By Bryan Richardson
What does it take to establish a World-Class management program? Here’s a summary of project results from the collaboration of The NeuGroup’s Global Cash and Banking Group and Citi’s Treasury Diagnostics Group on the main principles.
World-class athletes do not all follow the same approach to success. The training regimen for a marathon runner, for example, will vary dramatically from that of basketball player or speed skater. Yet, regardless of the sport, athletes will generally follow a commitment to universal principles like a proper diet, plenty of rest, aerobic exercises and strength training, in addition to the repetition and refinement of their specific sport.
Similarly, world-class cash management operations will vary by industry, company size, geographical coverage and other factors. They must conform to the specific needs of their business, which will differ from company to company. Yet, successful operations all follow a guiding set of principles in areas such as liquidity optimization, operational efficiency and organization structure. The World-Class Cash Management principles project was all about identifying and documenting those principles.
Identifying World Class
So what does “world-class” cash management look like? Unfortunately there is no simple answer to that question because there are as many definitions as there are definers. What’s more, world class for a $75 billion company may be different than for a $2 billion company. So, if a cash management department wants to be world class, to what does it actually aspire?
In March 2010 The NeuGroup’s Global Cash and Banking Group (GCBG), which is comprised of 26 Fortune 500 senior treasury professionals, began a year-long effort to create a set of principles that would answer this question and define and guide cash management operations toward being world class.
Supported by Citi’s Treasury Diagnostics team, members spent the summer of 2010 identifying the key cash management activities to include in the research, breaking the activities into two phases.
The first phase focused on foundational topics such as organizational structure, policies and procedures, centralization, technology, talent management, and bank relationship management and was intentionally targeted at activities that are in general relational and structural in nature. The second phase addressed nine tactical and process-centered activities, including accounting, liquidity management, inter-company transactions, payments, cash positioning, cash forecasting, bank account management, dividends and reporting and dashboards.
No one-size-fits-all
The objective of the project was not to prescribe specific solutions, tools or structures that may be suitable for only certain types of companies, but rather to outline core principles that characterize the cash management operations of world-class companies in general.
Focusing on principles rather than specific solutions allows the outcomes to be applied to a full array of industries and companies of various sizes and types. For example, the “Rolls Royce” of treasury management systems may be a world-class solution for a Fortune 50 company, but may not suit a Fortune 1000 company for which a bank portal can effectively accomplish the same goals.
In other words, it is not a given tool that matters, but rather what that tool does and accomplishes.
A World-Class sampling
Foundational principles are the most challenging. World-class cash management starts with well-thought-out organization, proper scoping of treasury’s responsibilities, and effective delegation of execution responsibilities. Given the myriad complexities and possible permutations with these topics, it is no surprise that these topics posed the most challenges to the group. Members debated how world-class cash management is best organized and what activities treasury/cash management should own vs. influence. Debate over the merits and limitations of centralization and decentralization, for example, largely revolved around the roles and reporting lines of shared service centers (SSCs) and treasury centers (TCs), as well as regional and local treasury activities. Overall, the group expressed a strong bias toward centralization of policy-making and toward centrally coordinated governance and control frameworks while also including broad workload sharing among HQ, regional and local operations, for execution activities.
Key Principles
- Cash management seeks to establish extended operations at existing SSCs to capture efficiencies such as the availability of a broader talent pool and better integration with operations.
- Cash management activities are defined as either “owned” or “influenced” and are rationalized periodically to avoid being overly burdened by non-treasury or non-strategic activities.
- Comprehensive objectives, policies and procedures that cover at least the most critical cash management functions are published, accessible and reviewed at least annually and as operations change.
People are principal. World-class operations require world-class people to perform them. Thus, talent management was another critical topic and one that the group acknowledged derives value from non-monetary incentives such as flexible work hours, shortened work weeks, and telecommuting options. The group also concluded that rotational programs contribute significantly to developing professionals with the breadth of experience to apply world-class principles and oversee world-class activities.
Key Principles
- Treasury and non-treasury rotational opportunities, formal or informal, are supported and encouraged for personal development and career management.
Strive for core efficiency. Core cash operation principles embody the notion that centralized coordination and harmonization of processes, that also leverage automation and information technology, are essential to world-class cash management—so too is the effective use of metrics, and the reporting of variances against them, to improve performance.
Key Principles
- Straight-through processing and full automation for at least 75 percent of cash management activity processes is the bright line for being world-class.
- Cash positioning is highly automated and accurate, moving toward full STP and elevated to levels consistent with business operating needs.
- A centralized database warehouses all bank account details and includes the key data elements needed to effectively manage operations and bank relationships (e.g. legal entity, signatories, currency, country, GL account, open/close dates, account type and bank contacts).
Optimize intercompany flows. World-class cash management makes ample use of netting and an in-house bank, at the appropriate stage of enterprise evolution, to optimize and put a governance framework around interco transaction flows that almost everyone can identify with (i.e., a bank).
Key Principles
- Intercompany and in-house bank account settlement is performed at least quarterly and aligns with the FX rate-setting process to minimize exposures and aligns with overall business needs.
- In-house banks are established when it becomes operationally, geographically and financially beneficial to offset the costs and complexity of operating them.
Improve forecasting accuracy. With a solid foundation that includes both efficient, automated processes and a governance framework aligned with the interests of the lines of business, treasury will be well-positioned to improve the accuracy of cash forecasting. This is as much the ending point as the starting point of a world-class cash management initiative.
Key Principles
- Centralized treasury ownership of the cash forecasting process is not necessary, but treasury must ensure organization has a strong forecasting process in place.
- Forecasting features such as frequency, time horizon, style and accuracy meet the needs of the business.
- Forecast time horizons match those of P&L forecast cycles and updates are made at least as frequently as P&L forecast updates.
improve efficiency
The overarching objective of any world-class treasury should be to improve the efficiency of the more mundane cash processes so that it can better focus on supporting the businesses generating cash.
In other words, world-class cash management needs to continually remind its practitioners that their focus needs to be on cash growth and all that is underlying it. This is all the more true as growth shifts to those parts of the world where both doing business and managing resulting cash flows pose greater challenges.
By focusing on principles rather than specific solutions the project’s results apply to a fuller array of companies, businesses and local market environments. Gaining a fuller understanding of these principles, however, and their application in various circumstances is best done through candid discussions with peers both within a specific sector and across all types of businesses. Service providers can help too, offering up best practices that they’ve seen elsewhere.
“Banks can help clients understand the application of world-class principles to their situation, having seen them applied by other customers,” said Ron Chakravarti, a managing director at Citi.
Achieving world-class status may not have been a realistic goal for some. But hopefully, utilizing a principles approach as developed by the GCBG, makes the aspiration more manageable and achievable.