February 11, 2016
By Julie Zawacki-Lucci
By the end of 2015, treasurers had rearranged their priorities lists, but their top priorities remained the same.
NeuGroup Peer Research highlights what we learn from our unique access to survey data, trends and insight of world-leading treasury and finance professionals interacting across The NeuGroup Network. In this our introductory piece, we show what has been top of mind for treasurers as they wrapped up 2015.
latest Research KEY FINDINGS
- Capital structure and interest-rate management initiatives are top of mind. With the December Fed rate hike a reality, more hikes possibly on the horizon, and shareholder activists pushing for returns, treasurers are taking a fresh look at their overarching capital structure. Of those respondents naming capital structure as their top priority, 40% are focused on planning and analysis, 30% on debt financing and 16% on capital allocation. The rate environment has reached a turning point. Although higher rates mean higher borrowing costs, they also furnish the opportunity for higher returns on cash reserves; and managers are vetting allocation and investment strategies.
- FX management under a strong USD continues to cause pain. FX losses as a result of continued USD strength made it a tough year for many US-based members. Emerging markets have been extremely difficult to manage as well, due to historically depressed commodity prices and the slowdown in global economies. Thus, members continue to evaluate their existing hedge programs and are making moves toward more dynamically run programs to allow for better management of their portfolio of exposures. The vast majority of members cited priorities in this category that involved FX, although commodity risk entered into the equation for some in connection with overall hedging, market volatility and emerging market weakness. China was cited as part of the FX priority for 10% of members. The most referenced project type was related to efforts to improve FX programs: 24% focusing on program management, 17% on hedge execution and 17% on exposure management, all of which require stronger communication, better reporting and sturdier cross-functional ties throughout the organization. Dollar appreciation requires proactive messaging and metrics to show that the underlying business is performing.
- The new era of cash management still being defined. Treasurers still puzzle over where to place their cash as banks discourage deposits in response to regulations and as the utility of traditional short-term cash investment alternatives diminish. Because banks refuse or limit deposits or offer negative rates, the cost of cash forecasting inaccuracy has become more important, underscoring the need for treasurers to focus on how much cash they have or will have, and what deployment options are viable across various time horizons. Of those respondents naming cash management and liquidity as a top priority, 31% are focused on cash-flow forecasting and 27% on liquidity management. The eventual cost of the liquidity drain will be higher transaction costs, more volatility, higher liquidity buffers and more demand for liquid bonds. Since liquidity will become more expensive to keep, those companies with robust forecasting will be best prepared to weather the storm.
- Systems implementation and enhancements planned to increase efficiency, automation and security. Technology and TMS-related projects jumped up treasurers’ priority lists from the first half of the year; 11% of all respondents are now seeking technology changes and/or enhancement in their groups. We’ve learned that changes are underway for some members since throughout meeting cycles and across our network, we hear of system dissatisfaction and encourage benchmarking in search of better solutions. In response to TMS-related project discontent, The NeuGroup initiated a Principles of World-Class TMS project in 2015 that included a comprehensive survey of treasury technology strategy, selection, implementation, and support practices. In compiling the results, we discovered that as many as 70% of respondents to the TMS survey said they did not have their desired treasury technology end-state. The current need for tighter security controls, increased efficiencies and more sophisticated reporting is helping pave the way for executive buy-in on tech transformation projects.
- M&A-mania and integration efforts pick up momentum. NeuGroup members were part of a larger M&A boom in 2015 as growing confidence in a global recovery, large cash reserves, strong balance sheets, and low interest rates allowed for advantageous funding and provided companies with the opportunity to aggressively pursue expansion. Whether to pursue new deals or how to integrate recent ones are top of mind for 7% of survey participants. One of the key themes that emerged from our recent meetings was whether more members should join the wave of strategic acquisitions, cresting of late, which are creating valuations that are increasingly hard to justify against most firms’ return-on-capital metrics. Some members reported being in the midst of absorbing previous acquisitions, or waiting on approval to close, which puts off their next major purchase and has left a lot of work on the table to integrate into processes, controls, forecasts and models.