Aspirations run into limitations, but multinational treasuries push forward in the race toward world-class status.
Most multinational corporate treasuries would love to transfer scarce staff from manual tasks to strategic, value-added activities; implement cutting-edge technology; engineer straight-through processing; streamline banking relationships; cut costs dramatically; and pool cash globally to maximize liquidity and invest funds wherever they produce the greatest return.
They would love to do all that without spending a lot of money on the changes. And that's the hitch, of course.
Best practices are most businesses' goal, but the practical reality is that few companies in this difficult economic environment are willing to spend lavishly on a thoroughbred treasury solution, and few treasury staffs have the time to implement a comprehensive program of improvements. Many treasuries are trapped in a catch-22: They need to automate day-to-day operations to free up their thinly stretched workforce for more strategic activities -- but they don't have the resources to handle automation projects. "New systems may be heaven once they're implemented, but you have to go through hell to get there," observes Jeff Wallace, managing partner with consulting firm Greenwich Treasury Advisors in Greenwich, Conn.
Part of the problem is that some CEOs see treasury as a cost center, according to Garfield Hayes, head of client research and strategy for Wall Street Systems, a New York City-based treasury and capital markets technology provider. During the past two years of tight credit and economic weakness, many CEOs have denied treasuries the funds they need in order to streamline, automate and centralize operations, he reports.
However, leading-edge companies are investing in technology to build straight-through processing and enhance liquidity management, Hayes notes. And some organizations have been forced by circumstances to develop a world-class treasury function.
Consider, for example, BP PLC, the $180 billion petroleum and petrochemical colossus.
Simplify, Standardize, Automate
Several huge acquisitions from 1998 to 2000 -- including Amoco, Arco, Burmah Castrol and Vastar -- presented BP with the monumental challenge of forging an efficient treasury out of a hodgepodge of legacy cash management operations and incompatible banking platforms, according to Robert Novaria, director of global treasury services and treasurer of BP America Inc. in Warrenville, Ill. "Interaction across our various legal structures was inefficient," he recalls. "In the U.S., at least, we were not a sustainable treasury operation at that point. We had to rationalize operations and simpli-fy, standardize and automate treasury activity."
In the United States alone, BP had over 1,000 legal entities with more than 800 accounts at more than 60 banks. "There was a ton of redundancy," Novaria says. Adopting a single treasury system to standardize activities around the globe was a key step in the company's campaign to eliminate that redundancy. The migration, which BP completed in December 2001, took considerable time and effort. But it paid off big time. "We eliminated 90 percent of the treasury tasks in the U.S.," Novaria reports. "Our manual workload dropped significantly."
BP selected the software (from Wall Street Systems) in part because of its in-house bank functionality. The system allowed the company's newly centralized treasury to set up a virtual in-house bank that comprises two linked banks, one in the United States and the other in the United Kingdom. All of BP's subsidiaries and business units now bank primarily with this operation. Their positive cash balances flow into depos-its there. Disbursements to meet their funding needs are recorded as intercompany loans. They earn and pay market rates of interest, and they receive bank statements.
The company now uses external banks only for a small number of borrowings, investments and foreign exchange trades and the hedging transactions it needs in order to cover net positions. The savings run into the hundreds of millions of dollars a year.
The number of external U.S. banks BP uses has shrunk dramatically. The company picked Bank of America to handle its lockbox business and all U.S. payroll activity. Citigroup is BP's controlled disbursement bank and its global cash management bank.
With so much business to award, BP was able to negotiate major concessions and push for innovative solutions from its banks, Novaria reports. For example, Bank of America contracted for armored truck services to pick up deposits from BP's far-flung gas stations. That arrangement saves BP considerable time and expense. And it's safer for employees, who no longer have to drive to bank branches with those funds. All deposits automatically flow into a Bank of America concentration account.
Productivity gains from the implementation allowed BP to reduce its treasury staff by about 17 percent at year-end 2001, Novaria reports. Staff was trimmed again earlier this year. "When you automate, you can reduce manpower and redeploy the staff to analyt-ical tasks that have higher value," he observes. "When you eliminate manual processing, the skill sets swing toward analysis. The big payoff wasn't the reduction in head count so much as it was the upgrading of our skills."
BP's goal is to have no cash sitting overnight in external bank accounts. "We're not there yet, but we're certainly trending in that direction," Novaria reports. The world-class treasury operation that is emerging has already attracted attention; BP won the EuroFinance/AFP International Treasury Excellence Award last year.
Steps to Streamlined Banking
In-house banks have been around for 40 years, but they are enjoying a surge in popularity. Many smaller companies now find that they can justify the cost, says Wallace. "The tax advantages that led some companies to set up in-house banks in places like Dublin have been slipping away," he notes. "Today, they pretty much have to justify themselves from treasury savings alone."
Organizations that lack the resources to set up an in-house bank can still simplify treasury operations by reducing the number of banks and accounts they use. Hayes notes that companies on that track centralize whenever possible. They move funds and staff from national to regional to global levels in their effort to maximize visibility and enhance worldwide liquidity management.
Dorothy Rule agrees. She's director of global product management for liquid-ity and investments at Citigroup Global Transaction Services in New York City. Innovative treasuries are keeping local banking relationships when there is a good case for doing so, she says, but they are moving to a regional banking structure whenever possible, sometimes with a global overlay bank at the top to pull together their regional positions. Increasingly, treasury operations are turning to multibank reporting services so that all balance data comes from a single source, she reports.
"Treasurers consider it far more important now to know their cash position across the whole enterprise and to improve their cash forecasts by getting more complete and more timely information about expected inflows," says Ken Lillie, head of marketing for SunGard Treasury Systems, a Calabasas, Calif.-based treasury management solutions provider. "They want it for liquidity management, and they want it so they can show financial analysts a verifiable cash position. What treasury does is more important now to the CFO and even the CEO."
Companies seeking to shrink the number of banks they use have been helped by a recent wave of mergers that resulted in fewer banks with bigger footprints. But bank consolidation has its downside. "Twenty years ago there were 11 good international banks in the U.S.," Wallace notes. "Today there are three, and they don't exactly fall over themselves anymore to get a company's business."
And treasury managers' efforts to streamline their company's banking design sometimes run into another buzz saw -- reduced access to credit. There's no question that many organizations face a trade-off between operating efficiency and credit resources. They have to use more cash management banks than they would like in order to keep their credit banks satisfied, Lillie explains. Companies with lots of cash and no need for credit have some distinct advantages.
$5 Million Reward
When you're sitting on as much cash as Oracle Corp. is -- $6 billion -- and it's scattered around the world, sometimes gathering dust, the rewards for finding it, concentrating it and putting it to work can be, well, a revenue increase of $5 million a year. That's how much the Redwood Shores, Calif.-based software giant gained when it built a world-class treasury operation.
Only half of Oracle's $10 billion in annual revenue comes from the United States. The rest is pulled from more than 60 countries in 30 currencies that are significant enough to hedge, says Geri Westphal, vice president and assistant treasurer. When the company launched its global treasury makeover three years ago, it had 500 bank accounts. It now has fewer than 300, she reports.
Oracle's treasury now operates as Delphi Asset Management Corp., a wholly owned subsidiary based in Reno, Nev. The word "asset" in the name refers to the $6 billion in cash on Oracle's balance sheet. Two members of the eight-person treasury team handle the investment of those funds, according to Westphal.
The first phase of the globalization project centralized the company's back-office staff in three shared service centers in Dublin, Ireland; Sydney, Australia; and Rocklin, Calif. At the same time, Oracle required all operations to migrate to a common system -- its own enterprise resource planning (ERP) financials, including its treasury module. Then the company standardized the financial processes used by accounts payable, accounts receivable, cash management and treasury. These changes "brought us tremendous savings in both time and money," Westphal reports. She estimates the latter at $200,000 annually.
The second phase of the strategic plan focused on enhancing liquidity management in Oracle's newly consolidated, standardized treasury operation, Westphal says. "We finally could get our arms around every account and every currency and determine what we really needed," she reports. "We found that we had more than 60 subsidiaries acting autonomously, setting up their own local banking relationships -- more than 180 of them."
The company has dramatically consolidated its banking activity and now uses just a handful of banks. ABN Amro provides services for the company's operations in Europe, Africa and the Middle East. Citigroup covers North America, Latin America and Asia. And Wells Fargo Bank is Oracle's concentration bank in the United States. Each subsidiary usually has one payroll account, one disbursing account, one collection account and one investment account, Westphal reports. The accounts are with those three banks whenever possible, though local accounts are still necessary in some cases. The company also consolidated its global custody for investments with JPMorgan Chase, she adds.
Oracle centralized control of its accounts by moving signing authority from the subsidiaries to the central treasury. "That allowed us to determine what cash stayed with the subsidiary and what didn't," Westphal says. Generally, a subsidiary keeps enough cash to cover 1.25 percent of its operating expenses; the rest is swept into treasury-managed pools or concentration accounts. Treasury now controls 95 percent of Oracle's cash, she estimates.
The payoff, according to Westphal: "Consolidation made most of our cash visible and opened the door to efficient pooling and cash concentration arrangements. As a cash-rich company, it's important for us to know where that cash is and invest it well."
The enhanced ability to capture cash and put it to work has brought Oracle stunning gains. Greater visibility and pooling allow the company to go further out on the yield curve and earn higher investment returns, Westphal explains. That's the activity that increased revenue by $5 million. But Oracle will not go too far in that direction. "We've always stayed pretty short," she reports. "We need to have cash available in case Larry [Ellison, Oracle's CEO] wants cash available."
The next step involves developing a more sophisticated investment strategy, with the specific aim of raising after-tax yields. "The biggest challenge lies in understanding the tax implications. Now that we have all of the information, we can do more value-at-risk analysis on a global level," Westphal notes.
The efficient liquidity structures that companies can build in the United States and Europe are more challenging to construct in Asia, reports Doug Stolberg, head of corporate and institutional banking, Americas, for HSBC Bank USA in New York City. Stolberg's organization is a subsidiary of London-based HSBC Holdings PLC, probably the leading global bank for Asian operations. The good news from the Orient, he reports, is that the derivatives markets there have grown to a level of sophistication and liquidity that makes it possible to earn respectable returns on cash trapped in Asia -- to invest it in a very American or European fashion.
Banks can put together pretzel financings that get around some obstacles to international liquidity, Stolberg notes. Let's say Subsidiary 1 in Country A needs to borrow $1 million, and Subsidiary 2in Country B has $1 million in available liquidity. Regulations or tax economics block the funds from flowing to Sub 1 from Sub 2. But a bank can issue a structured note to Sub 1, and Sub 2 can invest in that note. Thus essentially -- but not technically -- Sub 2's money funds Sub 1's loan, Stolberg explains.
That arrangement typifies the creative thinking that smaller multinationals can use to adapt world-class solutions to their scale. At Nordson Corp., a $750 million manufacturer of precision dispensing equipment based in Westlake, Ohio, a global treasury operation supports 30 subsidiaries and the 55 percent of company sales that occur outside the Unit-ed States, says Ray Cushing, treasurer. In-country financial managers use local bank accounts, but the company pulls excess cash from those accounts monthly so that treasury can find the best use for it, he reports.
Nordson has implemented simple procedures that perform many of the functions of an in-house bank -- funding subsidiaries, collecting surplus cash and multilaterally netting payments among operating units, for example. "We settle all intercompany transactions monthly," Cushing reports. "It's A/R driven. We presume that the biller is correct and pay the full invoice amount. Disputes are worked out later. It's a homegrown system, but we haven't found a better one on the market yet."
Netting is a great cost cutter, Cushing adds. "You save plenty when you can net 200 transactions down to one, especially if they are cross-border," he notes.
Beyond the Bucks
Bringing cash management closer to the leading edge isn't just about investment returns and cost cutting, although those benefits get the spotlight. Sometimes the goal is to look good. "This year's story is Sarbanes-Oxley," says Greenwich Treasury Advisors' Wallace. "Treasurers are making sure their operations are buttoned up and that nobody is pushing the envelope but strictly complying with corporate policies on investments, hedging and foreign exchange."
Leading treasuries are also taking a close look at outsourcing options, Citigroup's Rule notes. Many forward-looking treasury operations are outsourcing administrative aspects of their netting, intercompany loans and foreign exchange trading, but they are keeping controls and strategic management in-house, she reports.
Sometimes, too, moving toward a world-class treasury operation means wringing more value out of your technology assets. As companies deploy their ERP systems, treasury staffs are paying the price for dodging involvement in the implementation process as a time trap, Wallace says. "Now they face a challenge of getting cash flow information from the ERP system for their short-term cash forecasts instead of asking local controllers to get it for them. It's all there in the A/P and A/R systems, but they have to figure out how to get access to it," he says. When they do, they'll have more tools, and they'll be better able to centralize treasury operations and do the related accounting, he adds.
And sometimes it's just watching for a windfall. Pending legislation (the Homeland Investment Act) would allow corporations to bring money back to the United States at a low tax rate of 5.25 percent, Wallace reports. If that legislation passes, "we'll see a lot of cash that has been trapped abroad due to high U.S. tax rates come home quickly -- probably well above the $300 billion that has been estimated by JPMorgan," he says. "Treasurers and their tax advisers are watching that legislation carefully."
Adapting the concept of the perfect treasury to an imperfect world is a challenge, but it's one that companies -- with a little ingenuity and persistence -- can meet.