BRINGING IT ALL TOGETHER

Global Finance, Sep 2005 by Hawser, Anita

The key to successful management of a global treasury system is a balance between central control and local autonomy.

For a decade or so now, centralization of treasury management and accounting operations has been the most-used weapon in a corporate treasurer's armory for defending its global expansion, while reigning in some of the costs and inefficiencies associated with that strategy. Managing multiple accounting structures, treasury operations and business lines in 50, 100 or 200 countries demands a system that will help ease the cost and complexity of doing business in multiple locations and legal jurisdictions.

Most Fortune 500 companies have some form of centralized group treasury operations, which acts as a central policy-making body and nerve center for the group's global operations. "Volkswagen is a centralized entity in terms of decision making," says Olivier Brissaud, general manager, Volkswagen Group Services, based in Belgium. "The center in Germany runs the policies and laws and frameworks."

David Knight, global leader of the finance effectiveness advisory team at PricewaterhouseCoopers (PwC) in the United Kingdom, says there are aspects-minimum governance standards, awareness and visibility from a group perspective-that should come from the center. "Treasury is one of those areas of activity that has to be governed properly," he explains. "How the processes and structures fit together, however, can vary from one firm to another depending on the nature and complexity of their business."

Most larger corporates will probably have consolidated their treasury operations along regional lines, establishing centralized payment processing centers, otherwise known as shared service centers (SSCs), which handle accounting and accounts payable and receivable. Brissaud says Volkswagen's SSC in Belgium acts globally and has helped the company achieve economies of scale as well as other financial and tax benefits. These centralized structures also allow companies greater control over transaction flows and allow the treasurer to focus on more strategic value-added tasks, such as risk and bank relationship management. Michael Mueller, managing director of global transaction banking-cash management at Deutsche Bank, says: "In the past there was a lot of talk about SSCs and payment factories but not much happening in terms of actual installations. Now we are seeing a lot more activity in this space. Some companies are taking this a step further by using providers to cover significant parts of their respective workflows. There are payment processors behind certain companies, and consolidators which represent a number of different companies." Knight says there is an increasing trend toward centralizing payment operations on the back of shared services by linking in-house banks with SSCs to achieve greater synergies. An in-house bank handles inter-company payments to global subsidiaries and external payments to suppliers on the internal accounts of the company. In this way, companies can reduce banking fees as well as optimize working capital and liquidity. Thomas Bergqvist, chief marketing officer at treasury solutions provider Trema, says it is seeing the closer alignment of commercial and financial payments within companies. "Treasury is becoming more active in linking with other financial activities such as customer financing, and there is closer alignment and integration of business processes," he says.

MANAGING RISK

Centralized payment and accounting functions also help simplify group-wide risk management, including FX exposures, market risk, credit risk, operational risk or dealing with regulations such as Sarbanes-Oxley (SOX) and IAS 39. "Risk management is an increasingly important concept, and having functions centralized provides an element of sound risk management," says Volkswagen's Brissaud.

Bergqvist adds that regulations such as SOX and the focus on corporate governance is forcing companies to move toward a global-platform approach in treasury management. "Risk management is now enterprise-wide," he says, "and companies need to get as many business units, financial flows and commercial flows on the same platform."

John Alarcon, CEO of XRT, a US-based treasury systems provider, says compliance is much smoother when processes are consolidated and automated. "If a company is centralized, it will be easier to demonstrate the effectiveness of internal controls," he says. Centralization aids compliance by providing greater transparency in terms of where a company's cash is and where the risks and costs lie, says Deutsche Bank's Mueller.

Knight says "visibility from the center" is achievable even if treasury is decentralized, as long as subsidiaries provide information back to the center. "Some organizations have realized the benefits of well-coordinated management of currency risk, but that doesn't mean you have to bring exposures into the center," Knight explains. "Hedging can be done locally, as long as central treasury has visibility of those exposures." Browser-based technologies and open and more flexible standards for integrating data enterprise-wide have evolved to provide treasurers with a more centralized view of their operations, without having to physically relocate staff and resources to a central location. "Using web-based technology, it is possible to initiate a payment in one place and review it in another, which gives corporate treasury a different level of control over their processes," says Mueller.