By Joseph Neu
Much like a pendulum, management trends tend to swing back and forth. In treasury management, the pendulum has been swinging in the direction of centralization for some time. While the pendulum is not necessarily swinging back to decentralization, the wisdom of doing everything at headquarters continues to be rethought and here’s why.
As International Treasurer has highlighted before (see “Infrastructure Firms Re-Engineer Their Treasuries for Global Shift,” March 2010), all it takes is a look at a chart of GDP forecasts around the world to see why most multinationals will want to further position themselves to support business growth in less traditional markets. But this is not really what’s driving change in treasury.
Treasury organization drivers
Recent discussions with treasurers suggest the following factors are even more important:
- Global companies need centers of excellence around the globe. Whether it is cost-of-talent analysis, business continuity planning or simply diversification, more global companies are realizing value in setting up centers of excellence for corporate support functions in different parts of the world. It helps to do this where there are well-educated people, favorable regulations and taxes, good communications and tech infrastructure and relatively low entry costs.
Plus, MNCs are overlaying time zone, ease of travel and other factors to make shifting to higher skill-to-cost locations a means to improve global support infrastructure as much as to reduce cost.
Tapping into these locations may start with outsourcing arrangements that lead to shared-service centers, but eventually they evolve toward higher-minded centers of excellence where value-added work gets done. Indeed, a similar trend is being seen with corporate suites: CEOs are moving out of their traditional headquarters’ locales to plant their leadership flag in new places of strategic focus (of course, such moves also send a message to policy-makers that created the need for change).
- More exposure to diverse markets and business challenges call for decentralized knowledge and information flows. Coupled with the centralization of treasury activities outside HQ are moves to better educate and share treasury information and knowledge to empower finance and business managers at the local level to make better “treasury” decisions.
The mantra for risk management, for instance, is to push risk thinking all the way out to the front lines where exposures happen. This not only improves risk management, but eliminates the need for a local risk manager in every affiliate. The same holds true for other aspects of treasury, from cash utilization to credit and collections. Indeed, as treasurers gain more touchpoints with the business—across funding, risk management and management of working capital—working to embed treasury thinking into every affiliate decision, in lieu of a local treasurer, is the only path to success.
- Flexibility and redundancies mean more after a crisis. Among the many lessons of the financial and economic crisis is that relying on one team, one bank, or one access point to financing can be existentially dangerous. Setting up treasury at HQ, or even a single global payment center outside it, that is overly reliant on one bank—or one bank regulatory jurisdiction, for that matter—may be the most efficient solution on paper, but it may create unacceptable exposure. In response, treasurers are looking to build in redundancy and flexibility to change banks using SWIFT and preferring to have multiple centers partnered with more than one bank, perhaps with more than one chief regulator, and with cross-over back-up capabilities between centers where possible.
Centralized, but not
Centralization need not mean everyone is working from the same place. Indeed, it may be better not to be. This sums up one treasurer’s criticism of most calls for treasury centralization several years ago and it may be even truer today. While the pendulum may not have swung back far enough for advocates of a “decentralized” treasury organization, it has come to a point where treasurers can advocate that centralization take place across multiple centers and that it be made compatible with sharing of knowledge and information to make decentralized decision-making better.