By Joseph Neu
We have been speaking with treasury leaders in various forums over the last nine months to help refine the principles from our World-Class Global Cash Management project, conducted with The NeuGroup’s Global Cash and Banking Group (GCBG) and Citi Diagnostics. At one such forum in London last month, we had one treasurer challenge the notion of treasury value added.
Value added Semantics
While not a principle per se, underlying many of the world-class project’s principles is that world-class treasuries are relentless in implementing new systems and process innovations to shift human capital resources from low-value treasury operations and transaction support toward higher-value-added finance analysis, business growth support and risk management. While the treasurer was not challenging the merits of shifting from low-value to higher-value activities, he did draw a distinction between treasury supporting business initiatives and seeking to do more than that.
Just as with profit-center mandates, it’s a slippery slope to excessive risk-taking if treasury feels compelled to show its worth by adding value to what the businesses are doing. Treasury should rather have its mandate defined by the goals and objectives set forth by the senior leadership of the business.
Without getting too bogged down in the semantics, drawing this kind of distinction to treasury’s core mandate can be helpful for a variety of reasons, but one in particular:
Performance measurement alignment. One of the perennial challenges for treasurers seeking to lead a value-added treasury function is identifying performance measures that can measure treasury’s value add objectively. The lack of success on this front was indicated most recently at the Deutsche Bank-sponsored March meeting of The NeuGroup’s Treasurers’ Group of Thirty. Of the performance measures cited as useful by the treasurers, including hedge performance against a benchmark, none came close to providing an aggregate, objective measure of treasury’s value add.
When it comes to pay, the norm is to tie performance-based compensation to broader business performance anyway, so why bother coming up with a treasury value add metric?
Plus, most attempts to measure the marginal value add by treasury will leave it open to accusations by business managers that treasury simply managed to change the value allocation at their expense.
Wouldn’t it be easier to say that treasury’s mandate is to do everything it can—within its risk, policy and other compliance limits—to make it easier for the business’s managers to succeed?
De-risking the roadmap
More and more, treasurers are thinking in terms of corporate strategy and carving out a role for treasury in executing the strategic plan, if not being a part of the planning. Part of this is mapping out the treasury infrastructure and resources required to support each phase of company growth in line with the C-suite’s strategic vision. The next step is redefining specific treasury activities in terms of supporting this plan—or, better yet, business manager efforts to meet the business and financial goals set forth in it.
A good example of a strategic plan treasury can tie its support mandate to is IBM’s five-year roadmap. Among the goals set forth in its 2015 roadmap are for software to contribute nearly half of segment profit; for growth initiatives, including acquisitions, to deliver $20bn in revenue growth; for growth market revenue to reach 25 percent of IBM’s total; for enterprise productivity to deliver another $8bn in gross savings; and for the company to generate $100bn in free cash flow and return 70 percent to shareholders. Treasury along with all corporate functions is expected to support the businesses in achieving these goals. On the one hand treasury is ensuring the funding, helping find the cost savings and supporting efforts to maximize cash flow, but it is also working with other areas of finance to increase the probability of success, or de-risk the roadmap.
Following this thinking may well lead more treasurers to give up on trying to do anything more.