By Ted Howard
Capital structure and planning are top of mind for many treasurers, along with technology, treasury organization and tax reform.
“Prediction is very difficult, especially if it’s about the future.” That quote, attributed to Niels Bohr, atomic physicist and Nobel laureate in physics, sums up well how difficult it is to predict the future. And while many predictions for 2019 are valid and can be useful guidelines, we know that many if not most won’t come true. Thus, this article will make no attempt to forecast. Instead we’ve asked members what topics are on their minds for 2019.
And what are they? Capital structure, technology and systems, treasury organization, tax reform and cash management. The top two really aren’t a surprise as they were tops heading into 2018. So the discussion is still a live one for capital structure and certainly, with the rapid increase in technology innovation (robotic process automation, AI, etc.), very much alive for ever-lean treasuries.
Capital Structure and planning
One of the big capital structure discussions for the second half of 2018 was allocation, which will extend into 2019. In a pre-second-half-meeting survey of NeuGroup’s “T” groups (Treasurers’ Group of Mega-Caps, Treasurers’ Group of Thirty Large-Cap Edition, Treasurers’ Group of Thirty and Tech20 Treasurers’ Peer Group), 46% of respondents describe their capital allocation process as dynamic. In another words, their allocations were more responsive to markets. Another 44% say the process is a combination of static and dynamic.
Many of the capital structure discussions were of course prompted by the 2017 tax reform. And 26% said they changed their process because of tax reform, while 65% say they did not change it, although respondents said their assumptions changed, and they report that there was more cash to work with in some cases.
Meantime, the tracking of ROIC on capital allocation decisions varies with members of the Ts: some do it ad hoc or only on major initiatives; some describe formal tracking over several years with ongoing analysis, or post-audits comparing outcome to original business cases. Sixty-two percent say they have a process for evaluating return vs. original expectations. Several members complain they do not have a good process, so this will be a conversation for 2019.
Technology and treasury systems
Technology and treasury systems was the second most popular topic survey respondents want to talk about during the 2019 meeting cycle. There is a lot of speculation and conjecture about where treasury tech is heading and how it will impact the treasurers’ role.
In 2019, as in just about every year lately, treasurers will continue to work toward their goal of creating efficiencies and maximizing performance through technology. And if machine learning and robotic process automation are in the offing, they’ll take all they can get and apply it wherever it makes sense. In digitalization, enhancing data quality and using it properly in order to offer better analysis and insights remains a critical skill for treasury. And this is where automation will become increasingly important as it is applied to time-consuming and error-prone tasks.
To that end, treasurers will want more data visualization and the ability to “use tools to better tell the treasury story,” as one survey respondent put it. They’ll also want to hear more about RPA use cases; ones “that have actually been implemented successfully by treasury,” as another said. The attraction of RPA and machine learning is that they are more readily available, effective, and affordable than their higher-level cousin, artificial intelligence (AI). Nonetheless, companies looking to embark on an RPA project should take a look at the tech feasibility as well as the ROI.
Organization, Tax and Cash
Rounding out the top five topics for 2019 are treasury organization, tax reform and cash planning/management.
Treasury organization will be an especially important discussion point in 2019 (as it was in 2018). The focus here will be on global structures, expansion, shifting of resources, shared services centers and the like. Talent management is in here, too, as members work on staff development, managing millennials, succession planning and compensation.
Tax reform will continue to have an impact on how treasuries do their jobs throughout 2019, particularly in the areas of capital structure and returning cash to the US from overseas. Meanwhile, what to do with that cash will also be top of mind for executives, with activists, regulators, tax authorities and Congress looking over their shoulders.
The Decision Factor
Many MNC treasurers have been zeroing in on return on invested capital or ROIC. This is seen as the best way to measure a company’s ability to create value. For NeuGroup members, a WACC or ROIC (75%) hurdle is the most common decision factor for capital allocation, followed by country risk (63%) and FX risk (48%). Other factors include legal and industry risk. Members also cited, for example, accretion/dilution and payback period as important.