Global cash and banking managers deal with current market challenges while advancing on the path of operational efficiency.
On the current market challenges front, HSBC presented recent developments and client trends around centralized treasury structures. Members continued their discussion of the challenges of managing a notional-pooling structure and updated us on their plans for the future. On the best practices front, members discussed their current approaches to reporting and KPIs.
1) The Future of Treasury. The centralization path is a long one, and companies that have more successfully walked this path do it with a very clear set of goals in mind.
2) The Pool Is Closed. As corporates centralize operations and improve their support systems, they are able to move away from notional-pooling structures to physical pools and IHB structures.
3) Treasury KPIs — What Do You Measure? Metrics should help make decisions or provide actionable directions in order to be useful.
Sponsored by:
The New Banking Paradigm
The current regulatory environment has added pressure on banks’ capital and they are becoming more selective about the businesses and markets they want to pursue. Change is taking place at a rapid place in the banking industry, as evidenced by RBS’s retreat from Europe, HSBC‘s sale of its Brazilian and Turkish operations and banks’ unwillingness to hold large cash deposits, just to mention a few examples. In reply, members are looking more closely at their banking partners and dusting off and updating their backup plans to be able to adapt rapidly if needed.
Also, changes in regulations might affect pricing, but mainly it will affect the way banks look at their business relationships. Basel III is increasing the cost of doing business and affects certain offerings more than others. In this context, banks might pass along some of the additional cost of certain products depending on the risk profile of the client. Notional pooling is one of the affected offerings. It won’t go away, but banks will evaluate it in the context of the overall business relationship, since this service can be less efficient or too expensive to offer.
The Future of Treasury
Treasury transformation has been a key area of focus for many of the world’s largest corporates over the past few years. Key goals now are to reap the benefits of implemented streamlined structures while optimizing investments in resources and treasury technology systems. In this session, HSBC discussed best practices, recent market developments and client trends around centralized treasury structures and In-House Banks (IHB) as treasurers look to make the most out of efforts and expenditures made in this space.
Key Takeaways
1) Change is in the air. HSBC challenged the group to take a look at the many sources of change in their current environment and to discuss how prepared their function is to face the challenges and opportunities that may accompany these changes. It is clear that the landscape is evolving and affecting treasury managers’ ability to manage cash efficiently. Treasury organizations have to review at least their preparedness and start setting up plans to respond if they have not done so.
2) Changes in regulations might affect pricing, but mainly it will impact the way banks look at their business relationships. Basel III is increasing the cost of doing business and affects certain offerings more than others. In this context, banks might pass along some of the additional cost of certain products depending on the risk profile of the client. However, the main outcome is that banks will be forced to take a more holistic approach when looking at their client relationships. In turn, this might lead to more concentrated banking relationships for practitioners and more thorough risk counterparty evaluations.
3) Regional centralization is one tool to manage better through change. Centralizing operations in a regional treasury center allows companies to have better cash visibility, efficiently deploy excess cash, reduce transaction costs and hedge more effectively. This is possible in part because of the adoption of regional/global regulations and industry initiatives that allow for standardizing treasury processes, as described by HSBC. The expectation is that, long-term, more regions will feel the need to move towards more standardized payment types.
4) Cash mobilization structures are also part of the solution. In-house banks and POBO/ROBO structures allow will become even more popular given the efficiencies that they can provide. The market is moving away from overlay structures into physical consolidation. To take full advantage of these structures, it is critical to understand the technologies that can enable their implementation as well as best practices in implementation and day-to-day management.
Outlook
Change is here, and treasury managers have the opportunity not just to react to patch the “hole” the latest challenge creates, but to look at it holistically and in a bigger context. There is an opportunity to define the long-term vision of treasury operations and to start taking steps in that direction.
Cyber Crime: Not Just an IT Problem Anymore
Cyber attackers continue to target individual consumers but also larger organizations. Meeting sponsor HSBC’s presentation provided very interesting insights on the current threats faced by banks and corporates:
- Attacks range from trying to access financial data to steal intellectual property or to create a serious business disruption.
- Attackers’ tools and techniques, in many ways outpace, innovative detection and prevention security controls.
- Attack tactics range from using malicious code and social engineering to
taking advantage of physical/proximal access. - Attackers no longer only try to reach your system via another system: They will look for any weak point that will allow them to touch your systems, including your staff or your supply chain.
- Attackers are no longer just individual hackers, but entire criminal organizations or, in some cases, countries.
- IT can be a great partner to find best practices to manage access to treasury systems, like providing training, monitoring, tools and guidelines.
The Pool Is Closed
Given how new regulations are affecting the long-standing use of global cash pooling structures, what should treasurers be doing to ensure their existing pooling structures will survive longer term?
Key Takeaways
1) The best pooling structure for a company depends on its particular circumstances. There are many benefits of pooling cash, including (i) ability to leverage credit & debit positions across multiple entities & currencies; (ii) greater visibility to cash balances; (iii) funding flexibility; (iv) increased interest income; and (v) decreased interest expense. That said, choosing a notional or a physical pool depends on the particular circumstances of the company. Notional pooling is ideal for companies with decentralized treasury organizations and no TMS in place. The management of the pool is transferred to the bank, which allows the company to obtain the benefits of pooling without having the infrastructure to support it.
2) But benefits of notional pooling aren’t free. Besides the obvious costs associated with interest rates and FX spreads, there is the internal cost of providing the cash forecast needed to manage the pool. This is especially onerous when the company has not developed the systems and processes to automate and standardize the data collection. And there is the added risk of relying on a single banking partner to support the pool.
3) As circumstances change, the pooling structure needs to be reassessed. As either internal or market circumstances change, the costs of running a notional pool might outweigh the benefits and a new solution might need to be put in place.
In the wake of Basel III, banks might require updated customer legal documentation regarding the right of offset and cross-guarantees; increase the cost to pool notionally; reduce the sizes of debit and/or credit positions; and limit availability of this product based on creditworthiness of customers. Also, RBS retreating from Europe has left some members looking for a new partner to take over their notional pool. In this environment, many companies have decided to reassess their need for a notional pool.
4) Best practice should be to reassess liquidity structures routinely. Even if a change in regulation or a bank leaving the space is triggering the re-evaluation of the pooling structures, members mentioned that when looking at the structures, there were other reasons that warranted the move away from a notional pool to a new liquidity structure. This highlights the need to establish periodic reviews to ensure the current liquidity structure is the best, which is difficult in an environment in which treasury organizations are in need of resources.
Outlook
As members look at their notional pools and decide their future, there will be many decisions to make if they decide to move away from their notional pooling structures. Treasury managers will need to have a clearly laid out plan to execute the move successfully. The group will continue to explore alternative liquidity structures in the next meeting.
Choosing Effective KPIs
There is no “one-size-fits-all solution.” A KPI is most effective when aligned with the goals of the organization, so it can help drive the operations toward achieving those goals. In that spirit, KPIs will differ from company to company. They are also heavily influenced by the operational structure and the systems and processes in place. For example, companies whose operations are significantly automated will be more prone to measure and benchmark straight-through-processing metrics than a company with less automated processes.
When choosing KPIs or metrics, make sure they provide actionable information. The information you compile should allow users to make decisions: If it is easy to compile but not actionable, it is a waste of time.
Even if there is value in tracking several metrics for day-to-day decision making and compliance, not all metrics should be KPIs. At their best, KPIs will drive projects and process improvements geared toward achieving treasury’s goals. If there are many organizational goals, resources would be spread too thin to be able to make a significant impact.
Treasury KPIs — What Do You Measure?
As corporates continue their quest for efficiencies, there is increased emphasis on finding the right KPIs to measure effectiveness. In this session, members discussed their current approaches to reporting and KPIs to define best practices in selecting KPIs for a global cash management organization.
Key Takeaways
1) Cash groups as centers of excellence and risk management, not cost centers. Most members track cash operations across three main categories:
- Cash operations (95%) — e.g., # bank accounts, cash balances, % cash visibility, % pooled cash, STP
- Bank relationships (80%) — e.g., counterparty limits, bank fees
- Cash and liquidity forecasting (65%) — e.g., % forecasting error
When looking at the data being reported, treasury managers focus on what the facts say about operational efficiency and risk associated with the operations. The implication is that, even though they do not focus on reducing cost, they achieve it indirectly via operational efficiency and risk management.
2) Reporting metrics come in many shapes and forms. Depending on the activity being monitored, reporting frequency among member organizations varied from a daily to a monthly, quarterly and even annual basis, but most operational measures were assessed monthly. The main user of the information was usually treasury itself; however, some metrics were geared to keep the CFO, the finance committee and board of directors apprised of the state of treasury operations.
3) Leverage technology. In an environment in which treasury operations are moving away from non-value-added activities, it is important to leverage technology when it comes to generate and track KPIs. Streamlining processes and systems so reporting becomes an STP should be the objective.
Outlook
As corporates continue their quest for efficiencies, we will see more attempts to find the right KPIs to measure effectiveness. The challenge will be to not get carried away by the effort to measure everything, losing sight of the ultimate goal — to benchmark with the objective of improving processes. If the measurement does not provide actionable information, then it’s useless. Also, there has to be a cost-benefit balance between the time it takes to prepare reports, if they are not automated, compared to how that time could otherwise be used.
Conclusion
Market challenges continue to grab the attention of busy cash managers. However, they are making their best effort to take these challenges as opportunities to continue to improve their operational efficiency and advance strategic projects.