The Trends Driving Global Treasury

It's essential for multinational corporations to capitalize
on five key trends that are driving these transformational
changes in treasury. Leading-edge treasury departments are
actively driving and exploiting these new opportunities to
create global, best-in-class treasury operations. Companies
that continue to maintain a traditional structure of delegating
offshore treasury activities to foreign subsidiaries risk
falling to a level of underperformance relative to their
peers.

SEPA and the coming transformation in payments. When
it comes to establishing a truly integrated and streamlined
treasury operation, the devil is in the details -- and nowhere
are the details more critical than in payments. Companies
receiving and disbursing payments around the world have faced
a disjointed global payments system, with each country operating
unique clearing systems. In the area of low-value payments,
for example, companies operating globally find that many
nations do not provide a clearing system comparable to the
automated clearing house (ACH) in the United States. Where
such low-value clearing systems do exist, formats will be
unique to each system, requiring a customized set of instructions
to initiate the payment.

As a result, many companies have traditionally relied
on local subsidiaries to generate payment instructions, often
utilizing proprietary communication platforms linked to local
clearing systems. These payments must then be locally cleared
and reconciled, creating additional costs. The challenges
associated with centralizing accounts payable and accounts
receivable were evident in a recent Treasury Strategies survey,
in which over 50 percent of respondents indicated that local
subsidiaries were responsible for these functions -- the
least centralized of all their treasury activities.

However, a major transformation of global payments is
just around the corner. On Jan. 1, 2008, a new era in European
payments will begin with the advent of the Single Euro Payments
Area (SEPA). While the ultimate goal of SEPA -- to create
a single European payments area on an operational and legal
basis -- will take at least until 2010 to achieve, over the
next several years banks will be required to introduce pan-European
payment instruments that provide consistent pricing and float
conventions along with standardized formatting.

For the corporation, this could mean, in theory, the ability
to clear all Eurozone payments through one operating account.
Additionally, the greater flexibility in payment formats
afforded by SEPA will further enable companies to establish
centralized payment factories and even centralized collection
points.

At the same time, those companies that do not make a priority
of assessing and adopting SEPA standards may encounter significant
cost increases as banks transition away from supporting local
payment formats. For example, under SEPA the Bank Identifier
Code (BIC) will be the only bank routing designation accepted
by EU-domiciled banks. Payments that do not contain the BIC
will need to be repaired by the bank, resulting in additional
charges to the company. Unfortunately, many companies do
not have BICs in their vendor files and will need to collect
this information or implement an automating solution.

Fortunately, the bank-owned cooperative SWIFT is leading
several key initiatives that aim to deliver a common platform
to support global standards for payments in Europe and globally.
The UNIFI (ISO 20022) project, led by SWIFT, is developing
global open (XML) payment and collection standards that will
meet SEPA rules, including the provision of far richer messaging
formats. In addition, ongoing projects to enable direct access
by corporations to SWIFT, such as the Standardised CORporate
Environment (SCORE) initiative, will enable large global
companies to participate directly in SWIFTNet rather than
through individual, single-bank linkages. The ongoing harmonization
and enrichment of payment formats will serve to drive continuing
improvements in straight-through processing rates and the
ability to realize just-in-time funding of subsidiaries,
outcomes that further bolster the business case for centralized
treasury processing.

Creating a global master database. A global treasury
operation must be able to access accurate and timely global
data in order to be effective. Corporate treasury departments
have long struggled to create a centralized and coordinated
approach to treasury when obtaining key data such as foreign
bank balances, cash forecasts and foreign currency exposures.
The need for efficient access to data becomes even more critical
for a company seeking to establish a regional shared services
center to process payments.

The need for a common platform that provides access to
business intelligence across the enterprise -- both in treasury
and across other functions -- has led companies to implement
ERP systems and other financial applications in subsidiaries
around the world. The availability of hosted and ASP treasury
systems, corporate access to SWIFTNet, and improvements in
bank reporting platforms are also making data more accessible
on a worldwide basis. While global system rollouts are an
ongoing project at many companies, access to worldwide data
from a central location has reached an unprecedented level.
For corporate treasury departments, this means the opportunity
-- and the need -- to implement centralized tracking of treasury
management processes that previously were impractical.

For example, foreign currency risk management has remained
relatively decentralized at many companies as a result of
the difficulty of obtaining timely exposure data. Following
implementation of global sub-ledgers for accounts receivable
and accounts payable, however, corporate treasury now has
the ability to independently view booked exposure information.
Armed with this direct access to data, treasury can more
easily take responsibility for trading and administering
the derivative portfolio.

Treasury technology: a tool for the global enterprise.
The introduction of treasury management systems over a decade
ago was a major step forward for treasury departments in
their quest to enhance efficiency and reduce risk through
process automation. Manual and sometimes error-prone tasks
such as debt and investment accrual calculation, bank activity
reconciliation and posting, and gathering of cash position
data could now be performed automatically rather than by
hand. Costly and time-consuming to install, however, these
"workstations" were typically limited to the corporate
treasury department or perhaps key treasury center locations
offshore. With only a select number of users, these applications
often failed to receive the IT support needed to realize
their full functionality and integration with other company
systems. In addition, personnel in foreign subsidiaries were
often unable to access and take advantage of these treasury
management systems, inhibiting global coordination and the
visibility of treasury.

The introduction and rapid adoption in the marketplace
of Web-based treasury technology is changing the rules of
the game, however. From anywhere in the world, company personnel
can now access and utilize their treasury management systems
through the Web. Companies now deploy a worldwide platform
to capture distributed data across the enterprise. Real-time
reporting of the global cash position, for example -- long
sought by CFO's but too costly for treasury to provide --
is now a practical proposition. Furthermore, the cost of
licensing and installing the newest breed of hosted and ASP
treasury systems is now well within the budget of most midsize
companies.

The challenge of creating a global cash forecast illustrates
the strength of a global treasury management system. Faced
with the difficulty of obtaining and compiling cash forecast
spreadsheets from foreign subsidiaries, many companies have
simply opted out and are unable to develop a consolidated
forecast. With a Web-based treasury system, however, subsidiary
staff can now input forecast information through a Web interface.
Corporate treasury can utilize robust hierarchy and user-privilege
functionality to ensure a consistent forecast methodology
and define roles. For example, a particular individual may
have the right to input forecast information, while only
being able to view data for the local subsidiary.

The advent of true global banking. If the corporate
treasury function has remained a local affair, so has the
banking industry. Homegrown banks dominate their national
footprint while achieving a far more limited presence outside
their borders. While a small group of global banks have long
claimed a worldwide presence, branch locations and local
banking services have frequently been limited in many countries.
The need for a local branch network for making deposits and
servicing payroll, for example, has led many companies to
establish local bank relationships throughout the world.
The result: a long list of bank relationships and bank accounts.

Treasury Strategies found, for example, that over 25 percent
of U.S. corporations in a recent survey had more than 10
banks globally. Within the United States, the proportion
having this number is only 11 percent, reflecting the far
greater levels of streamlining that U.S. companies have realized
domestically. For these companies, the cost of dispersed
bank relationships outside of the United States is high.
Bank accounts may be excessive and costly to maintain. Visibility
into bank balances and service charges is low. For many larger
multinationals, simply cataloging the bank relationships
around the world can prove difficult, creating risk and control
concerns. Companies are unable to award a lion's share of
their wallet to their credit providers.

The rules of the game are changing, however, as an elite
group of global banks is emerging with true capabilities
to provide regional, and even global, capabilities. Bank
consolidation and investment in branch networks are replacing
many of the traditional homegrown banks with global brand
names. Nowhere is this trend more evident than in Europe,
traditionally a stronghold of "balkanized" banking.
After years of consolidation, a select group of European
banks have attained leading market positions in multiple
Eurozone countries. SEPA is certain to reinforce this trend
by reducing the cost of cross-border payments and the need
for local clearing arrangements.

In other parts of the world, the elite global banks are
making major outlays to land leading positions in key developing
markets. Three of the Big 4 Chinese banks, for example, have
received significant minority interest investments from U.S.
and European financial institutions. These investments illustrate
the importance to the world's leading banks of providing
a global partnership to their corporate clients.

Corporations will need to continually monitor the growing
capabilities of these global banks and evaluate the opportunities
to establish regional and eventually even global partnership
arrangements.

Deregulation: expanding cross-border
solutions.
When implementing global, or even regional, treasury centralization
solutions, theory often does not translate to reality when
it comes to actually applying cross-border techniques around
the world. Exception countries are all too common, limiting
the effectiveness and scope of such solutions. Foreign exchange
and other controls, for example, prohibit netting of payments
in key Asian markets such as China and India. In Latin America,
tax regimes impede concentrating funds between financial
institutions. Even in Western Europe, generally amenable
to cross-border cash management solutions, there are exceptions
to be dealt with. A recent judicial ruling in Germany, for
example, calls into question the ability for subsidiaries
located there to participate in notional pooling programs.

Nevertheless, as a result of the long-term trend toward
globalization and market liberalization, these restrictions
are gradually falling away in many areas. It is critical
for treasury practitioners to monitor developments around
the world in order to understand when solutions previously
considered impractical can and should be implemented. The
example of China illustrates the dynamic regulatory environment
in many countries, particularly in the developing world.
Just in the past year we have seen continuing relaxation
of currency controls and branch banking. Brazil, Mexico,
and India -- traditionally some of the most problematic countries
for multinational treasury operations -- have been introducing
important reforms that eliminate some traditional restrictions.

Treasury management -- often described as more evolutionary
than revolutionary -- is entering a unique period of transformation.
Treasurers must establish a strategic vision for their companies
that leverages these unique opportunities to create shareholder
value. Those companies that continue to rely on traditional
organizational structures, technologies and payment processes
risk facing an environment of rising costs as solution and
financial services providers increasingly cater to a new
breed of global treasury operations.