Is change necessary, and if so, are we ready?

Summary

Research in Asia reveals what Treasury will focus on in the period ahead. Though a lot of time is traditionally spent on mapping innovation and new development, it is sometimes quite difficult to actually push for change. How innovative are we, and how does price factor in to our decision making process?

And, if we’re going to embark on the journey of change, maybe we should take a closer look at what we really want to achieve; go back to basics and most of all try to keep it simple. Improvement could already be achieved by just revisiting those procedures and processes we tucked away and take for granted. But keep an eye on the business.

Research in Asia

This year Bank of America Merrill Lynch and SunGard published the second edition of the Asia Pacific Treasury Management Barometer. The report provides insights framed by the views of over 1.350 treasury professionals from across all major markets in the Asia Pacific region as well as Europe and the USA. The first edition was published in 2013.

According to the barometer, “Asia Pacific’s leading corporate treasurers have identified improving cash visibility and cash flow forecasting as key priorities”, in the 12 months ahead. Scope and sophistication of treasury management develop rapidly in this region. However, despite this, almost 70% (still) rely on spreadsheets. Bank platforms, though on the rise, represent 13%.

The survey outlines that “by analyzing the data, it is clear that corporations in the Asia Pacific region are increasingly focused on integrated treasury management platforms and solutions, which deliver real-time multi-bank visibility, cash flow forecasting and transaction management across regions, countries, currencies and time”. Next to cash visibility and cash flow forecasting (21%), focus is on leveraging efficient technology to improve treasury process automation (12%), optimizing working capital (12%) and risk management (12%). So these four points cover no less than 57% of the treasury priorities, followed by roughly a dozen, single digit, other priorities.

Also this year, the Japanese Ministry of Economy, Trade and Industry published a report outlining its research done as it pertains to global Cash and Liquidity Management. In the introduction of the report, it defines global Cash and Liquidity Management as a topic of strategic importance and indicates it is fundamental to carry out business in a sustainable manner. The purpose is to maximize the use of group liquidity and to minimize the financial and operational risk.

A good global Cash and Liquidity Management platform, the report continues, is equipped to provide both offensive and defensive fundamentals to corporate treasury. As offensive characteristics we need to think of cash flow forecasting, maximization of the information on internal funds and enhancement of corporate governance to overseas subsidiaries. Defensive characteristics are along the lines of the reduction of interest bearing debt, increased visibility, the ability to capture liquidity as well as managing financial risks and prevent fraud risk.

Commoditization – cost vs. quality

To capture all of this is a tall order, and will lead to many treasury-professional’s headache. This in no way implies that they have not done a good job so far, but it does indicate the constant need to keep up with current events, and stay at par with peers. Obviously banks are there to “lend a helping hand”. However, since the end of the financial crisis, there is an increased commoditization of banking products in general. This trend seems to continue. And when products become more similar from a buyer’s point of view, they will tend to buy the cheapest. Even though, at first glance, this is seemingly a good development, it actually isn’t. In the words of the title of economist Milton Friedman’s 1975 book; “There’s No Such Thing as a Free Lunch”.

This may seem like stating the obvious, but not necessarily to everyone. In Asian cultures, high quality of service is a given, irrespective the kind of service. Executional excellence is simply assumed. But should it be expected in all circumstances? Best in class products and services just happen to come at a certain (higher) price. If you shop for the lowest possible price and take pride in having banks compete against each other for that purpose, beware what you ask for, as tunnel vision can inadvertently lead to disregarding or excluding quality of service altogether. And by the time this is realized, it unfortunately may be too late.

Are you really ready for change?

Why is change so hard? Irrespective of the solution currently used to assist with daily treasury activities (spreadsheet, ERP, TMS or other software), we just happen to feel very comfortable with what we do and the way we do it. Despite of what we make ourselves believe, deep within, change makes us feel uncomfortable. For those that like to know the psychological background; apparently change stimulates the prefrontal cortex, an energy-intensive section of the brain responsible for insight and impulse control. The prefrontal cortex is also directly linked to the amygdala (the brain’s fear circuitry, which in turn controls our “flight or fight” response). And, according to the experts,  when the prefrontal cortex is overwhelmed with complex and unfamiliar concepts, the amygdala connection gets kicked into high gear. It seems all of us are then subject to physical and psychological disorientation (anxiety, fear, depression, sadness, fatigue or anger).

So no matter how open-minded we think we are, orientation on replacement could inadvertently merely boil down to copying current processes and procedures into a new system. Those that come to the rescue (banks, software developers etc.) see this too. Therefore the products and solutions they usually offer also stay very close to home, as big leaps forward have the tendency not to be understood. Along the same lines; did you ever wonder why responses to your Requests for Proposal look so similar? This is neither innovation, nor best in class, but what it does, is allowing us to compare price. Having the ability to compare and make a choice based thereon, makes us feel we make an value added decision. But is it really helpful?

The market-share of price leaders may be considerable, but this can only be achieved by offering generic products. Products which do not allow much room for the often much needed customization or tailoring. Sure, certain software developers have a high level of creative freedom and a reasonably short time-to-market. This allows them to address specific needs and trends in a timely manner, which leads to very good software, real gems. However, unfortunately, liquidity management is often – ultimately – about real settlement, something which requires banks to get involved. So no matter how sophisticated the software, banks form an indispensable link.

Addressing the priorities

For this we need to go to the basis. The first question that needs to be answered is; “what do we really want? And why?” Obviously “The Business” drives our processes. But who or what facilitates the Business? Is it Treasury, or does it happen to be Tax, Legal, Accounting? Or, more likely, is it a combination? Irrespective of who should be involved, make sure they’re onboard.

Next, we need to look through the way we currently work, and ask ourselves what we actually try to achieve with the processes we carry out. By doing so we should avoid to continue working with a mindset of the past, get stuck and dismiss all kinds of options because it’s not the way we do things. Don’t immediately think in solutions, first try to understand the challenges. Besides this, “complicated” is often mistaken as synonym for “sophisticated”. Focus on simplicity, avoid hypes.

As 52% of the over 1,350 respondents interviewed by Bank of America Merrill Lynch and SunGard are “seeking to leverage treasury and banking technology to optimize internal processes”, assumingly a lot of attention is paid to Virtual Accounts, POBO/COBO and other new developments. But does applying technology to improve Treasury Management per definition mean that we need to look for “something new”? What exactly is the problem we’re trying to solve?

I do not necessarily agree. Having been involved in many treasury projects in Asia in an advisory capacity, it is my experience that a lot can be achieved by optimizing those areas we simply have stopped paying attention to. In other words improving “something old”. A very good example in this case is the efficient settlement of intercompany invoices (transaction management across regions, i.e. Netting). In some cases this is – due to lack of priority – not yet addressed at all. In other cases spreadsheets form the backbone of the intercompany payment process, underestimating data integrity issues as well as risk management in general. If software is used, sometimes processes are outdated and can be improved. This status quo unintentionally and unnoticeably leads to a lot of extra administrative work, work we have seemed to accept, but still bears a cost.

In conclusion

It seems both publications (The Japanese Ministry as well as Bank of America Merrill Lynch and SunGard) agree on the vital importance of – the entire process surrounding – managing balances as well as transactions/payments. In my view every multinational should have a multi-regional (or global) Netting, Pooling, Multi bank reporting, Forecasting and Exposure Management in place, combined with the necessary interfacing to internal systems. So for some this means that it’s time for change.

Reducing cost should never be the driving force behind change. This only works for commoditized goods. MNC’s will always require customization of certain treasury solutions combined with operational excellence and service. But before system specifications can be drafted, we need to take a closer look at what we really want, and why. Back to basics. Make sure to get all stakeholders involved.

 And as it is nearly impossible to realize proper cash forecasting when group companies settle their obligations at random, or worse, not at all, I’ll spend some time on Netting –  an underestimated liquidity management tool – in the next post.

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