The Pros and Cons of Treasury
Centralisation
John Herrick, Treasury Strategies - Michael Gallanis, Treasury Strategies - 16 Feb 2010
With the rapid pace of economic globalisation over the past decade, treasury
centralisation has once again become a hotly-debated
topic.
This debate over a centralised versus decentralised treasury
structure is not a new one. It has long been the source of
discussion and frustration for many treasurers and chief
financial officers (CFOs). Each structural model offers
benefits to the global organisation. Clearly delineating which
is superior is a difficult task, and one that requires careful
consideration.
As multinational organisations grow, and global footprints expand, the complexity of treasurers’
responsibilities increase and their ability to manage these responsibilities becomes far more
difficult. Routine treasury tasks become harder to manage, such as:

Maintaining visibility of cash, investments, debt, and overall liquidity.

Monitoring and managing risk.

Executing transactions in financial markets, with unfamiliar business practices and
trading protocols.

Communicating effectively with far-flung operations with significant time-zone and
language differences.
A Decentralised Model
Facing these types of significant challenges, it’s not difficult to see why many treasurers have
traditionally considered a decentralised model as a potential solution (figure 1).
Figure 1: Decentralised Model
Source: Treasury Strategies
The decentralised model usually includes a strong global treasury centre as the hub, or treasury
headquarters (HQ). This site provides general ground rules to all decentralised operations by way
of global policies and guidelines. Generally, the HQ is supported by one or more regional treasury
centres, located in key markets throughout the company’s footprint. These centres provide
regional treasury expertise and leverage local knowledge of regional banking and financial
markets, practices and protocol. As the scale of trade and geographic growth dictates, companies
can further enhance this decentralised model with the creation of payment factories and foreign
exchange (FX) centres to manage the processing of transactions more affordably.
While the decentralised model solves many of the problems that expansive global treasuries face,
this model has its owns challenges. A decentralised treasury structure typically requires more
aggregate global treasury personnel than a centralised structure. And the model still presents
some challenges to the HQ treasury level in areas of communication and oversight. And, in these
difficult economic times, the added costs of redundant staffing, maintenance of multiple treasury
sites and systems can be a challenging economic hurdle to overcome.
A Centralised Model
Because of these issues, many treasurers have moved to a centralised treasury structure (figure
2).
Figure 2: Centralised Model
Source: Treasury Strategies
A centralised treasury offers a number of tangible and intangible benefits to the corporation,
including:
Economic

Improved working capital management through increased access to cash, resulting
in reduced debt and increased return on investments of excess cash.


Reduced number of cash flows leading to improved management of liquidity.
Reduced number of bank accounts, which translates to lower transaction costs and
bank fees.
Control


Standardised cash management across all legal entities.
Global compliance with headquarters treasury policies and procedures, including
Sarbanes-Oxley (SOX) and Office of Foreign Assets Control (OFAC) requirements.
Risk management

More effective management of FX exposures and interest rate risks through global
oversight.

Netting of exposures leading to cost savings from fewer FX conversions and bank
transfers.

Global view and management of limits on bank exposure.
Scale economies

Increased productivity by leveraging centralisation of treasury activities and
technology to achieve more output with fewer human resources.

Better process management through standardised key performance indicators
(KPIs).
Transition to a centralised treasury is no easy task. Treasurers should keep in mind several critical
success factors for a smooth transition:
Involvement of regional and local financial personnel


Critical for local buy-in as subsidiaries give up responsibility for some treasury tasks.
Local knowledge will undoubtedly be required to structure the right banking
architecture for a global solution.
Executive management support

Senior corporate management must sponsor the project to ensure sufficient
resources for a successful transition.

Division, regional, and local senior management must also be on board to ensure
coordination with corporate treasury to get the project done.
Technology
Best-in-class technology is a requirement for a centralised global treasury operation:

Treasury management systems (TMS).

Derivatives management and trading systems.

Bank-to-book reconciliation software.

SWIFT.
Treasury technology should be bank-agnostic to ease the transition from one banking partner to
another in the event of a bankruptcy or financial crisis.
A global standard enterprise resource planning (ERP) system, while not necessarily a prerequisite,
nevertheless will reduce the amount of effort to create interfaces with the new treasury technology
needed for centralisation.
The right banking partners
Critical to the success of a treasury centralisation effort is the selection of the right banking
partners.

Bank capabilities must be appropriate on a local, regional, or global basis,
depending on the banking need.

Evaluation of the bank’s future commitment to providing a particular service is
essential prior to awarding the business.
Conclusion
Both the centralised and decentralised treasury structures offer advantages and disadvantages.
Which design a company chooses will depend on global footprint, available resources, executive
commitment, and available technology. Regardless of which centralisation path treasurers select,
a successful implementation will hinge on their ability to secure prior senior management buy-in, a
well-defined plan, and sufficient resources to implement. Once in place, to remain successful, each
structure will require:

Strong, clear, global policies.

Effective tools and technology.

Effective ongoing management reporting.

Well-trained, capable personnel.
With an effective treasury structure and capable resources, treasury can support even the most
challenging demands that a global business can present.
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