-change initiatives is akin to its role in managing commodity price exposures, then it pushes treasury’s agenda closer to that of the CFO. The number-one challenge confronting treasurers over the next 12 months is commodity prices, according to 51 percent of CFOs polled by CFO Europe (also an Economist Group publication; and another sign of how the Economist Group footprint is getting heavier at EuroFinance since its January 2006 acquisition). Coming in a close second (at 48 percent) was forecasting cash flow, followed by the changing credit cycle (33 percent).
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SEPA (OVER) HYPE Much of the information presented at the EuroFinance International Conference related to the Singe Euro Payment Area (SEPA) suggested that it has received more attention than its impact warrants—at least immediately. Indeed, more corporates than not (51 percent) surveyed by EuroFinance before the conference stated they had not yet even investigated the impact of SEPA on cash and liquidity management. Here’s why they may be wise to avoid the SEPA hype: • Banks not totally ready. While nearly every bank will profess to be ready, many will not be capable of progressing past base compliance and offer customers the benefits of a single payment platform for all of Europe. The start date for credit transfers (the first phase) has already been pushed back to January 28, from January 1 of next year to give banks more time to work through technical issues. Direct debits were set back further, due to delays in enabling legislation by the EU. The infrastructure changes contributing the most to large corporate treasury operations aren’t scheduled to begin until 2010. • Large corporates to gain regardless. Analysts, including McKinsey’s, suggest that small-to-medium sized companies and their mid-tier banks may have more to gain from SEPA directly than large global corporates and banks. Banks servicing MNCs are being forced to make the changes impacted by SEPA anyway, as their customers continue to centralize. SEPA just gives them another reason to push for streamlined accounts and pay-on-behalf arrangements. |
FORMING CLOSER TIES WITH OPS
Certainly, CFOs in the survey said they expected treasurers to do more. Asked if there was one thing they would change about their treasurer, nearly a third of the CFOssaid that they would like treasury to provide improved cash forecasting, and a fifth wanted less data and more analysis (a wish that echoed that of most treasurers). Further, treasurers who look to please their
bosses—at least in Europe—should focus on improving their knowledge of business operations, as 17 percent of CFOs surveyed said this was the one thing they would change. And this certainly makes sense; if treasury is going to improve its cash flow forecasts, it is going to have to know what drives the cash-flow generating operations of their firms.
Which brings treasury full-circle back to encouraging and fostering closer work ties with sales, procurement and operations. According to the data from a pre-conference survey conducted by EuroFinance and presented by Sebastian di Paola, a partner with PricewaterhouseCooper’s Corporate Treasury Solutions Group, over a third of the 312 firms polled reported that sales is the function most hard of hearing within their organizations; procurement and operations came in next, at 21 and 18 percent respectively.
No wonder then that the same survey indicated that two-thirds of treasurers share their bosses’ dissatisfaction with cash-flow forecasting accuracy. The cause of this dissatisfaction for treasurers, according to the survey, is the lack of appropriate processes and technological tools, incorrect data, as well as corporate staff’s seeming low motivation to input fresh data.
The dissatisfaction with forecast accuracy is certainly one of the reasons that more companies (41 percent) reported they are considering turning to ERP solutions for their treasuries—the latter are supposed to give treasury more direct access to cash-flow data. If experience is any indication, then the move would mark a point of no return: almost 63 percent of corporates already using an ERP treasury module said they won’t go back to a dedicated treasury management system (TMS). The migration to ERP treasury modules is something the NeuGroup has also seen in its research with peer group members.
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SERVICE EXPECTATIONS IN INTERNATIONAL CASH A panel convened at the EuroFinance International Conference looked at the latest trends in international cash services. What it made clear is that treasurers define the best service as that which need not be discussed because it simply works: • Responds to change. The best service responds effectively to changes in the company without prodding from treasury. If there is a new acquisition or change in business plan, the bank providing cash services should respond accordingly. • Fixes problems. No treasurer expects a problem-free service relationship. However, what differentiates good service from bad is how the bank responds. It is the bank that should come forward, identify the problem and offer to fix it. The bank should not expect, as many seem to, the customer to flag the problem for the bank and help the bank find the solution as well. • Is self-sufficient. While SEPA and other trends make non-global network banks more competitive, there is still a preference for global players among treasurers. While all the panelists agreed that local in-country relationships are vital, especially in emerging markets, there is a preference to link them into the global scheme with as few intermediaries as possible. Partnerships between banks will be an unavoidable and an integral part of international cash service relationships, but banks must prove themselves to be effective and reliable service integrators if they expect treasurers to embrace them. |
ENSURING ALIGNMENT
While there was plenty of overlap between the CFOs’ and treasurers’ agenda revealed by the two surveys, there were signs that they were not totally on the same page. For example, treasurers ranked FX (vs. commodity prices) and liquidity management (vs. cash forecasting) as their top two concerns. The first may reflect the unprecedented strength of the euro, while the second the recent shock to the credit markets.
Notably, however, when treasurers were asked where the CFO needs more knowledge about treasury issues, financial risk management followed by cash and liquidity management ranked one and two. This might suggest that (1) treasurers more fully appreciate the impact of FX on input prices in today’s global supply chains; and (2) that CFOs place too much emphasis on forecasting cash, rather than effective management of known cash and liquidity.
Finally, to tackle their agenda, treasurers are also concerned with implementing new treasury structures such as in-house banks and payment factories. These structures arguably can help with FX, liquidity management and more. However, treasurers should also look to use them to provide better analysis of business-, including cash flow from, operations, if they want to keep their bosses totally happy.
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ABN AMRO’s Last Stand? There clearly will be other conferences where ABN AMRO will have its own stand (or booth) before the proposed merger/break-up of its assets is finalized; however, last month’s event, where it was lead sponsor, will likely be one of its last before it starts down the path to its post-acquisition form. In the consortium bid, many of ABN’s businesses serving multinationals will end up with RBS—with the notable exception of local banking offerings in countries like Brazil, where Santander has dibs on ABN AMRO’s Banco Real. • Nothing to fear? Global cash managers concerned about cash services concentrated with ABN (see IT, June 2007) may take comfort in the words of Ann Cairns, CEO of Transaction Banking for ABN AMRO; Ms. Cairns assured us in an interview that ABN’s transactions network will likely remain mostly intact. This means today’s service-level agreements (SLAs) should survive as well. Looking at the relative strength of the cash management capabilities of the group Ms. Cairns runs compared with the acquirers’, her claim appears to hold water. While the perception that ABN AMRO is technologically challenged and lacks critical network integration dies hard, a key part of Ms. Cairns’ mandate when she joined the bank five years ago was to improve the technology platform and make it fully web-based. There has been tangible evidence of success, including award-winning solutions like MaxTrad, for trade finance, and the improvements made to ABN’s internet banking portal, Access Online, that have allowed better interaction between cash and liquidity positions and those for payments and trade. • People are key. While systems are important, banking is primarily a relationship-driven business. Therefore, a key element of Transaction Banking’s success has been the “can do” culture of its people. Ms. Cairns noted that while the transaction business is a scale (read: commodity) business that requires a level of product standardization, she has encouraged her staff to be creative in the application of the bank’s solutions to the needs of customers. Her comments were backed by the attitudes on display from her staff: employees attending the event were generally upbeat about the opportunities that will come with change. • US challenge. ABN customers in the US may be understandably anxious about how the new bank will replace ABN’s existing footprint, which will be diminished with the sale of La Salle to BofA. Under the likely consortium bid, Citizens (owned by RBS) would become the cornerstone of the bank’s US-transaction banking presence, but that will take some work. • Global advantages. Despite the break-up implications of the consortium bid, the trend in international cash management services continues to favor global network banks vs. looser partnerships. This suggests ABN’s new owners are best leaving the bank’s global network as intact as they can, which in turn should leave the Transaction Banking team something to sell MNCs when they get their new business cards. |