Centralizing treasury operations is at the top of most treasurers' to-do lists today. In fact, one-third of financial executives responding to a 2006 report by Aberdeen Group indicated that centralizing treasury and cash-management functions was one of their top three priorities. "There definitely is a trend to centralize," says Holger Fortnagel, managing member with IAM Treasury Services LLC in Pasadena, Calif.
One driver behind these efforts is the heightened regulatory environment, which compels treasurers to maintain a thorough grasp of their companies' far-flung operations. "By creating a centralized-operations or treasury center, you get better control of cash positions and operational risk," says Lisa Rossi, head of U.S. product management and liquidity management, global transaction banking - cash management with Deutsche Bank in New York City. Centralization adds a layer of oversight for reviewing information and transactions, she notes.
At the same time, finance executives are being pushed to reduce the overall cost of their departments, says Sanjay Srivastava, COO with Aceva Technologies Inc., headquartered in San Mateo, Calif. The cost of finance operations accounts for about 0.67 percent of revenue at leading companies, according to information from The Hackett Group, a business advisory firm in Atlanta. That compares with 1.22 percent at average companies, Hackett reports. One way to reduce costs is to eliminate redundant operations and minimize the number of information systems in use.
What's more, the technology now is available to allow companies to consolidate or link different IT systems onto one global platform. That wasn't the case even a decade ago, Rossi observes.
Cadence Design Systems Inc., a San Jose, Calif.-based provider of electronic design automation solutions for the electronics industry, derives more than half of its $1.3 billion in revenue from operations outside North America. Before 2005, the company had decentralized treasury operations around the globe, says James Haddad, corporate vice president with responsibility for global treasury. This was driven by time zones; treasury employees needed to be available when business was conducted, and increasingly, it was occurring on a 24x7 basis. Even the most die-hard employees can't be available around the clock. As a result, however, the corporate treasury department couldn't get daily cash balances on a timely basis.
Haddad and his team began by holding monthly phone calls with their counterparts around the globe. They discussed their divisions' cash balances and flows as well as broader finance issues. This communication improved corporate treasury's ability to accurately forecast Cadence's overall cash flows. Next, Cadence began consolidating information from its European and Asian operations into a regional treasury center in Europe.
In 2005, the company implemented a treasury workstation from Thomson. With all the regions linked to it, Haddad and his colleagues can see where cash is accumulating and what transactions are occurring. He can net funds between regions that have excess cash and those that need cash and can more accurately hedge Cadence's foreign exchange (fx) exposures. In addition, the corporate treasury staff has been able to reduce the number of Cadence's bank accounts by about one-fourth. He expects further reductions as the company continues to centralize.
Centralization of Cadence's cash management enhanced forecasting accuracy, so it became a key factor in a recent successful note issue. Management comfort in the forecast was critical to their giving the go-ahead to issue $500 million in convertible notes in December 2006. The company issued $250 million at an interest rate of 1.375 percent and $250 million at 1.5 percent. Without the insight into cash flow now available, Cadence would probably have had to pay a higher rate on another form of financing.
Successful centralization requires several steps. One is determining the degree to which it makes sense to centralize. Next is coming up with a process to determine which bank accounts, treasury processes and information systems are in use across the company and developing a plan to consolidate them where possible. Throughout these steps, treasurers need to work with their peers in the business units and other areas of finance to gain support for the centralization process.
When financial executives use the term "treasury centralization," most actually mean semi-centralization, says Al Sanders, director, treasury consulting, with BearingPoint Inc. in Chicago. The goal usually is to centralize treasury information to boost visibility and control. Often, however, some functions remain in the field.
Fortnagel provides an example: Companies usually centralize interest-rate and fx management. These functions require specialized knowledge of such subjects as currency hedging strategies and tax regulations. Managers usually want to leverage this expertise across a number of business units. In addition, managing these risks requires a broader view of operations than what an individual working at the business unit level would have, Fortnagel says. For example, to create effective hedges, the fx manager needs to know the cash positions of at least several divisions, rather than just one.
Companies can centralize policy- and decision-making or transaction processing or both, says Michele Allman-Ward, managing partner with Allman-Ward Associates Inc., a treasury management consulting firm in Los Angeles. "It's not one size fits all."
For instance, the treasurer in an organization with numerous divisions may centralize A/P processing in order to boost efficiency. At the same time, the treasurer may allow the regional treasury staff to set some policies. For example, the local finance group may decide when to pay suppliers based on trade discounts available or the business unit's cash flow. "It may be better to leave some areas of decision-making at the local level," says Allman-Ward. "The treasurer in Kansas may not know the best way of running the business in Kuala Lumpur."
Of course, some policies still need to be established at the corporate level, Fortnagel notes. For example, if the treasury group at the operating unit is responsible for investing short-term, the corporate treasury group has to define what's permissible. "You need a clear, detailed policy," Fortnagel says.
In contrast, a treasurer can set policies that are consistent across all divisions but allow operational autonomy at the local level. For instance, the regional staff may handle local payments but use the bank chosen by the treasurer.
It's important to note that centralizing doesn't mean that all treasury functions must occur within a single location, notes Bent Benjaminsen, senior vice president, strategic initiatives, with Calabasas, Calif.-based SunGard AvantGard. A company may centralize its fx management in the United States while moving its accounts payable processes to India, for instance.
Also key to most treasury centralization efforts is minimizing the number of banking relationships and accounts. World-class firms have 42 percent fewer banking relationships than average firms, reports The Hackett Group. About five banking partners seems to be the magic number, says Karen Willis, treasurer and partner with Elire Inc., a Minneapolis-based management consulting firm. Any more and it becomes difficult to manage the relationships and track the fees.
Reducing bank accounts also reduces the potential for fraud, as it's easier to keep tabs on a smaller group, says Suzanne M. Gittus, senior vice president and global sales manager, international treasury management, with Wells Fargo & Co. in San Francisco.
Which banks should companies keep? Treasurers should consider their banks' ability to support transaction automation; provide quick, easy access to information; and operate across the globe, says Katie Downs, REL total working capital EAP leader with The Hackett Group.
Honeywell International Inc. of Morristown, N.J., centralized in 2002. The company, which was formed by AlliedSignal's acquisition of Honeywell Inc., had a good grasp of its U.S. bank accounts and treasury operations but lower visibility into bank accounts outside North America because these businesses had been more centralized, says Craig Mondschein, director, global banking and cash management. "It was a situation where we didn't know what we didn't know," he says.
To change that, Mondschein and his colleagues began a census of all bank accounts. They started by developing an Intranet application to which the finance employees in the regions would enter data on their bank accounts. "It was a country-by-country, business-by-business scouring of accounts," Mondschein says.
Once the bank-account database was fairly complete, the business units began entering their Friday closing balances. To check the accuracy of the data, Mondschein compared the total from these entries to the cash amount on the balance sheet, looking for the two numbers to be within 5 percent of each other.
The next step was deciding how many and which banks to continue doing business with. Mondschein and his colleagues decided that Honeywell would work with one bank within each country, choosing those offering the best technology and service at a reasonable price.
Consolidating banks and accounts took about a year because it required Honeywell to work with customers to get their A/P systems set up with the new banks.
In 2003, Honeywell introduced a treasury workstation from SunGard that automated much of the manual data-entry work. Today, Mondschein automatically receives daily balance information on about 1,400 bank accounts, or about 85 percent of all Honeywell's accounts.
As Honeywell's experience indicates, consolidating onto a single, or just a few, information systems is critical in centralizing treasury operations. "You want to view all transactions through a single portal," says Gittus of Wells Fargo.
For a treasury workstation to function in a centralized treasury environment, several qualities are key, says Benjaminsen. It needs to be able to operate 24x7 so it can accommodate employees working in different time zones; handle transactions in multiple currencies; and connect with -- or at least transmit information between -- multiple banks as well as different units within the company, such as the A/P and A/R systems.
Wind River Systems Inc. centralized its treasury operations in 2003 and 2004, says Tyler Painter, the company's corporate treasurer and vice president of investor relations. "Our goal was to increase visibility, control and the efficiency of our global treasury operation." The Alameda, Calif.-based business, which helps companies optimize device software, has operations in 18 countries and revenue of $266 million.
Wind River chose Wells Fargo as its banking partner and uses its Commercial Electronic Office (CEO) business portal. "Moving to a centralized one-platform banking solution significantly increased corporate treasury's ability to view and control our working capital worldwide," Painter says.
Wind River's business units can collect money from customers in the local currency and deposit it in a local bank. The application provides a technology link between Wind River and the local bank, so Painter can view the company's balances across banks, across the globe. He also can control users of the system from Wind River's headquarters.
Previously, a treasury employee would have to log in to each local banking system in order to issue a vendor payment, Painter says. Now employees in the regions can transmit a payment file from the company's Oracle system directly to the bank instead of manually entering information into the individual bank payment systems, and Wells Fargo's CEO application issues the payment and provides a confirmation. "This takes all the one-off manual processing and makes it automated," Painter says.
As a result of these changes, Wind River's costs to process payments have dropped by between 30 percent and 40 percent, Painter says, and the company has been able to ensure Section 404 compliance and minimize fx exposure.
As critical as technology is to a centralization process, change management is even more so. "The issues are 80 percent process and organization and 20 percent technical," says J. L. "John" Alarcon, general manager of North American operations with XRT Inc. in King of Prussia, Pa.
First, treasury must have the support of the company's top management, notes Gittus. "You need a clear, consistent message to help open the dialogue with the regional treasury centers," she says. "You want to gain an ally."
Accomplishing that requires effectively managing the personnel issues that can come into play as jobs and organizational charts shift. Involve both treasury and business-unit employees early on, advises Allman-Ward. Otherwise, they may assume the worst and not cooperate fully.
At Honeywell, the CFO and treasurer made sure the business unit heads knew that the change was mandatory. "Because they came from a decentralized philosophy, they would have pushed back," Mondschein says. The leaders of the units had to work through the "psychological hurdle" of no longer having their own cash, he adds.
Helping them get over the hurdle was the fact that the benefits of centralization appeared on their divisions' financial statements. As cash and accounts were consolidated, each business group's banking costs dropped, immediately reducing expenses.
The new processes put into place need to be at least as strong as the existing ones, according to Allman-Ward. If they aren't, employees at the subsidiaries will circumvent them. For example, they may issue checks to suppliers themselves if headquarters can't do it on a timely basis. One way to ensure that expectations are met is to establish service-level agreements with the business units. And, as Honeywell did, it helps to let the business units share in any benefits resulting from the centralization, says Allman-Ward.
Treasurers also need to set a realistic time frame during which the centralization will be completed. A one- to two-year time frame is not uncommon, says Srivastava.
While that may seem excessive, Sanders notes that many treasury centralization initiatives are just as complicated as ERP implementations. They require integrating with internal accounting, A/R and A/P, as well as the business units. It's also necessary to link to external parties, such as the company's banks. "These are complex projects," he says.