International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 78 (2011)
© EuroJournals Publishing, Inc. 2011
http://www.internationalresearchjournaloffinanceandeconomics.com
The New Role of the Corporate Treasurer: Emerging
Trends in Response to the Financial Crisis
Petr Polak
Corresponding Author, Associate Professor in Finance, Faculty of Business
Economics and Public Policy, University of Brunei Darussalam
Jalan Tungku Link, Gadong BE1410, Brunei Darussalam
E-mail: petr.polak@ubd.edu.bn
David C. Robertson
Partner, Treasury Strategies, Inc., Chicago, USA, Magnus Lind
Chair, European Treasurers' Peer Groups, Gothenburg, Sweden
Magnus Lind
Chair, European Treasurers' Peer Groups, Gothenburg, Sweden
Abstract
This paper discusses the role of the modern corporate treasurer in a multinational
company and its transformation in response to current challenges companies and treasurers
face. The most significant incident driving change in the role of the corporate treasurer is
the credit crisis that occurred in 2007-2009. The crisis replaced a focus on earnings with a
focus on cash and liquidity, and marked the end of easy availability of cash for most
corporates and the beginning of a situation in which the financial markets were no longer
able to reliably supply corporate demand for financing. The crisis saw the end of a credit
expansion initiated in the 1980s by the deregulation of the financial markets. Increased
focus on liquidity and financial risk management changed the role of the treasurer
dramatically. During the crisis, many sectors of the markets totally ceased to function, e.g.
the ability to hedge foreign exchange and interest rate exposures was constrained for
certain emerging markets and certain structured securities, such as Auction Rate Securities,
became wholly illiquid. These disruptions led to an inability to hedge, manage liquidity or
even properly measure certain risks any longer. Embedded risks - e.g., in vendor and
customer contracts - also emerged as a critical focus and corporations were forced to take a
broader view of risk in light of weaknesses and risks exposed by the crisis. As a result of
these changes, treasury is no longer merely a function for cash management, funding and
hedge accounting. Treasury is now a strategic function securing liquidity and understanding
the true risk profile of the corporation. The treasurer is now much more involved in the
management of the business and has become a business leader instead of an administrator.
This transformation in role has placed a much higher demand on the skill sets of the
treasurer and he or she must command the arts of communication and sales as any business
area manager would.
While the changing role of the treasurer resulted in new requirements, multinational
companies maintained their focus on efficiency – particularly in response to the economic
downturn. Yet executive managers and treasurers must not concentrate solely on cost
Electronic copy available at: http://ssrn.com/abstract=1971158
International Research Journal of Finance and Economics - Issue 78 (2011)
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savings, as this would fail to recognize and prioritize critical strategic benefits such as
improved quality, resiliency and scope of work. As Treasury has become a strategic role,
the legacy operational mandate has lessened in importance but Treasury must still
determine the optimal organizational structure that meets both strategic goals and supports
overall efficiency. In optimizing the organization of roles, treasurers and business leaders
must also consider multicultural and other barriers - in many countries, "custom and
practice" inhibit “pure” efficiencies that might be achieved via centralization or even
regionalization. Further, an excessive focus on “rationalization” of functions can fail to
attract and motivate key and highly qualified specialists required for critical knowledge
centers, such as treasury departments. While a purely centralized model may, on the
surface, appear optimal due to enhanced control and efficiency, competing factors that
argue for local structures make it difficult for treasurers to determine the optimal balance
between centralization, regionalization and locally sourced activities. Thus, treasurers must
explicitly assess multinational organizational structures at the same time they face an
expanding and more complex set of responsibilities.
The ideas in our paper optimally apply to multinational companies operating in
global environments that present challenges in language barriers and different time zones
across the globe. While the paper has direct applicability for financial and treasury
managers, the text also holds larger insights for any strategic manager at a complex,
multinational organization. It addresses:
 The change in the role of the treasurer resulting from the change in financial
markets’ functionality and the new restrictions in cash availability and risk
hedging introduced during the credit crisis. This includes new strategies for
cash and liquidity management.
 The process of optimal centralization and segregation of operational duties
across regional centers, a single global centre at the headquarters, and local
units. We will show that centralization cannot be a theoretical construct, but
must take into consideration regulation, local conventions and the identity and
morale of the workforce.
 Factors to consider when identifying optimal locations for regional centers.
 The role of outsourcing in meeting emerging challenges while optimizing
efficiency and organizational structure. While the challenges faced by the
largest multinational corporations are complex, pressure on greater efficiency
applies to mid-size companies too, and small to mid-size enterprises (e.g.,
those with less than 1 billion Euro annual turnover) may access additional
competencies and improve efficiency by removing the process out of the
company entirely. The article will help those companies evaluate what to
outsource and how to choose a provider of outsourcing.
Keywords: Corporate treasury management, centralization of treasury, standardization,
efficiency, financial risk management, cash management, assets and liabilities
management.
1. Introduction
The paper works with following ideas:
1.
The emerging responsibilities of the treasurer in light of the financial crisis.
2.
An evaluation of how organizations can be optimally structured to maximize scale and
strategic impact while also addressing underlying operational functions and risk.
3.
A contrast of centralization and regionalization on a global level.
Electronic copy available at: http://ssrn.com/abstract=1971158
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4.
An empirical assessment of how regional center location might be best addressed in
light of required functions, regulation, local conventions, economics and other key
factors.
5.
A review of how the question of scale / scope applies to optimal outsourcing decisions
for a complex function with strategic ramifications.
There have been a lot of discussions about the role of the corporate treasurer and what
additional responsibility or oversight this integral position within a company should take. Treasurers
themselves would agree that it makes sense to increase their involvement in all areas that require cash
management, assets and liabilities management and financial risk management. The need for enhanced
reporting and communication with all internal and external stakeholders of the company has increased.
The treasurer must be able to communicate potential implications of different market scenarios in a
reliable way to all stakeholders. This is a clear trend and a new requirement since the demand within
the organization for activities conducted by the treasury function has increased together with the
volatility related to increased uncertainties in the financial markets.
Treasury is now migrating to its third phase in terms of structure and scope. Prior to the 1970s,
Treasury functions were largely decentralized, informal, and concerned with operational activities.
Following key market changes – most specifically the decision to allow major currencies to float and
the movement of the US away from the gold standard for the dollar – financial market volatility
increased and the role of the treasurer became increasingly focused on analytics and financial risk
management. Now, as a result of globalization and the increased importance and complexity of the
financial value chain, Treasury is far more strategic in nature and must act in far closer coordination
with its business partners – in order both to more dynamically assess liquidity and risk – as well as to
support business units in the execution of their strategies.
Figure 1: Treasury management timeline
Source: Treasury Strategies
1.1. Definition
The paper discusses the role of the modern corporate treasurer in a multinational company and its
transformation in response to current challenges companies and treasurers face.
Today’s treasurer is challenged by increased financial risk, a transformation of the financial
regulatory environment and a continued corporate focus on efficiency. Against the backdrop of these
challenges, treasury must determine an optimal organization and location of roles across the globe.
International Research Journal of Finance and Economics - Issue 78 (2011)
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Blake (2011) points out that ‘a company operating in today’s world [faces] the unprecedented
challenges we have experienced over the past few years.’ He categorized the challenges into ‘risk
management, access to cash/credit and efficiency.’ Seifert (2011) notes, ‘forthcoming regulations, such
as SEPA and Basel III, are also set to focus the attention of treasury on improving and centralizing
payments in the Eurozone and improving internal financing efficiencies. Overall, the focus of treasury
is increasingly on delivering value and efficiency for the company and acting as a strategic support unit
to achieve the company's overall commercial goals.’ And ‘centralization, standardization,
simplification and automation - these are the focus areas for an efficient treasury process’ as per Ala
(2011). The importance of treasury function centralization is highlighted by Polak et al. (2010b),
‘centralization of treasury activities offers corporations the ability to achieve higher efficiency, greater
transparency and access to real time information across a broad geographical area and many entities.’
In addition ‘one of the treasury’s most important roles is to develop and nurture its relationships
with the core banks facilitating the corporation’s financial needs’ – Lind (2008). Through research, the
European Treasurers’ Peer Group (www.treasurypeer.com based in Sweden) found that over the last
couple of years bank relationships have been further centralized and the evaluation criteria and
interaction with them has developed substantially. Similar to the needs of a corporate treasury, banks
now need to understand the underlying business model of the corporate to be able to support its full
supply and demand chain. Treasury Strategies’ corporate research (Corporate Treasury Research
Program: 2008, 2009, 2010) showed a gradual concentration of transactional banking relationships
across all regions of the world at the same time that corporations sought existing liquidity and credit
providers in order to ensure their ability to access and invest liquidity.
According to Hartung (2010) ‘companies’ increasing focus on treasury along with their
heightened awareness of the need for better liquidity management after their experience during the
economic downturn over the past two years has led more companies to take advantage of the benefits
regional treasury centers can provide. BMW, for example, expanded its center in Singapore this year
and said “the intention is to benefit from greater economies of scale and to simultaneously instill
improved process efficiencies.’
To understand the changes facing a multinational company today, we have categorized the
challenges as “traditional” and “emerging”.
2. Traditional Challenges
Since mid-2000, corporate treasury had to return its focus toward development of core activities
needed to address traditional challenges, such as financial risk management (focused on interest rate
and foreign exchange risk), forecasting of cash, optimization of access to credit and liquidity, assets
and liabilities management, management of cost of capital and bank relationship management. Even as
these initiatives were pursued, treasury groups continued a gradual trend towards increased centralized
control.
We have here chosen the term “centralized control” rather than centralization since the trend is
not always to gather all treasury activities in one location. However the trend is definitely to get control
of the treasury activities throughout the corporation. One particular reason why centralization to one
location is not always possible is the current regulatory environment in many of the emerging or
growing economies, e.g. Brazil, China, India and Russia. Highly regulatory frameworks remain in the
financial markets in the growing countries. For instance their currencies are not fully convertible with
free-floating rates, and cross-border cash transfers are restricted, creating so-called “trapped cash”
inside these countries. These regulatory restrictions are designed to shield growing countries from the
constant pressure of fluctuating financial markets. Open economies such as in the western economies
require full transparency and governance to be able to maintain an unregulated financial market, which
vastly improves the cost effectiveness of financial transactions and thus boosts productivity and
growth. Free flowing investments to areas and countries that most efficiently can utilize capital prove
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to be the most efficient way to create value and growth. Conversely, trapped cash causes corporations
to hold cash on the books but be unable to use it outside the jurisdiction. It may also force local
representation of treasury in one form or another to manage these cash balances within the boundaries
of the country.
Another reason why treasury is not located only at one location is contingency planning. Image
for instance that a large corporation only has one office performing payments and collections for the
whole group. What happens if that office becomes restricted to handle its tasks for a day or several
days? One location would also create problems with time zone cut-offs, backups, verifications,
allocations and repair of payment issues.
3. Emerging Challenges
In response to a dynamic environment, many corporate treasurers plan to create value for their
companies by focusing on the following non-traditional areas:
 Efficiency.
 Globalization.
 Centralizing the control and management of treasury and outsourcing of some of the
treasury activities.
 Identifying geographic organization of roles in light of centralization, local requirements /
conventions, labor markets, proximity to key business constituents and other factors.
 Standardization and integration of treasury activities to improve alignment and
coordination with the company’s core business activities.
 Adapting to new regulation, especially those emerging in response to regulatory
frameworks established in response to the credit crisis. One particular example is the
expected regulation of OTC (Over The Counter) derivatives being forced to be traded
over an exchange, a so called CCP (Central Counter Party).
3.1. Efficiency
Optimizing operational and financial efficiency has been among the objectives for treasurers in recent
years. Increasing operational efficiency in treasury and finance management is closely connected to its
risk management role. There are a wide variety of ways to increase efficiency, which in turn help to
mitigate the risk of error and fraud. Efficient business processes reduce costs, which reduce pressure on
margins, and facilitate better decision-making based on greater visibility over information and
transactions. Automation and process optimization reduce the potential for errors or data latency.
Improved efficiency can also improve the speed and quality of information – a critical component for
Treasury in dynamically assessing risk and liquidity.
Potential efficiency improvements for MNCs (Multi National Corporations) include:
 Automation of low value added operational tasks including basic intelligence activities,
such as, for example, managing payment and investments.
 Location of staff in low cost / high talent centers.
 Removal of paper documentation from the entire process.
 Migration to e-payments and mobile payments
 Leveraging the scale of partners to reduce unit costs of activities.
 Improving straight-through processing of payments and collections to minimize costly
exception processing.
One of the foundations for achieving efficiency is to have full visibility over cash flow in all
currencies and countries. While it is very easy to understand in theory, it is a problem in practice as
detailed payment formats vary by country and companies often work with multiple banks that
frequently store and communicate information in disparate formats and frequencies. Companies may
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also operate multiple general ledger systems, often due to acquisitions, each with unique data elements
and formats. In one consulting engagement, Treasury Strategies worked with a multinational
corporation that operated 27 unique general ledger systems characterized by poor data integration at an
enterprise level. Another problem is that in many of the fastest growing economies, e.g. Brazil, China
and India, movement of cash is trapped or, at best, severely constrained through regulation and cannot
be sweeped to a single concentration location. Further, many emerging economies are characterized by
banks with incomplete or delayed information reporting capabilities and poor transparency into
payment execution and settlement.
A common first step in increasing the efficiency of treasury operations is to centralize the
control of the treasury processes. A centralized treasury management system is a prerequisite for
supporting efficiency. But even if the company has centralized processes, it may still need to
standardize and simplify both the internal and external processes, and those steps must be attempted
before automation. During the recent credit crisis, the value of real-time access to key information –
global visibility of cash position, immediate access to counterparty risk, and global cash flow
forecasting - was further highlighted. The crisis also increased the need for real-time management
reporting.
There are a variety of reasons why companies decide to automate their treasury functions,
including improved cash forecasting and straight-through processing, integration with multiple banks
and multiple formats, increased visibility of cash, improved management of risk, and regulatory
compliance – just to name a few. However, the recent convergence of several environmental factors
such as globalization, rapid business growth, increased competition, has made treasury automation a
priority for many corporations. In addition, treasury’s increasing ability to affect the bottom line has
resulted in a significant shift in the role and responsibilities of corporate treasury professionals. This
shift has brought about a renewed focus on cash forecasting and global cash management, interest rate
and foreign currency risk management, and overall working capital management. This, in turn, is
further driving the need for automation and collaboration across a broader ecosystem.
Automation of Cash Management
Corporate treasurers continue to demand more automated solutions for the cash management function.
This is certainly not a new development; over the past few years, corporate treasurers have pursued
various automation initiatives. Early initiatives focused on streamlining of settlement processes,
enabling many corporate treasury departments to settle transactions automatically via treasury
workstations or direct interfaces with their banks.
A second wave of automation initiatives focused on automating the cash position and liquidity
forecasting processes. Corporate treasurers asked their banks to build interfaces directly into their
treasury workstation or ERP systems in order to provide timely cash positions and liquidity forecasts.
Automation provides transparency, mitigates operational risks and creates one standardized
process that is repeated every time. Today, automation can include daily cash investments and
borrowings (via sweeps or portals). Further, as the reporting requirements of treasury have grown due
to risk and regulatory pressures, many treasury units have automated a battery of periodic and ad-hoc
reports so as to avoid time rekeying and formatting data.
Efficiency is strongly tied with a pressure on standardization of the format of financial
messaging between counterparties, which in turn facilitates greater interoperability. At the present time
the scene is set for substantial progress towards standardization in the form of ISO 20022 financial
messaging standards based on XML. ISO 20022 is succeeding where previous efforts have failed,
because it is supported by SWIFT to consolidate channels to over 8,000 banks and almost 1,000
corporations globally. In emerging economies, especially in Asia, where financial markets and their
regulation are taking a different evolutionary path from those of Europe or the United States, deploying
new technology and leveraging new technical standards is often easier as there are fewer legacy issues
and vested interests to address. But the most important trend amongst companies that are mostly
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operating in emerging or growing markets is to adopt significant automation and leverage their
standards to integrate payment and treasury data directly to the core system to maintain their
competitive edge and reduce costs.
As more companies expand operations across international borders, the erratic behavior of the
international financial market forces standardization of international payments, as the simplification of
fund movements becomes the extended challenge for corporate treasury. Corporate treasury is required
to be more aware of the volatility of the international financial market and conversant with the current
payment standards practiced by other corporate treasuries, in order to keep up with international trends.
For example, the recent implementation of the single euro payments area (SEPA) has resulted in the
SEPA Credit Transfer (SCT) replacing myriad payment instruments across the EU countries. The SCT
was introduced in January 2008, and the SEPA Direct Debit in November 2009.
Standardization of data promises faster, more comprehensive, and more efficient consolidation
of data – which in turn will enable treasurers to access strategic insights more quickly – e.g.,
identifying variances to forecast and expediting the inclusion of data into automated general ledger
posting and forecasting systems.
3.2. Globalization and Centralization
Companies of all sizes are globalizing. To support their company’s global growth, corporate treasurers
must manage cash, liquidity and financial risk across each continent equally efficiently. Corporate
treasury is required to be more aware of the volatility of the international financial market and
conversant with current payment standards practiced by other corporate treasuries, in order to keep up
with international trends. For example, the recent implementation of the Single Euro Payments Area
(SEPA) has resulted in replacing myriad payment instruments across the European Union countries by
the SEPA credit transfer. The SEPA credit transfer was introduced in January 2008 and the SEPA
direct debit in November 2009. These challenges influence corporate treasury in determining the scope
and coordination of centralized functions and the practicality of various organizational models. Despite
the fact that some corporations have experimented with a single global treasury center, most
corporations have thus far preferred to consolidate to regional treasury centers, mostly because of
language barriers and time zone issues.
Within the treasury function, cash management is an activity that clearly benefits from
economies of scale and process reengineering. By centralizing its cash management operations, a
corporation can achieve better management of internal cash-flows, reduce its float and transaction fees,
and, of course, pare its operating costs. By standardizing liquidity management processes, significant
improvements can also be obtained in terms of control and security of cash.
In addition to the measurable financial advantages of centralization, such as “cost savings”, the
centralization, standardization and automation of treasury activities offer an opportunity to streamline
control and management processes in treasury, increase visibility over all company cash-flows,
reengineer processes, and build in desired efficiencies and controls. In most cases, firms must rearchitect their technology platforms to realize the level of integration and automation necessary to
achieve the benefits of centralization.
4. Emerging Responsibilities of the Treasurer and the Financial Crisis
Corporations are increasingly aware of the financial risks they face, particularly in the areas of foreign
exchange exposure and interest rates — both on the investing and funding sides. Their awareness
results from new regulatory pressures, such as Sarbanes-Oxley and its global equivalents (e.g.,
European Union 8th Company Law Directive; Bill 198 in Canada, Financial Instruments and Exchange
Law in Japan), other regulatory requirements, and an increased emphasis on corporate governance. The
improved transparency and control that result from centralization support improved risk management,
both in terms of financial and compliance risk. Exposures can be hedged and unnecessary losses
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reduced; at the same time, stop signs can be raised about transactions that may put the company at risk
of Sarbanes-Oxley violations. Technological advances and the solutions of banks and third-party
providers make centralized cash management and the operation of an ‘in-house bank’ a reality for any
multinational company. An in-house bank provides the most aggressive level of cash centralization, as
a centralized treasury unit maintains control and oversight of the internal accounts of individual
companies and performs investing, borrowing, hedging and other treasury operations on behalf of the
internal accounts of these companies. An internal settlement is usually processed on a bilateral net
settlement basis. The in-house bank generally includes one or more primary concentration accounts for
external settlement. However, larger corporations do not want to be dependent on one external bank
and try to optimize their banking costs by managing the external bank accounts as efficiently as
possible. At the subsidiary level, it does not make a difference if one or more external accounts are
maintained by the central treasury, because the subsidiary can manage its external banking activities at
a level of autonomy determined by Treasury – e.g., for collections and local disbursements – and is
provided with short-term investment and borrowing through its interaction with the in-house bank.
The severe credit crisis began in 2007 in the US and expanded globally in 2008-09. It changed
the basics of cash and liquidity management. Pre-crisis we had a situation where access to capital was
not a direct bottle-neck even at fairly aggressive leveraged balance sheets and sub investment grade
rating. During the crisis and in its aftermath corporate treasuries realized they needed to develop more
reliable alternatives for funding and raising liquidity. A trend to deleverage, which many times was
imposed by financial institutions, meant corporates started to build up cash cushions, in the form of
reserve capital for situations of financial stress. This trend was many times also driven by the
company’s stakeholders, including shareholders, who requested lower levels of debt and/or increased
cash balances. The normalization of the financial markets after the crisis has thus led to improved
capital structures and reduced reliance on committed facilities. Besides having higher levels of cash on
the balance sheet, corporates also have diversified their channels of funding using more varied debt
instruments and spreading into more funding markets (e.g., such as by issuing debt in multiple
regions). Corporate treasury and investor relations have in many cases started to cooperate and
performing joint road shows and communication directed not only to investors owning company shares
but also those holding company debt. This shift in liquidity management and funding strategies is a
systemic shift and there are no signs that the corporate sector will return to the relatively lax attitude
towards capital availability as they had prior to the credit crisis.
The size of the cash cushions vary across companies dependent on the conditions under which
they do business. Here are some factors that reduce the level of cash a firm might hold:
1. Strength and stability of cash generation capabilities.
2. Degree of balance sheet leverage, as high levels of leverage require the use of cash to
repay debt.
3. Precision of cash forecasting accuracy.
4. Low levels of business risk – for example firms with high levels of operating risk may
unexpectedly require sudden inflows of cash for major product and market investments.
This is typically the case for the technological and telecom markets for instance.
5. Trust in commitment for the corporate’s banking relations.
6. Lack of merger and acquisition demand.
7. Low volatility of cash flows (e.g., large pharmaceutical firms, which are dependent on
unknown returns from heavy R&D spend will often hold multi-billion dollar cash
balances as a hedge against cash flow risk).
One consequence of creating considerable cash cushions is that cash requires investment
management of the resultant interest rate and credit risks within the cash portfolio. Another major
concern is the cost of carry, as firms may face a negative return on cash when debt is held at a higher
interest rate than the cash cushion generates. This cost of carry is regarded as an insurance premium
but in situations of high-risk aptitude in the financial markets it may create a motivation to take higher
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risks in anticipation of higher returns, increasing the overall risk position of the company. We saw that
tendency during 2011 prior to the credit downgrade of the USA in August 2011.
The new liquidity management conditions have changed the corporates’ banking relationships
strategies. Pre-crisis corporates aimed to decrease the number of core bank relations to maximize
efficiency / minimize integration costs, with the anticipation that banks were always prepared to lend
sufficiently. In Europe in particular many corporates regarded banks as vendors rather than long-term
partners. The pre-crisis led instead to an increase of number of bank relations and also securing other
sources of financing (both bank and non-bank) aimed at an expanded investor base and increased cash
reserves. The SOW1 (Share Of Wallet) analysis became more important as corporations had to reward
the banks providing the most balance sheet commitments with the largest amounts of auxiliary fee
services such as cash management and payment solutions. SOW measures three target areas to
optimize the portfolio of bank relations:
1. Strategic goal of securing cash headroom including operational liquidity and extra
financing required for acquisitions or in situations of severe stress e.g. committed backup
facilities.
2. Interest rate margin and fees paid for debt. This includes defining and reaching an optimal
credit rating.
3. Bank fees paid for auxiliary bank services.
Lind (2008) defines share of wallet as ‘the most common method of rewarding the banks to
achieve desired behavior. The corporate therefore needs to know what revenues it creates for each
bank.’ This information may be obtained either by performing its own calculations based on
transaction volumes and expected spread and capital adequacy requirements, or, in many cases, can be
received by the banks themselves through account analysis reporting. It is important for banks to share
business within their target market segment and specialties.
In fact the crisis did not create any change of trend in the areas of core cash management
meaning centralizing payments, bank account management, and introducing payment and collection
centers. The greatest inhibitors of centralization are disparate standards, requirement of large
investments by the financial institutions for harmonizing with one global payment standard, and lack of
sufficient business cases to do so. Other reasons include regional and country legislation and regulation
prohibiting transfer of cash cross-border. One major problem is that in the countries with the highest
growth rate the cash are many times trapped within its respective borders. Corporates obviously strive
to centralize as much as possible despite these obstacles but that trend pre-existed the crisis.
To optimize bank structure in conjunction with the organization of Treasury activities, many
firms chose to select banks on a regional, rather than functional basis – e.g., a North American primary
bank rather than a global collection provider.
With new technology providing better solutions for collections and purchasing, new suppliers
have entered the market. One example is purchasing cards for B2B relations. However they are still
very expensive for the vendors and therefore mostly applicable for SME vendors. However in B2C we
can see a shift towards providing customers to pay with online payment solutions (e.g., PayPal, Google
Wallet, Amazon Payments) and credit cards, which many times are incentivized through discounts in
order to change customer behavior. For the selling company, receiving payments through mobiles or
card payments result in fewer DSO (Days-Sales-Outstanding) and thus reduces working capital that
has to be offset by the seller’s margin being shared with the mobile network or the card issuer. A
special concern with mobile and card payments is security on several layers, e.g. stolen cards and
keeping customer payment data secure from improper use.
1 SOW = marketing term referring to the amount of the customer's total spending that a financial institution captures in the
products and services that it offers. Increasing the share of a customer's wallet a company receives is often a cheaper way
of
boosting
revenue
than
increasing
market
share
(http://www.investopedia.com/terms/s/share-ofwallet.asp#axzz1XElWfGvj).
International Research Journal of Finance and Economics - Issue 78 (2011)
57
Myriad payment vehicles pose opportunities and threats to Treasury. In addition to the need to
support multiple payment methods with attendant costs of data integration, treasurers must now
evaluate the overall cost / benefits of various payment methods by segment. In one consulting
engagement, Treasury Strategies helped a global 100 company identify the optimal target payment
media mix. In addition to traditional views around payments (risk and costs of different payment
vehicles), the company assessed the strategic impact of various payment media by segment – e.g., the
extent to which a payment type might increase the firm’s share of wallet with a customer segment.
Case study 1: Share-of-Wallet (SOW) from an engagement by the NFS Group2
From October 2008 until September 2009 the funding market even for very large investment graded
corporations were extremely restricted. Extraordinary funding sources like central bank direct funding and
end investors had to contribute when the banking market was unable to provide the necessary funding. This
forced many corporations to (i) introduce more funding sources and markets to spread risks, and (ii)
implement models for SOW. One very large, multinational, European public company decided to consistently
measure SOW and use it as a tool to manage its bank relations. The initial challenge was to gather the
information within the group of legal entities in more than 120 countries around the globe. The data was
spread on many different data sources, and in many different formats. The initial work was to gather the data
in one single format to be comparable within the group. Thereafter introduce new accounting and booking
routines to ensure future data was captured in a single standardized format. The captured data consisted of
balances, fees and interest rate margin, which was defined as interest rates over risk free interest typically
LIBOR or EURIBOR. The SOW reports were implemented in a business intelligence tool used for internal
analytics and communications with the banks. The aim with SOW is to consistently being able to present for
the banking counterparts how much of the bank's revenues corresponded to the bank's balance sheet
commitments. The ratio bank revenues and balance sheet commitments should correspond for all banks as a
general principle. Prior to implementing this automated SOW this corporate had regular discussions with its
banking group based on only subjective data creating a situation where many banks providing minor
financing received large parts of the wallet. With the SOW reporting solution the communication could
instead be brought to become much more objective and consistent over time.
5. Treasury Centralization and Regionalization on a Global Level
5.1. The Degree of Treasury Centralization
Decisions about the appropriate degree of centralization/decentralization of the treasury activities will
be made according to principles and evaluations in each of the following categories:
I.
What is the nature of the firm’s cash flows? The treasurer must consider whether the
following can be managed or monitored from one location:
 Volume of payments by amount and transactional volume – many payments may
remain with the local subsidiaries but others will be centralized.
 Nature of the payments (domestic, cross border, used currencies).
 Type of payment – for example paper and cash transactions are more effectively
managed on a decentralized basis.
II. Geographical spread – how many countries, systems and time-zones are involved?
III. What is the company’s structure? There must be a centralized structure in place across the
company if a central treasury is to be cost-effective and efficient. This is due to
infrastructure requirements and company culture. The cooperation of the local
subsidiaries will be very important when obtaining up-to-date and accurate information.
IV.
What controls does the company have in place? There must be a well established set of
treasury controls in place to minimize the potential risks of centralizing treasury. While
2 http://www.nfs-group.com/
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treasury will need a large degree of autonomy in order to function effectively, its precise
role and the scope of autonomy should be very clearly defined.
V. What information will treasury have access to? A centralized treasury will need access to
accurate and up-to-date information for all the companies it manages.
VI. Bank relationships. What is the nature of the company’s bank relationships? Are there
multiple local bank accounts the treasurer will need to manage? Will the treasurer have
access to real-time bank account information?
VII. What information systems and technology does the company have in place? Are they
reliable? Are they integrated with the rest of the company?
VIII. Does the company have available staff that can be relocated to implement a treasury
abroad? In order to implement a successful centralized treasury, the company may want to
relocate some key staff. These staff can train new employees at the central location and
oversee the set-up. They may also run the treasury for a short or a longer period.
And finally, there may be a concern of subsidiaries that, if funds are transferred to the treasury
center, they may not be returned as and when required.
Centralization of treasury activities offers companies the ability to achieve higher efficiency,
greater transparency and improved access to real-time information across a broad geographic area,
multiple time-zones and many entities. There are different phases in the centralization of treasury
management, from the decentralized treasury to fully centralized cash and treasury management. Many
firms start with the centralization of foreign exchange and interest-rate risk management as the first
step towards centralization of treasury activities, and then proceed through cash and liquidity
management up to fully centralized treasury.
To some degree, the process of centralization reflects the evolutionary nature of treasury
management. It also reflects the differences in executing corporate finance and cash management
activities. Developments in technology and the global financial markets have made it possible for
funding and hedging requirements to be collected and executed centrally. Given the opportunities for
cheaper and more effective management of these functions when handled centrally, including the
opportunity to net exposures internally, most multinational companies employ a professionally trained
corporate staff to execute the transactions for the entire company and then to distribute internally the
required funds or hedging.
In comparison, it has not been as easy to centralize the daily operational tasks of maintaining
bank accounts, monitoring cash inflows and outflows and investing short-term funds. There are
external legal, tax and banking issues, and internal political/personnel issues that constrain
centralization. Many established companies with existing financial operations in multiple countries
find vested local interests that resist centralization efforts. As a result, up to this point, most companies
have established regional centers – not single global centers – to coordinate and perform international
cash management activities. This has become most common in the Eurozone where the introduction of
the Euro since 1999 has led to the opportunity for concentration of Euro-denominated funds. The
concept of pan-regional cash management activities has extended especially to the Asia-Pacific region,
however, the hurdles in these very heterogeneous regions are more pronounced.
5.2. Decentralized Treasury
One of the key challenges of maintaining a decentralized approach to treasury is the difficulty in
producing an overall view of the company’s cash position and exposure to risk on a timely basis. For
example, different parts of the business involved in treasury will frequently have different systems and
different ways of recording and reporting information. This can mean that it can take a long time to
construct a global cash or risk position when combining information from different sources.
Consequently, this information is often only produced monthly or even less frequently. It is impossible
to make strategic decisions without access to timely, accurate information which is particularly
significant during periods of economic volatility.
International Research Journal of Finance and Economics - Issue 78 (2011)
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5.3. Centralization Versus Regionalization
In a typical decentralized environment, a company allows its subsidiaries to manage their own
payables and payments processes. Each location uses its own staff and infrastructure to support the
operation. While this offers flexibility, it can also result in poor visibility of cash and additional interest
rate risks because of a lack of pooling mechanisms and a fragmented view of cash.
A lack of standardization in treasury systems across different subsidiaries and a lack of
automation can lead to risks in transactions that are not processed straight through (e.g., incorrect
payments and data redundancy). As segregation of functions is more complex within smaller group
companies, combined with a limited central audit/control, the possibilities of error and even fraud
increase.
In a decentralized treasury, the subsidiaries remain responsible for their own foreign exchange
and interest rate risk management. Proximity and knowledge of the local markets could be an
advantage and help to select appropriate hedging instruments. Such a structure, however, might also
trigger unwanted exposure for the group as a whole. In decentralized companies, local and regional
staffs take great pride in the fact that they manage all aspects of their business. It takes a great deal of
education to convince local managers that the centralization of support activities such as tax,
accounting, and treasury is more cost effective, will increase their profits, give them access to more
consistent and professional thinking in these areas and free them up to focus on growing their
businesses.
Why do Companies Centralize their Treasury Operations?
The main advantages of the central execution of treasury tasks are as follows:
 Cost minimization – create economies of scale. Major areas for cost reduction include
headcount, site related expenditures, and process related improvements.
 Competency - enabling companies to focus on core competencies and more easily apply
functional best practices for continual improvement.
 Information access – consolidating and standardizing information to improve access by
key staff.
 Flexibility - ability to outsource selected administrative processes.
 Yield - improved opportunities for cash and liquidity management and the execution of
FX and other capital market trades, including the consolidation and netting of exposures
across the firm.
On the other hand, companies often fail to retain key specialists as they centralize operations
into a shared services model. There can be various reasons for this. In some cases, multinational
companies do not budget for bonuses to retain key staff during the transition from local finance
departments into the shared service centres, resulting in a loss of expertise and lack of trained staff to
support new personnel in the centres. In others, there is little or no transition period and there is no
continuity of staffing between the previous business organization and the central treasury. And
implementing change across embedded cultures and managing the transition to shared services are a
formidable task in many companies. There needs to be a sound appreciation from the beginning about
the impact of the central treasury on each individual employee, which needs to be clearly
communicated.
While cost reduction was an initial driver for many shared service centres, the objectives have
expanded to include strengthening compliance, managing risk in the financial supply chain and
enhancing working capital. Since the financial crisis, these factors have become even more significant.
By ensuring greater visibility over cash, control over payments timing, reduced operational costs and
faster collections of cash, the positive impact on working capital can be considerable.
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International Research Journal of Finance and Economics - Issue 78 (2011)
Even there is a decision, and steps are taken, to centralize the treasury functions, additional
factors must be considered, such as:
 Existing bank relationships – the participating companies may think they enjoy good
terms and conditions from their current banks.
 Lack of control over funds – there may be a concern that if funds are transferred to the
treasury centre they may not be returned as and when required.
 Additional administration required to track inter-company loans.
 Culture – for example, in Southern and Central Europe countries, companies may be used
to have banking relationships with more than one bank. That means it may take some time
for these companies to make the cultural change to work with one bank system on a panEuropean basis.
 Treasury management system upgrade requirements and its integration with the ERP
system.
Using Treasury Centralization for Corporate Consolidation3
Generally in cases of group centralizations the treasury is one of the key functions taking a leading
role. By getting control of the group’s cash processes treasury is a catalyst for the rest of the
centralizing initiative. Most of the strategic treasury initiatives are implemented through technology.
Treasury process improvements are therefore putting a focus on the TMS and other treasury
applications and how well they are integrated in the group’s operations. Modern treasury solutions
provide huge opportunities for optimizing processes, centralizing cash and control, and for reducing
working capital and costs. They therefore become very able tools for leading the consolidation of
group operations.
6. Regional Centres
Considering that most multinational companies have already decided to centralize their treasury and
cash management activities, one of the most important questions is: Where is an optimal location for
our treasury activities? If a new central treasury company is going to be formed to perform the
international financing activities, the corporation needs to consider the optimum location from an
organizational, as well as legal and tax point of view. Giegerich et al. (2002) and the European Cash
Management — a practical guide (2007) define a treasury centre as a ‘centralized treasury management
function which is legally structured as a separated group or as a branch and is normally located in a tax
efficient environment’. A ‘tax efficient environment’ is essentially a location that offers multinational
companies a more beneficial tax regime compared with another location. Blair reaffirms the
importance of the tax system. When Nokia needed to be closer to its international operation in
Singapore, it considered setting up a regional treasury in Singapore, Hong Kong, Malaysia and
Australia, but chose Singapore due to its more favourable tax regime. Furthermore, Murphy (2000) and
Polak et al. (2009) point out that regional treasury centres are primarily tax-driven, where tax on profits
generated is at favourable rate.
As more and more companies expand operations across international borders, international
financial market erratic behaviour entails standardization of international payments to simplify fund
movements becomes extended challenges for corporate treasury. Corporate treasury is required to be
more aware of the volatility of the international financial market and conversant with current payment
standards practiced by other corporate treasuries in order to keep up with international trends. These
challenges are key influencers of corporate treasury to the extent of provision of functions and
practicality of management organization.
3 Taken from http://blog.magnus-lind.com/2010/02/treasury-leading-group-consolidation.html
International Research Journal of Finance and Economics - Issue 78 (2011)
61
When considering the set-up of a regional treasury structure, a key issue is to validate what its
role will be in driving and managing core treasury functions. If a company already has an active group
treasury, it is likely that this group function will be the one driving and establishing the company’ s
strategy and policies regarding most of the above. In that regard, the role of the regional treasury centre
becomes one of execution, essentially acting as a hub for the group treasury function. On the other
hand, the regional treasury centre has a key role to play in ensuring that the company maintains an
appropriate knowledge of local issues and local peculiarities and therefore is in touch with the local
markets. It also needs to ensure that these local issues are duly reflected and understood by the group
treasury function. A possible segregation of tasks between the regional and global treasury centre is
around the front, middle and back office functions as seen in the following example where all the tasks
relating to execution are maintained within the regional treasury centre whilst the corresponding
accounting work and risk control remain centralized at a group level.
Corporate treasuries face problems with treasury functions to undertake and degree of
management to organize i.e. degree of centralization and decentralization, and decision making here is
greatly influence by these associate challenges. The complexities of treasury centres organizations are
of crucial importance for understanding different structures and models developed by other studies
based on common practice by multinational corporations.
Figure 2: Segregation of operational duties between regional and global treasury centre
Source: HSBC Bank
For further reading about the regional treasury centres, tax environment and other criteria that
must be assessed before establishing an regional treasury centre, and an effect of a globalization, etc.
please see the corresponding author previous papers and a book:
Polak, Petr and Rady Roswanddy Roslan. 2009. “Regional Treasury Centres in South East Asia
– the Case of Brunei Darussalam.” Management – Journal of Contemporary Management Issues, 14
(1): 77-102.
Polak, Petr and Rady Roswanddy Roslan. 2009. “Location Criteria for Establishing Treasury
Centres in South-East Asia.” Journal of Corporate Treasury Management, 2 (4), 331-338.
Polak, Petr. 2010. “Centralization of Treasury Management in a Globalized World.”
International Research Journal of Finance and Economics, issue 56, 88-95.
Papers
are
available
for
downloading
through
the
internet,
e.g.
at:
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=411555
Polak, Petr and Ivan Klusacek. Centralization of Treasury Management. 1st Ed. Sumy:
Business Perspectives, 2010. 100 pages. ISBN 978-966-2965-08-7.
Book is available for downloading at: http://aei.pitt.edu/14063/
7. Specific Tasks of a Typical Treasury Functions
While facing and following these new challenges, the corporate treasurers still must guarantee the
execution of “old fashioned” tasks, such as cash management, asset and liability management, and
financial risk management, for their company.
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7.1. Optimizing Asset and Liability Management
Assets and liabilities management includes the control and care of the cash assets and liabilities of the
corporation and optimization of the balance sheet structure, many times called the capital structure.
The capital structure consists of assets and liabilities.
Optimizing Asset Management
Asset management means optimizing the use of short and long term investment vehicles for the
company’s cash holdings. Investment vehicles include commercial paper, bonds, mutual funds,
certificates of deposit and savings accounts, etc. The credit crisis changed the conditions for managing
cash assets for two primary reasons:
 Cash contingency planning for situations of severe stress has made corporates sometimes
dramatically increase bank held cash as a precaution to be able to meet its obligations at
all times. As a result, corporates therefore have a substantial amount of cash to invest.
 The crisis increased the overall credit risk in society and prevailing investment
alternatives were scrutinized as to their liquidity and credit-worthiness. For instance the
crisis exposed the embedded risks in money funds, some of which were not always able to
live up to the expectations of being repaid on demand. The crisis made corporates change
their focus to return of cash instead of return on cash.
While investing one optimizes between three factors:
 Security or limitation in the risk of the investment to wholly or partly default.
 Liquidity or how fast the investment can be turned into readily available cash.
 Yield or return of the cash investments.
Recently, many large corporations strengthened their investment governance and introduced
more prudent credit risk management, including more rigorous reporting and analytics and early
warning models. The trend became to reduce the emphasis on yield and focus instead on liquidity and
security, including diversifying investments and counterparty exposures among a larger amount of
counterparties.
Optimizing Liability Management
The crisis delivered major lessons in liability management – primarily to be opportunistic with respect
to funding and to use multiple funding sources. The conditions for financing changed dramatically and
there does not seem to be any signs of the situation normalizing in some regions as the debt crisis
continues to spread into the sovereign economy (2011 fall).
Funding is either on- or off-balance sheet. On-balance sheet is cash funding or borrowing.
Generally when borrowing, the treasurer must first determine the period during which funding is
needed, and required currency. This is based on the currency mix of future cash flows and of the assets.
The funding period has two parameters, (i) the tenor of the loans, which is the remaining time until it
matures and shall be repaid, and (ii) the period for when the interest rate is fixed. The interest rate
period can be adjusted with interest rate derivatives such as interest rate swaps. Derivatives will be
included in the reported risk and disclosed in the annual reports and accounting and can thus be
regarded as on-balance.
Off-balance sheet financing consists of committed or uncommitted lines that may or may not be
used, or “drawn upon”. The need for committed lines is to create financial headroom at acquisitions,
large investments, or unexpected funding needs for instance. The committed lines are credit facilities
the corporate has agreed with one or several financial institutions who commit to supply funding ondemand for the corporate for pre agreed costs and terms. The financial institutions are required to
report all its committed lines and to provide sufficient capital requirements for them. Uncommitted
lines are funding or credit lines the financial institution has no obligation to provide at any time but
anyway provides as a mean to win financial business from the corporates. Most corporates rely on both
on-balance cash funding, derivatives and committed line for its financing.
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Cash Positioning
Within the remit of corporate treasury is the cash positioning meaning the monitoring of available
surplus and deficits of cash funds on each individual bank account. Each morning the balances are
mapped and the account deficits are filled and surpluses are swept, or transferred, to a corporate top
account. The reason for cash positioning is firstly to net out gross balances of surpluses and deficits to
decrease balance sheet size and interest expense. Secondly the purpose is to get group control of the
cash and be able to use it efficiently throughout the whole group. Cash positioning is closely performed
with the accounts payables and accounts receivables teams. Cash positioning is managed per currency
and can be swapped into one group currency and one final residual amount being borrowed or invested
in the financial markets.
Cash positioning requires a cash management technical solution with the ability to connect to
all providers of cash data, typically via banks or SWIFT. These solutions are provided by system
vendors and banks.
7.2. Financial Risk Management
Most financial managers and/or treasurers would consider that one of their primary roles in the
corporations they work for is the management of financial risk. This financial risk can be defined as the
extent to which a corporation may incur losses as a result of either the adverse movement of money
and capital markets prices or rates (foreign exchange rates, interest rates, commodity and securities
prices, etc.), and/or adverse change in financial markets, e.g. the demand of lenders in certain market
changing as a result of which the company is no longer able to raise debt in any preferred financial
market, or cost of its finance increases substantially.
Financial risk management, often regarded as the preserve of the treasurer, needs to be
managed in the context of the company. Companies face a number of different financial risks. Market
rates and credit risk are most important types of financial risk, with commodity risk and increasing
concern. Plenty of techniques are available for the management of financial risk, but the treasurer must
ensure that the processes used are always approved at the highest level of the company, with easy to
understand targets and rigorous application,, including reporting so that all layers of management are
kept fully informed. The corporate treasurer can then be seen to be fully contributing to the success of
the firm in reducing risk.
Why Should Corporations Manage Financial Risk?
First of all, as any undergraduate Business School student knows from the financial management
theory, the capital asset pricing model (CAPM) purports that shareholders require compensation for
assuming risk. There is a direct proportion, the riskier a share, then the greater the theoretical return is
required by shareholders to compensate for that additional risk. A security’s risk is measured by the
volatility of its returns to the investor over and above the volatility of return from the market overall.
This volatility of returns is affected by three main factors, and the level of financial risk is one of them.
The objective of managing financial risk is thus to reduce the volatility of returns of a security over and
above that of the volatility of return from the financial market. This should increase overall value to
shareholders. Another reason why financial risk should be managed is to avoid financial distress that is
usually reflected in the inability of a corporation to raise finance for new projects, to refinance existing
financial liabilities or to meet the ongoing liquidity needs of the company.
The last, but not the least, reason is to prevent an adverse impact on a company’s chosen
strategy. Most Boards of Directors need to know that they can continue to pursue key strategies
unhindered by unexpected financial losses. Many non-financial corporations believe that they have no
specific skills in financial markets, and therefore any risks arising from the company’s involvement in
these markets should be mitigated. Potential losses arising from adverse movements in financial
markets can, especially if they are significant, require all or part of the company’s strategy to be
modified, or even cancelled. Financial risk management, or “hedging” only postpones the effects of
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market rates on the cash flows, income statement and balance sheet of the company. Hedging in the
financial markets using financial derivatives, for instance does not take away financial risks that arise
from ongoing operations (though they may fully offset one time events). Foreign exchange risks are
usually created by having production and supplies in a different currency denomination than that of the
sales. This means that through investment decisions the company creates foreign exchange exposure
that must be managed through derivatives and other financial instruments. The only way to eradicate
the financial risks is to have all costs and revenues in the same currency. The credit crisis created
awareness from the Board of Directors that financial risk is actually created through business decisions
and can only be fully eradicated through business decisions. Financial risk management has become a
much more strategic issue after the crisis. However many companies still try to avoid the effects of
adverse foreign exchange movements through specific accounting treatment, so called hedge
accounting. Hedge accounting is a technique to link the financial hedges to the underlying commercial
cash flows. Hedge accounting does not change the structure of the risk but merely accounts for the
financial results in the overall results rather than specifically in the financial net.
Some firms now structure their balance sheets and expense / income structures so as to create
natural hedges. For example, a firm which bought raw materials denominated in one currency may
establish sales offices and production facilities in local countries, in effect diversifying the foreign
currency risk exposures faced by the firm. As can be seen, strategic business decisions around markets
and the location of expense centers can shape financial risk exposures and thus Treasury is increasingly
pulled into business strategy questions of which financial risk may be a material component.
The treasury department has three possible alternatives how to handle financial risk:
1. Strategically avoid the risk - for instance, by locating production and sales costs in the
same currency jurisdiction of the customers.
2. Tactically manage the short term effects through financial risk hedging to gain a grace
period to adjust for the effect, for example, by changing customer pricing.
3. Accept the risk and retain it and present the effects in the accounts. This is usually the
case when the risks are reasonably small.
4. “Outsource” the risk.
Risks that aren’t avoided must be accepted by the company and either retained, reduced
internally or transferred externally. There are a number of distinct steps in the management of financial
risks, first of all treasury must identify financial risk within the organization and be able to measure
these risks and estimate the probability and impact of each of them. Then, as a response to each type of
risk, treasury must define the company’s risk management policies, which will be enshrined in the
company’s financial policies and implement the financial risk program for a whole company as well as
each department. The final, but very important part of the whole process, is to report on the progress
and efficiency of the policy (i.e. assess the extent to which the policy chosen has reduced the risk in the
most efficient manner possible), periodically provide feedback, and re-evaluate the entire financial risk
management process.
Integration of Financial Risk Management
Financial risk management integration – as any other corporate activities integration – must logically
start at the top level. Executive management and the Board must set the strategy and ensurie
appropriate high-level objectives and a governance and reporting structure for the organization. These
corporate objectives must then be translated into the business units and functional operating areas. The
mid and lower level objectives must support the company’s strategy. In order for these components to
be in sync, management must clearly and consistently communicate its goals.
International Research Journal of Finance and Economics - Issue 78 (2011)
65
8. An Evaluation of how Organizations can be Optimally Structured to Maximize
Scale and Strategic Impact While Also Addressing Underlying Operational
Functions and Risk
Centralization need not require the consolidation of all activities and staff to a single geographic center
– it may not even require the consolidation of all relevant staff to a single operating unit. For purposes
of this paper, we will distinguish centralization as having multiple levels:
Level 1: Consolidation and standardization of processes and data
Level 2: Consolidation of functions under a single organizational unit
Level 3: Consolidation of personnel to a geographic center
Level
1 – Processes and
Data
2 – Organizational
consolidation
Benefits
● Uniformity and consistency in execution of
processes
● Scaling of process expertise
● Enhanced integration of data
● Optimization of staff efficiency at a local
level, where a single individual may supply
multiple, sub-scale local functions
● Consolidation and scaling of competency
within a single organizational unit
● Same benefits as 1, but with improved
compliance due to organizational oversight
over activities
●
Greater flexibility in location of staff versus
level 3 centralization
●
Consolidation of scale at a process, data
and staff level
●
May improve organizational influence if
geographic center is within HQ or aligned
with other critical staff functions (e.g.,
shared service center)
Constraints
● Weak organizational control – e.g., the
problem of ensuring organizational
compliance with processes and data
standards
●
Potential duplication or lack of clarity in
roles across the organization
●
Some local units may feel disengaged from
the activity if the activity is seen as strategic
– e.g., approval of credit exposures to
customers may not take local objectives into
consideration
Geographic dispersion may fragment scale
at a staff level (as opposed to level 3
centralization)
Potential disengagement from local
processes, regulations, conventions
Weak coordination with business units /
other constituents (e.g., local banks) due to
central global location and potential for
language and cultural differences
Challenges in providing local time zone
coverage due to single geographic location
●
●
●
3 – Geographic
consolidation
●
Acquisition of scalable competencies at a
market rate, which may be more efficient
than internal production
●
●
Loss of control over supply of solution
●
Outsourced solution may not meet all of the
unique needs of the firm, which may create
inefficiencies or limit competitive
differentiation
Integration / change management costs may
be significant
4 - Outsourcing
●
Possibility of continuous improvement of
activity without significant capital outlay
●
These levels can be seen both as a decision framework and, in the case of activities that lend
themselves to full geographic consolidation, as an evolutionary roadmap.
8.1. Evaluation of Centralization
From the perspective of a Treasury unit, centralization drives multiple benefits, some of which can be
accomplished via limited centralization (e.g., Level 1), while others may require a deeper form of
centralization (e.g., Level 3). Finally, in some cases, the size and strategic focus of an enterprise may
suggest it pursues outsourcing (level 4)
The factors that determine the optimal level of centralization (vs. regionalization or local
location) include:
 Scale dynamics
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International Research Journal of Finance and Economics - Issue 78 (2011)





Homogeneity of requirements across jurisdictions and regions
Labor market considerations
The intensity and nature of local collaboration
Importance of hard controls
Other?
Scale
Discussions of scale typically focus on unit cost optimization, whereby higher fixed costs are used to
reduce marginal variable costs, thus producing significant unit cost improvements at higher volume
levels. A good example of this would be RTGS processing by commercial banks
However, for a knowledge-based unit such as treasury, the primary focus on scale is the scaling
of competency and resources. A treasury unit comprised of 6 people will necessarily be staffed
primarily by generalists, each responsible for multiple functions. Such a staff will often have to
externally source deep functional expertise due to limitations in staff size. Further, such a staff will
often be characterized by weak resiliency, as lack of staff limit overlap in competencies. In contrast, a
unit comprised of 80 staff can develop functional specialization and improved redundancy in staffing
levels. Smaller firms and firms with limited treasury staff levels may lack sufficient Treasury size to
develop deep functional expertise across multiple domains.
For key knowledge functions, merely standardizing processes and data does not provide scale
as the underlying expertise will remain fragmented organizationally. In its corporate consulting work,
Treasury Strategies sees clear differences in the expertise levels of treasury units based on the degree to
which responsibilities have been globally centralized. For example, while core treasury functions may
be centralized, a firm may have decentralized staff managing customer credit risk exposures. Even if
processes and data are standardized, this function will generally be relatively immature, due to the lack
of consolidated expertise around this function. In contrast, a consolidated function (even if
geographically dispersed) can have the resources to pursue ongoing improvements such as improved
tools, analytical methods, etc.
With respect to the new and emerging roles of the Treasurer, we can see that these activities are
more strategic, which argues for more of a generalist approach. However, simultaneously, the depth of
risk and liquidity expertise has intensified, arguing simultaneously for functional specialization,
necessitating scale. While outsourcing may be a promising avenue for smaller firms seeking expertise,
treasury outsourcing has failed to thrive, despite several attempts. The degree of integration and the
strategic importance of treasury makes outsourcing these functions challenging.
International Research Journal of Finance and Economics - Issue 78 (2011)
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Requirements
When centralization efforts are pursued, local units will often argue against centralization due to
unique requirements resulting from regulations or market conventions. Evaluating which of these
concerns is legitimate can be a challenge. Navigating this decision will depend on several factors:
 The flexibility of a firm’s treasury technology in meeting disparate local requirements
 Access to local expertise – e.g., via third parties such as banks, treasury associations and
consultants
 The comfort of the firm’s culture in interacting remotely –e.g., via phone, web and other
indirect channels
Within the domain of treasury, several elements have historically limited the scope of
centralization:
 Provider scope – until recently, few banks had the capability of delivering fully global
solutions. Today, multiple banks are expanding their footprint and partner arrangements
to deliver global banking.
 Regulation – several emerging / large economies – e.g., China, India, Brazil – are
characterized by significant controls around the movement of funds. Other jurisdictions
may have unique restrictions around invoice methods / formats, reporting or even the use
of non-local resources for key activities. As a result, treasury must not only determine if
the unique requirements of a market can be met via a centralized unit, but also must
determine if the dynamic nature of the market (e.g., China) requires a more active
presence merely to remain up to date on regulatory requirements. Conversely, a treasury
unit could decide that unique regulatory requirements and market conventions can be
monitored via third party sources and that a centralized unit can fully meet the
requirements of locally restricted markets via technology.
 Expertise – while banking is gradually standardizing at a global level, unique payment
and banking conventions exist in many jurisdictions – whether it be Islamic banking and
credit, unique payment media or conventions around settlement practices. Navigating
these differences requires local expertise that must be sourced internally or externally
While the above factors may argue for unique processes, a firm may determine that these
activities may still be centralized due to the similarity of the required competencies or the benefits of
control. Subject to economies of scale, a firm may determine that local requirements are best met via a
Level 2 centralization in which roles are dispersed geographically – close to local conventions – while
reporting centrally. The key challenge in this regard is that such an approach may lack scale – for
example, a local jurisdiction with unique requirements may not have sufficient scope of treasury
activities to warrant a full staff – and even if it were to warrant a single staff, it would provide very
little redundancy and overlap as a single staff unit.
Labor Market Considerations
Firms may locate treasury centers or other shared service centers in low cost / high skill centers. In its
global consulting practice, Treasury Strategies, Inc. observes many organizations establishing treasury
centers in Poland, India and even China (often Shanghai).
Intensity and Nature of Local Collaboration
Firms are increasingly better able to promote collaboration globally via technology that supports
interaction – e.g., webinars, virtual teleconferencing. Still, at the end of the day, there are many
interactions that are more powerfully supported through face to face interaction. These types of
activities tend to be collaborative, iterative interactions that are complex and strategic in nature.
High Frequency
Low Frequency
Outsource / Centralize
Regionalize / Centralize
Highly Structured, Operational Tasks
Localize
Regionalize / Centralize
Ad-Hoc, Unstructured Tasks
68
International Research Journal of Finance and Economics - Issue 78 (2011)
Importance of Hard Controls
Some activities – e.g., bank account management – are viewed as such severe control risks that they
are centralized so as to clearly demarcate organizational responsibilities and thus maximize control
while minimizing risks.
Many firms traditionally allowed local units to establish bank accounts using standard
processes and data requirements for cataloging such accounts (Level 1 centralization) only to find that
without greater formal controls (Level 2), the organization created an unwieldy array of accounts that
were inadequately cataloged and maintained. For this reason, activities that require significant
regulatory or risk controls have now been centralized so as to improve oversight. Examples include:
 Bank account opening / management.
 Execution of real-time payments.
 Financial risk management (exposure measurement, hedging strategies, monitoring of
hedges).
 Foreign currency transactions.
 Investments, etc.
Integration of Above Factors
Any single component of an organization can have an impact on multiple of the above factors. As a
result, the optimal level of centralization can only be determined through a synthesis of the above
factors and this analysis must also consider interdependencies and synergies among these activities –
e.g., centralizing one activity may be infeasible or ill advised if a related activity must necessarily
operate at a regional or local level.
 For risk-intensive activities, hard controls are desired, as they promote organizational control
and consistency of execution / management.
 Tasks requiring specialized competency will be specialized so as to scale that competency to
fund the specialized knowledge or skill.
 Tasks requiring unique local execution or collaboration will be locally located, subject to
control and scale considerations.
 Other factors, such as labor costs, do not determine centralization vs. regionalization or local
sourcing, but instead drive the location of centers once the appropriate model is formed.
Conclusion
The challenges to greater efficiency and mitigating risk faced in a global environment must be the top
two priorities for any treasurer today. Their expanding role will continue to evolve and become even
more significant within the company’s hierarchy. The way to achieve a greater efficiency and broad of
risk responsibilities within the company to incorporate counterparty, country, and financial supply
chain is treasury centralization. The centralization consolidates control within treasury, giving it the
power to automate / optimize functions AND to gain greater visibility into and control over risks.
The new trends of corporate treasury emerge from the credit crisis, which changed the trust in
the reliance of the efficiency and existence of the financial markets. Most companies experienced a
severe shortage of funding and many financial markets, especially in the emerging or growing markets,
were merely shut down. It meant that liquidity became a scarce resource, hedging was not able to be
performed. The shock waves from the crisis created a realization from the companies of the importance
of the treasury operations and the need for contingency plans for financing and risk management. This
led to a fast balance sheet deleveraging and creation of cash cushions and increasing the financing
sources. The role of the treasurer also became more strategic and central to the companies. The crisis
also exposed the lack of transparency in financial risk exposures –whether it was a fund, a structured
asset or even an indirect exposure – e.g., if Lehman were a funder in a revolver, access to that funding
was disrupted when Lehman failed. Accordingly, treasurers must disaggregate risk to its underlying
International Research Journal of Finance and Economics - Issue 78 (2011)
69
components, which sounds simple in theory, but could mean understanding, dynamically, all the
components of a fund.
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